Tax Collected at Source (TCS) – Rates, Payment, and Exemption

Indian Income Tax Act has provisions for tax collection at source or TCS. In these provisions, certain persons are required to collect a specified percentage of tax from their buyers on exceptional transactions. Most of these transactions are trading or business in nature. It does not affect the common man. Read on to know more!

Latest updates

Tax collection at source (TCS) for foreign remittances under LRS was raised from 5% to 20% in Budget 2023. Except for education and medical reasons, this will extend to international travel, sending money abroad, and other remittances. This new rule will take force on July 1, 2023.

What is Tax Collected at Source (TCS)?

Tax collected at source (TCS) is the tax collected by the seller from the buyer on sale so that it can be deposited with the tax authorities. Section 206C of the Income-tax act governs the goods on which the seller has to collect tax from the buyers. Such persons must have the Tax Collection Account Number to be able to collect TCS.

Example: If a box of chocolates costs Rs.100, the buyer pays Rs.20 (Rs 80 + Rs 20), which is the tax collected at the point of sale. The funds are then transferred to a certain approved branch of a bank that has been authorised to accept payments. The seller is only responsible for collecting this tax from the customer and is not liable for paying it himself or herself. The tax is intended to be collected while selling items, conducting transactions, receiving a payment in cash from the buyer, or issuing a cheque or draft, whichever method is paid first.

Section 206C of the Income Tax Act of 1961 has this provision.

Goods covered under TCS provisions and rates applicable to them

When the below-mentioned goods are utilised for the purpose of manufacturing, processing, or producing things, the taxes are not payable. If the same goods are utilised for trading purposes, then tax is payable. The tax payable is collected by the seller at the point of sale. The rate of TCS is different for goods specified under different categories :

When will a higher TCS rate apply?

Note that as per Section 206CCA, tax at a higher rate (other than rates in the above table) will be collected from the buyer if such buyer has-

• Not filed ITR for the last two financial years before the relevant financial year in which TCS had to be collected.
• The time limit to file ITR has expired.
• The total of TCS and TDS was more than Rs.50,000 in each of these two financial years.

Such a higher TCS rate will be the highest of the following two rates-

• Two times the TCS rate mentioned in the Income Tax Act ( in the above table)
• 5%

In special cases given under Section 206C(IG), 5% TCS applies where the authorised dealer arranges remittance out of India of Rs.7 lakhs or more in a financial year from a buyer of foreign currency remitting under Liberalized Remittance Scheme (LRS), not being the overseas tour program package. If Aadhaar or PAN is unavailable, then TCS is 10%. Such TCS is collected while debiting the buyer’s account or on receipt of money.

Classification of Seller for TCS

There are some specific people or organisations who have been classified as sellers for tax collected at the source. No other seller of goods can collect tax at source from the buyers apart from the following list:

• Central Government
• State Government
• Local Authority
• Statutory Corporation or Authority
• Company registered under the Companies Act
• Partnership firms
• Co-operative Society
• Any person or HUF who is subjected to an audit of accounts under the Income-tax Act for a particular financial year.

Classification of Buyers for TCS

A buyer is a person who obtains goods of specified nature in any sale or right to receive any such goods, by way of auction, tender or any other mode. However, the below buyers are exempted from the collection of tax at the source. In other words, TCS need not be collected from the following persons.

• Public sector companies
• Central Government
• State Government
• Embassy of High commission
• Consulate and other Trade Representation of a Foreign Nation
• Clubs such as sports clubs and social clubs
• Where resident buyer utilises such purchase for the purposes of manufacturing, processing or producing articles or things or for the purposes of generation of power (not for trading) and gives this declaration in writing in duplicate.

When should TCS be collected?

The seller must collect TCS at the earlier of the following two dates:

• When debiting the money payable by the buyer to their account in the books of accounts.
• Upon receipt of such money from the buyer in any mode such as cash issue of a cheque or draft.

In the case of the motor vehicle sale, the TCS is collected upon receipt of money or consideration for the motor vehicle from the buyer.

Example of TCS calculation

If a buyer purchases a car from a showroom that is valued at Rs.11 lakh then an amount of Rs.11,000 is the TCS deposited by the showroom. So, the total amount to be collected from the buyer is Rs.11,11,000.

An invoice was issued to the customer for Rs.12,000 on which 1% TCS was charged and collected at Rs.120. So, the total payable by the customer is Rs.12,120.

TCS Payments & Returns

• All sums collected by an office of the Government should be deposited on the same day of collection.
• The seller deposits the TCS amount in Challan 281 within 7 days from the last day of the month in which the tax was collected (monthly).
• If the tax collector responsible for collecting the tax and depositing the same to the government does not collect the tax or after collecting doesn’t pay it to the government as per the above due dates, then he will be liable to pay interest of 1% per month or a part of the month.
• Every tax collector has to submit a quarterly TCS return i.e. in Form 27EQ in respect of the tax collected by him in a particular quarter. The interest on delay in payment of TCS to the government should be paid before filing of the return.

TCS Certificate

1. When a tax collector files his quarterly TCS return i.e.  Form 27EQ, he has to provide a TCS certificate to the purchaser of the goods.
2. Form 27D is the certificate issued for TCS returns filed. This certificate contains the following details:
   • Name of the Seller and Buyer
   • TAN of the seller i.e. who is filing the TCS return quarterly
   • PAN of both seller and buyer
   • Total tax collected by the seller
   • Date of collection
   • The rate of Tax applied
3. This certificate has to be issued within 15 days from the date of filing TCS quarterly returns. All the TCS due dates are summarised in the below table:

In case you are still confused about filing TCS returns, feel free to consult the tax experts at ClearTax.

