Tax collection at Source (TCS) is an additional amount collected as tax by the seller of specified goods from the buyer. It is a concept where a person selling specific items is liable to collect tax from a buyer at a prescribed rate and deposit it with the government. Section 206C under the income tax act controls the goods on which the seller has to collect tax from the buyers. TCS needs to be collected during transactions, selling goods, issuing a receipt of cash taken from the buyer, or issuing a draft or cheque, whichever mode suits the buyer. In short, the seller is a middleman between the buyer and the government. Therefore, this tax is paid by the customer instead of the businessman.
Though we know what is TCS tax, let’s help you understand the concept of what is TCS tax with an example.
A purchases jewellery from B for Rs. 6,00,00. Here, as per the provisions of TCS, A would be liable to pay Rs 6,06,000 to B (Rs. 6,00,000 for the jewellery and Rs. 6000 as TCS at the rate of 1%).
B, who is selling the jewellery, is only responsible for collecting the cash from B and paying it to the government; he won’t pay anything himself.
Background of TCS Tax
The tax collected at Source was introduced as Section 206C of the income tax act, 1961 (Act) vide Finance Act, 1988 to curb tax evasion and money laundering by income tax officials. It was introduced as a consequence of Section 44AC of the Act with the title “Special provision for computing profits and gains from trading in certain goods.
As per the Memorandum to the Finance Bill, 1988, these provisions have been introduced on account of the considerable difficulty faced by the department in assessing the income in case of assesses who contract in for the sale of liquor, scrap, forest items, etc. According to the experience of the department, for securing such contracts, legal entities are constituted. After the execution of the agreement, no trace is left by them or their members. Therefore, to combat significant tax evasion by dealers in such products, Section 44AC and Section 206C were introduced.
It came into effect on 1st October 2020. Thus, it has been made clear that the introduction of TCS has been upheld for constitutional validity, enacted as an anti-abuse provision, and subsequently widened to curb cash transactions.
How TCS Tax Works?
TCS is a tax mechanism in which the seller collects tax from the buyer at the sale of certain specified goods and services. The seller then deposits the collected tax with the government. Let’s see how the tax mechanism works in India:
1. Applicability: TCS applies to particular transactions as specified by the government, such as the sale of goods like scrap, timber, minerals, etc., and services like hotel accommodation and tour packages, etc.
2. Collection: The seller collects the TCS from the buyer at the time of sale and then deposits it with the government within the due date. The collected TCS is then reflected in the seller’s TCS return, filed with the tax authorities. The TCS return contains details of the TCS collected, deposited and other details specified by the government.
3. Issuance of Invoice: The seller issues an invoice to the buyer indicating the TCS amount collected.
4. Payment of TCS: The seller then deposits the TCS collected with the government within the due date.
5. Filing of TCS Return: The seller files a TCS return containing the details of TCS collected, deposited, and other details as specified by the government.
6. Claiming TCS Credit: The buyer can claim credit of the TCS amount paid against their income tax liability.
The TCS mechanism is designed to increase tax compliance and prevent tax evasion. It ensures that tax is collected at the Source and deposited with the government, which helps increase tax revenue and curb tax evasion.
How is TCS calculated?
TCS is calculated by multiplying the applicable TCS rate with the transaction value. The transaction value is the amount paid or payable for the sale of goods or services, while the applicable TCS rate depends on the nature of the transaction.
For example, if the transaction value is Rs. 1,00,000 and the applicable TCS rate is 1%, then the TCS amount would be Rs. 1000. (1% of Rs. 1,00,000)
Here’s the formula:
TCS amount = Transaction value x Applicable TCS rate
It is important to note that TCS is a liability of the seller, and the seller is responsible for collecting and remitting the TCS amount to the government within the prescribed due date.
TCS Tax Rates
TCS tax rates have undergone various changes per the government’s decision over the years. Here are some significant changes in TCS tax rates over the years:
1. Finance Act 2010: In the Union Budget of 2010, the government introduced TCS on selling coal, lignite, and iron ore. The rate for coal and lignite was fixed at 1% of the sale value, while the TCS rate for iron ore was fixed at 0.5%.
2. Finance Act 2012: In the Union Budget of 2012, the government introduced TCS on the sale of immovable property, which was fixed at the sale of 1% sale value.
3. Finance Act 2016: In the Union Budget of 2016, the government introduced TCS on selling luxury cars costing more than 10 lakhs. The TCS rate was fixed at 1% of the sale value.
