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Are you confused about when to apply TCS under Section 206C(1H) and TDS under Section 194Q? With evolving tax regulations, understanding these provisions is crucial to ensure 100% compliance and avoid penalties.
The Finance Act, 2020 introduced Section 206C(1H) for Tax Collected at Source (TCS) on the sale of goods exceeding ₹50 lakhs, effective 1st October 2020. Later, the Finance Act, 2021 brought in Section 194Q, mandating Tax Deducted at Source (TDS) on the purchase of goods exceeding ₹50 lakhs, effective 1st July 2021. These provisions were enacted to enhance tax transparency, prevent tax evasion, and regulate high-value transactions.
But here’s the challenge: When do you deduct TDS, and when do you collect TCS? Since both sections apply to the same transaction threshold but assign tax responsibilities differently, businesses often struggle with correct tax compliance. Key takeaway? TDS under Section 194Q takes precedence over TCS under Section 206C(1H), but only if deducted by the buyer.
This expert guide, designed for businesses, tax professionals, and accountants, breaks down the applicability, legal interpretations, procedural compliance, and reporting obligations under both sections. By the end, you’ll have a crystal-clear understanding of how to apply TCS vs. TDS in different scenarios—ensuring seamless compliance under the Income Tax Act, 1961.
Section 206C(1H): TCS on Sale of Goods
Section 206C(1H): TCS on Sale of Goods
As per the Income Tax Act, Section 206C(1H) states:
“Every person, being a seller, who receives any amount as consideration for the sale of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, other than the goods being exported out of India or goods covered in sub-section (1) or sub-section (1F) or sub-section (1G), shall, at the time of receipt of such amount, collect from the buyer a sum equal to 0.1 percent of the sale consideration exceeding fifty lakh rupees as income-tax…”
Key Provisions:
- Applicability:
- Sellers with turnover exceeding ₹10 crores in the preceding financial year.
- Triggered when the total sales to a buyer exceed ₹50 lakhs in a financial year.
- Rate of TCS:
- 0.1% on the sale consideration exceeding ₹50 lakhs.
- 1% if the buyer does not provide PAN/Aadhaar.
- Exclusions:
- Goods exported out of India.
- Transactions covered under Sections 206C(1), 206C(1F), or 206C(1G).
- Point of Collection:
- At the time of receipt of consideration.
- Non-applicability:
- If the buyer is liable to deduct TDS under any provision of the Act and has deducted such amount.
Section 194Q: TDS on Purchase of Goods
Section 194Q, introduced in the Finance Act, 2021, provides:
“Any person, being a buyer who is responsible for paying any sum to any resident for the purchase of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, shall, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 percent of such sum exceeding fifty lakh rupees as income-tax…”
Key Provisions:
- Applicability:
- Buyers with turnover exceeding ₹10 crores in the preceding financial year.
- Triggered when the total purchases from a seller exceed ₹50 lakhs in a financial year.
- Rate of TDS:
- 0.1% on the purchase value exceeding ₹50 lakhs.
- 5% if the seller does not provide PAN.
- Point of Deduction:
- TDS is to be deducted at the time of credit or payment, whichever is earlier.
- Non-applicability:
- Transactions where TDS is already deductible under another provision.
Interplay Between Section 194Q and Section 206C(1H)
- The buyer is liable to deduct TDS under any other provision of the Act, and
- The buyer has deducted such TDS.
- The buyer is primarily responsible for deducting TDS under Section 194Q.
- If the buyer fails to deduct TDS, the seller must collect TCS under Section 206C(1H).
Analysis of Key Provisions
| Particulars | Section 194Q (TDS) | Section 206C(1H) (TCS) |
| Applicability | Buyer with turnover > ₹10 crores | Seller with turnover > ₹10 crores |
| Transaction Threshold | Purchases > ₹50 lakhs | Sales > ₹50 lakhs |
| Tax Rate | 0.1% (5% if PAN not provided) | 0.1% (1% if PAN not provided) |
| Point of Taxation | At the time of credit or payment | At the time of receipt |
| Precedence | Overrides Section 206C(1H) | Subordinate to Section 194Q |
Summary
The overlapping applicability of Section 206C(1H) and Section 194Q requires careful assessment by businesses. While TDS under Section 194Q takes precedence over TCS under Section 206C(1H), compliance with either provision depends on the specific roles of the parties involved in the transaction.
