Section 206C of Income Tax Act: Applicability, Limits, Amendments & more

Buying any goods and services has an indirect tax. TCS, GST, and TDS are some indirect taxes. Tax collection at source (TCS), is the process by which the seller of the goods collects the tax from the buyer at the time of sale itself. We will try to understand one of its sections here: Section 206C of Income Tax Act.

Section 206C of Income Tax Act, 1961 deals with profits and gains pertaining to forest produce, alcohol,scrap, etc. This section also provides the percentage of tax that is to be collected by the seller for specific goods.

Unlike TDS, for tax purposes, the seller must show the tax that was collected to the government. Under this section, tax has to be collected by the seller when the buyer purchases or when the funds are debited from the buyer's account, whichever comes first.

All the sellers have to collect TCS from the buyer according to this section. This section also has some exemptions. Under this section, if an Indian resident buys goods for producing or manufacturing other items instead of trading, such goods will not have any taxes.

Below are goods that are applicable under Section 206C TCS:

Here are some other subsections of Section 206C of Income Tax Act:

There are some rules and regulations pertaining to the payment and return of the TCS as mentioned under Section 206C of Income Tax Act. 

• If you are a seller, you have to remit all the tax that is collected at the source within 7 days of the month from when you collected TCS from the buyers.

• If the tax collectors do not submit or collect the TCS within the due date mentioned, a penalty of 1% per month or for a fraction of the month will be levied.

• Indian government offices that collect TCS have to deposit the TCS on the same day itself compulsorily.

• If you are a tax collector, you have to file for TCS quarterly with Form 27EQ. In case there is any delay of TCS deposition, there will be a penalty.

As per the IT Act provisions, there are particular organisations and individuals who are fit to collect tax at source. Only the sellers that are mentioned below can collect tax from the buyers:

• Individuals or HUFs who are subject to tax under the provisions of the Income Tax Act.

• Central government

• State government

• Any local authority

• Statutory corporation

• Co-operative society

• Companies 

• Partnership firms

A buyer is an individual who buys goods or has the rights to purchase certain goods through tender, auction, or through other modes. Nevertheless, Some of the buyers who do need to pay tax under this section are:

• State government

• Central government

• Companies in the public sector 

• Foreign Trade Representation 

• High Commissions or Embassies

• Social clubs

• Consulates

Tax audits are compulsory under Section 44AB in order to prevent income tax evasion. This includes Section 206C limit as well.

You should keep these things in mind in regards to the Section 206C limit:

• The Section 206C needs the sellers to deposit the tax that is collected with the government. The seller can be an individual or a HUF whose yearly turnover exceeds Rs.1 crore from a business or Rs.50 lakhs from a profession.

• As per the Section 44AB, any individual who carries on any profession must have his/her books audited if/her his gross receipts or turnover exceed Rs.50 lakhs in a year. Additionally, any business owner that has gross receipts or yearly turnover of more than Rs.1 crore must have his/her books audited. Now, this limit has increased to Rs. 5 crores.

• These are subject to certain conditions such as:

1. The receipts of cash during this year should not exceed 5% of the total receipts

2. The payments of cash should not exceed 5% of the yearly total payments.

Tax collection under this section is not applicable for the following circumstances:

• If the goods that are purchased are meant for personal consumption, then tax deduction under this section is exempted.

• The buyer do not have to pay taxes if they buy goods for manufacturing, processing, or production instead of trading with the goods that were purchased.

• Transactions for renewable energy and electricity are not subject to provisions under Section 206C.

When an individual is subject to an audit underSection 44AB, the auditor has to submit the following 44AB Forms to the IT department:

• Form 3CA

Auditors use this form for individuals who have a profession or a business and whose books are subject to audit under the laws other than income tax. As part of the audit report, a declaration in relation to form 3CD will also be included.

• Form 3CB 

Auditors use this form for  individuals who have a profession or a business but are not required to have their books audited under any other law besides income tax. As with form 3CA, this form will be accompanied by a declaration of form 3CD.

• Form 3CD

This form provides a detailed report of the entire audit process, along with the individual who will be audited.

• Form 3CE

This form is for foreign companies and non-residents. A non-resident who receives technical fees or royalties from an Indian company or Indian government is subject to audits under Section 44AB of the Income Tax Act.

The Finance Act of 2020 has a new subsection (1H) to Section 206C and a new rate of tax. The key points of this amendment are mentioned below. 

• Sellers have to deduct TCS at a 1% rate if the goods sold is above Rs.50 lakhs.

• This section will not apply to the import and export of goods.

• Only businesses that have a turnover of Rs.5 crores will need income tax audits.

• This is applicable for all the sellers who have over Rs.10 crores turnover in the previous year.

• Sellers do not have to deduct the tax if the buyer has already deducted the tax.

• If there is non-compliance, while filing income tax returns, the rates under this section will be doubled or 5%.

If collection of tax is done for goods, then you need to file TCS returns quarterly. You are required to provide a TCS certificate to the buyers. Form 27D is the certificate that you get after the successful filing of tax returns. 

A TCS certificate has the following details:

• PAN of the buyer and seller

• Names of the seller and the buyer

• Amount of tax that is collected by the seller

• Date of tax collection

• Rate of tax collection

Within 15 days from the date of filing quarterly TCS returns, you get the TCS certificate. The due dates are:

If you happen to be a dealer or a trader who is selling items online, the online website is responsible to deduct a tax of about 1% under IGST Act. This 1% tax will comprise of  0.5% CGST and 0.5% SGST. You can get your payments after the deduction is done. Individuals have to submit this tax to the government before the 10th of the next month.

This provision was made by the government effective from October 1, 2018.