4. Finance Act 2020: In the Union Budget of 2020, the government expanded the scope of TCS to include the sale of goods and services by e-commerce operators. The TCS rate was fixed at 1% of the sale value.
5. Finance Act 2021: In the Union Budget of 2021, several changes were introduced in TCS tax rates, such as the TCS rate for the sale of motor vehicles was increased from 0.75% to 1% for both the seller and buyer. The TCS rate for scrap was increased from 0.5% to 1% for non-resident buyers.
Current TCS Tax Rates For Different Sectors
1. Sale of Motor Vehicles – 0.1% of the sale value exceeding Rs. 10 lakhs for the seller and buyer.
2. Sale of Overseas Tour Packages – 5% of the total amount.
3. Sale of Goods & Services by E-commerce Operators – 1% of the sale value.
4. Sale of Alcoholic Liquor For Human Consumption – 1% of the sale value.
5. Sale of Tendu Leaves – 5% of the sale value.
6. Sale of Timber Obtained Under A Forest Lease – 2.5% of the sale value.
Exemptions and Exclusions from TCS Tax
TCS tax applies to a certain type of transaction, and certain categories of buyers and sellers may be exempt from it. Here are some exemptions from TCS tax:
1. Central and state governments, embassies, and consulates are exempt from TCS.
2. Buyers who are individuals and Hindu Undivided Families (HUFs) are exempt from TCS if they are not required to get their accounts audited under section 44AB of the Income Tax Act.
3. Buyers traded goods with a turnover of less than ten crores in the previous financial year.
4. Any seller of goods is liable to collect tax under any other provisions of the Income Tax Act, 1961.
Types of Transactions Excluded From TCS
The Income Tax Act, of 1961, provides for certain types of transactions that are excluded from the purview of Tax Collected at Source (TCS) under Section 206C. The following are the types of transactions excluded from TCS tax:
– Transactions covered under the Central Government, State Government, and local authorities.
– Goods exported out of India
– Goods covered under section 206C(1H) of the Income Tax Act. Certain goods, such as alcoholic liquor for human consumption, tendu leaves, timber obtained under a forest lease, etc.
– Transactions covered under other provisions of the Income Tax Act.
– Transactions covered under the Securities Contracts (Regulation) Act, 1956
– Transactions made by specified people such as a person importing to India, a person buying goods in the course of his business from a seller who is not required to get his accounts assessed under Section 44AB of the Income Tax Act, 1961.
Impact of TCS Tax on Businesses and Consumers
TCS has a direct impact on consumers and businesses. The impact on both of them can be explained as follows:
Impact on Consumers
1. Increase in prices: TCS is added to the selling price of the goods or services, which increases the overall price that consumers have to pay. For instance, if a consumer buys a car that attracts a TCS of 0.1%, the car’s selling price will increase by 0.1%, which will lead to an increase in the price paid by the consumer.
2. Reduction in disposable income: The increase in prices due to TCS can reduce the disposable income of consumers, as they have to pay more for the same goods and services.
3. Impact on affordability: TCS can impact the affordability of goods or services, especially for low-income or price-sensitive consumers. This can lead to a reduction in demand for such goods or services, which can affect the sales and revenue of businesses.
4. Administrative burden: TCS can lead to an administrative burden for businesses, which may be passed on to consumers through higher prices.
Impact on Businesses
1. Compliance costs: Businesses must incur additional costs to comply with the TCS provisions, such as maintaining separate records, filing returns, and making payments.
2. Working capital requirements: The amount collected as TCS must be deposited with the government, which can impact the working capital requirements of businesses.
3. Administrative burden: Businesses may face an administrative burden in implementing TCS provisions, which can divert focus from core business activities.
4. Impact on cash flow: TCS can impact the business’s cash flow, as the amount collected as TCS has to be deposited with the government, and credit for such TCS can be claimed only at the time of filing of the income tax return.
In short, the impact of TCS on consumers and businesses may vary depending on the nature of the business and the volume of transactions.
Compliance Requirements for TCS Tax
A certain group of people needs to comply with Tax Collect at Source (TCS) regulations. Let’s have a look at people who need to comply with it.
1. Seller: The seller is responsible for collecting TCS from the buyer and depositing it with the government within the prescribed time.
2. Buyer: The buyer must pay the TCS to the seller at the time of purchase and can claim a credit for the TCS paid while filing the income tax return.