TCS Exemptions

Tax collection at the source is exempted in the following cases:

• When the eligible goods are used for personal consumption
• The purchaser buys the goods for manufacturing, processing or production and not for the purpose of trading those goods.

TCS provision under GST for e-commerce sales

• Any dealer or trader selling goods online on the e-commerce platform would get the payment from the online platform after deducting an amount tax @ 1 % under IGST Act. (0.5% in CGST & 0.5% in SGST)
• The tax would have to be deposited to the government by the 10th of the next month.
• All the dealers/traders are required to get registered under GST compulsorily.
• These provisions are effective from 1st Oct 2018. Example: Mr Raj (seller) is a trader who sells clothes online on Flipkart (e-commerce operator). He receives an order for Rs.10,000 inclusive of commission. Flipkart would thus be deducting tax for Rs.100 (1% of Rs.10,000).

Submission of Form 24G

In the case of an office of the Government, where tax has been paid to the credit of the Central Government without the production of a challan associated with the deposit of the tax in a bank, below are the changes to the rules, Form 24G has to be submitted:

Rules where TDS is deposited without challan (changes to Rule 30)

• If TDS has been deposited without a challan, the person to whom TDS has been reported for depositing to the government – such a person has to submit a statement in Form 24G to the agency authorised by the Principal Director of income tax (systems). [Rule 30(4)]
• Such Form 24G must be submitted issued within 15 days from the end of the relevant month. For the month of March, the form should be submitted by 30 April 2019
• Form 24G must be submitted (a) electronically under digital signature (b) electronically along with verification in Form 27A (c) or verified through an electronic process as prescribed
• A person referred to in bullet 1 shall inform the Book Identification number generated to each of the deductors for whom the sum deducted has been deposited.
• The Principal Director General of Income Tax (Systems) shall specify the procedure for furnishing and verification of statement Form 24G.

Rules where TCS under section 206C is deposited without challan (changes to Rule 37CA)

• If TCS has been deposited without a challan, the person to whom the collector has reported the TCS for depositing to the government – such a person will submit Form 24G to the agency authorised by the Principal Director of income tax (systems).
• Such Form 24G must be submitted within 15 days from the end of the relevant month.
• If Form 24G pertains to the month of March, it must be submitted on or before 30th April.
• Form 24G must be issued:
  • Electronically under digital signature
  • Electronically along with verification in Form 27A or
  • Verified through an electronic process as prescribed
• A person referred to in bullet 1 shall inform the Book Identification number generated to each of the deductors for whom the sum deducted has been deposited.
• The Principal Director General of Income Tax (Systems) shall specify the procedure for furnishing and verification of statement Form 24G.

Frequently Asked Questions

Whether sellers should collect TCS on an amount inclusive of GST?

As per income tax law,​ the seller shall collect TCS from the buyer at the time of debiting the amount payable to the buyer’s account or at the time of receipt of such amount from the said buyer by any mode, whichever is earlier. So the amount debited to the buyer’s account or payment received by the seller shall be inclusive of VAT/excise/GST. Hence, one should collect the TCS inclusive of GST.

What are the consequences of the late filing of TCS return?

If the person fails to file the TCS return on or before the due date prescribed in the income tax law, a fee of Rs.200 per day must be paid, during which the failure continues. However, the amount of late fees shall not exceed the amount of TCS. One should deposit the late filing fees before filing the TCS return. Note that Rs. 200 per day is a late filing fee, not a penalty.

What are the consequences of the late filing of TCS return?

As per the Income Tax Act, if any person does not file the TCS return on or before the due date prescribed in the Income Tax Act, a fee of Rs 200 per day must be paid, during which the failure continues. However, the amount of late fees shall not exceed the amount of TCS. One should deposit the late filing fees before filing the TCS return. Note that Rs. 200 per day is a late filing fee, not a penalty. 

Is there any penalty for incorrect filing of the TCS return?

Penalty under Section 271H can also be levied if the tax collector files an incorrect TCS return. In other words, a minimum penalty of Rs 10,000 and a maximum penalty of up to Rs 1,00,000 can be levied if the collector files an incorrect TCS return.

Can I check my TCS in Form 26AS?

Yes, Form 26AS displays details of Tax Collected at Source (TCS) by a seller of specified goods when such goods were sold to you. It will display the seller’s details along with the TCS amount and the transaction on which tax was collected at the source.

The buyer has PAN have not filed IT returns for the last two years. The seller has charged 5% TCS to the buyer. Can the buyer recover such TCS later on?

Yes, the buyer can adjust the TCS later on while making a payment towards self-assessed tax liability in later assessment years.

Is tax collected at source refundable?

Yes, the TCS collected on a buyer’s PAN is available for adjustment just like the TCS.

Why tax collected at source is introduced?

These provisions were enacted on account of the difficulties faced by the tax department assessing the income of assesses who enters into contracts for the sale of liquor, scrap, forest products, etc. Legal entities such as firms or AOPs are set up for this, and after the signing of the contract, no trace is left. Hence, to combat large-scale tax evasion by income tax assessees in such products, Section 206C of TCS was introduced.

What is tax collected used for?

The tax collected at the source is the same as the income tax revenue collected in advance by the tax department for a financial year. It is used for the upliftment of backward sections of society, education, infrastructural development of the nation, etc.

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