Key Takeaways:
- Buyers with turnover exceeding ₹10 crores must deduct TDS under Section 194Q for purchases exceeding ₹50 lakhs.
- Sellers with turnover exceeding ₹10 crores must collect TCS under Section 206C(1H) if TDS is not deducted by the buyer.
- Accurate and timely compliance, including filing returns and issuing certificates, is essential to avoid penalties.
Comprehensive Comparison of Section 194Q and Section 206C(1H)
Particulars | Section 194Q (TDS) | Section 206C(1H) (TCS) |
Nature | Tax to be Deducted | Tax to be Collected |
Applicability | Buyer/Purchaser | Seller |
Effective Date | 01/07/2021 | 01/10/2020 |
Trigger Event | At the time of payment or credit, whichever is earlier | At the time of receipt |
Taxes on Advances | Applicable to advance payments made | Applicable to advance receipts |
Rate of Tax | 0.1% | 0.1% |
PAN not available | 5% | 1% |
Point of Taxation | Turnover/Gross Receipts/Sales from the business of BUYER should exceed Rs.10cr during previous year (Excluding GST) Purchase of goods of aggregate value exceeding Rs.50Lakhs in P.Y. (The value of goods includes GST) | Turnover/Gross Receipts/Sales from the business of SELLER should exceed Rs.10cr during previous year (Excluding GST) Sale consideration received exceeds Rs.50Lakhs in P.Y. (The value of goods includes GST) |
Exceptions/Exemptions | ü If TDS is already deductible under any other provision of the Income Tax Act. ü Non-Resident Transactions -Transactions with non-resident sellers, where the purchase is not connected to the permanent establishment of the non-resident buyer, are exempt. ü Import Purchases – TDS under Section 194Q does not apply to purchases made from foreign sellers (import purchases). ü Public Sector Undertakings – Public sector undertakings (PSUs) or corporations established under Central or State Acts are not exempt from Section 194Q. | ü Goods exported out of India ü Goods covered under Section 206C(1) – Alcohol, tendu leaves, timber, forest produce, scrap, minerals. ü Goods covered under Section 206C(1F) – Motor vehicles. ü Goods covered under Section 206C(1G) – Foreign remittance and overseas tour packages. ü Buyer is a Government or Foreign Entity Central/State Government, Embassy, Consulate, or Local Authority. ü Buyer is importing goods into India Exempt for imports into India. ü Other exclusions notified by Government As specified in official notifications. |
When to deposit/collect | Tax so deducted shall be deposited with government by 7th day of subsequent month | Tax so collected shall be deposited with government by 7th day of subsequent month |
Quarterly statement to be filed | 26Q | 27EQ |
Certificate to be issued to seller/buyer | FORM 16A | FORM 27D |
Examples of Section 194Q and 206C(1H)
| Seller’s Turnover (in crore) | Buyer’s Turnover (in crore) | Amount Received/ Paid for Sale/Purchase of Goods (in lakhs) | Taxable Amount | Whether PAN is available | TDS or TCS | Liable Person | Section Applied | Explanation |
| 11 | 9 | 55 | 5 | Buyers PAN available | TCS @0.1% | Seller | 206C(1H) | Buyer’s Turnover below ₹10 Crore |
| 11 | 9 | 55 | 5 | Buyers PAN not available | TCS @1% | Seller | 206C(1H) | Buyer’s Turnover below ₹10 Crore |
| 9 | 11 | 55 | 5 | Sellers PAN available | TDS @ 0.1% | Buyer | 194Q | Seller’s Turnover below ₹10 Crore |
| 9 | 11 | 55 | 5 | Sellers PAN not available | TDS @ 5% | Buyer | 194Q and 206AA | Seller’s Turnover below ₹10 Crore and PAN not available |
| 11 | 11 | 55 | 5 | Sellers PAN available | TDS @ 0.1% | Buyer | 194Q | Exclusion under Sec 206C(1H) |
| 11 | 11 | 55 | 5 | Sellers PAN not available | TDS @ 5% | Buyer | 194Q and 206AA | Exclusion under Sec 206C(1H) |
Conclusion
Understanding the provisions of TDS under Section 194Q and TCS under Section 206C(1H) is essential for businesses to comply with the Income Tax Act. These provisions ensure that businesses meet their tax obligations on transactions involving goods exceeding ₹50 lakh. By understanding the applicability, rates, and exemptions, businesses can avoid penalties and ensure timely tax collection and deduction.
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