3. E-commerce operator: E-commerce operators such as Amazon, Flipkart, etc., who provide a platform for buying and selling goods or services, must collect TCS from the seller and deposit it with the government.
4. Exporters: Exporters are exempted from TCS on goods exported from India.
The compliance procedures and documentation required for TCS are as follows:
1. Obtain Tax Deduction and Collection Account Number (TAN): The seller and e-commerce operator are required to obtain a TAN from the Income Tax department. TAN is a 10-digit alphanumeric number required for making TCS payments and filing TCS returns.
2. Collect TCS from the buyer: The seller is required to collect TCS from the buyer at the time of the sale of specified goods or services. The TCS rate may vary depending on the nature of the transaction and the type of goods or services.
3. Deposit TCS with the Government: The TCS collected by the seller or e-commerce operator must be deposited with the government within the prescribed time. The due date for depositing TCS is the 7th of the following month in which the TCS was collected.
4. File TCS returns: The seller or e-commerce operator must file TCS returns with the Income Tax department every quarter. The due date for filing TCS returns is the 15th of the month following the end of the quarter.
5. Maintain records: The seller or e-commerce operator should maintain records of TCS transactions, including invoices, receipts, and other documents, for six years from the end of the financial year the TCS was collected.
In addition to the above procedure, businesses should comply with other applicable laws and regulations, such as Goods and Service Tax and other regulatory requirements.
Penalties for Non-Compliance with TCS
Non-compliance with TCS provisions can attract penalties and interest charges. The following are the penalties for TCS non-compliance:
1. Penalty for non-collection or a short collection of TCS: If the seller or e-commerce operator fails to collect or short-collect TCS from the buyer, a penalty equal to the amount of TCS not collected or short-collected may be imposed.
2. Penalty for non-payment or late payment of TCS: If the seller or e-commerce operator fails to deposit TCS with the government within the prescribed time, a penalty of 1% per month or part thereof may be levied on the amount of TCS not deposited.
3. Penalty for late filing of TCS returns: If the seller or e-commerce operator fails to file TCS returns within the prescribed due date, a penalty of Rs. 200 per day may be levied, subject to a maximum of the amount of TCS collected.
4. Penalty for incorrect filing of TCS returns: On furnishing incorrect information in the TCS return, a penalty of Rs. 100 per day may be levied, subject to a maximum of the amount of TCS collected.
Conclusion
In conclusion, understanding Tax Collected at Source (TCS) is important for businesses and individuals to ensure compliance with tax regulations, maintain accurate records, avoid penalties and interest charges and claim credit for TCS paid. The purpose of TCS is to collect tax as the Source of income and ensure a steady flow of revenue to the government. Businesses and individuals should familiarize themselves with the TCS provisions and ensure compliance to avoid legal and financial complications.
FAQs
Is TCS Tax applicable on all types of transactions?
No, TCS does not apply to all types of transactions. TCS is only applicable on specified transactions as per the provisions of the Income Tax Act of 1961. It applies to certain types of transactions, such as the sale of motor vehicles above a certain threshold, the sale of goods by an e-commerce operator, and payment for overseas tour packages, specified goods such as liquor, timber, scrap, and tendu leaves.
What are the current TCS Tax rates?
The current TCS rates are as follows:
– 1% on the value of the motor vehicle exceeding Rs. 10 lakhs.
– 1% on the sale of goods by e-commerce operators
– 5% on the amount paid for the purchase of an overseas tour package
– 0.1% to 0.5% for certain specified goods such as liquor, timber, scrap, and tendu leaves.
Who is responsible for collecting TCS Tax?
The responsibility of collecting TCS depends on the nature of the transaction. The seller or the e-commerce operator is responsible for collecting TCS from the buyer and depositing it with the government. In the case of e-commerce transactions, the e-commerce operator is responsible for collecting TCS from the buyer and depositing it with the government.
Can TCS Tax be claimed as a deduction while filing taxes?
Yes, TCS can be claimed as a deduction while filing taxes. TCS can be claimed as a credit against the taxpayer’s total tax liability in the same financial year in which it is deducted. The TCS credit can be claimed in the Income Tax Return (ITR) for the financial year the TCS was collected.
How does TCS Tax impact businesses and consumers?
TCS tax affects both businesses and consumers in different ways. TCS can increase compliance burden and administrative costs for businesses, as it requires businesses to collect and deposit TCS with the government.
For consumers, TCS can increase the cost of goods and services as the TCS is added to the purchase price.
