Tax Collected at Source (TCS) – Rates, Payment, and Exemption | Taxation for CA Intermediate PDF Download

Introduction

The Indian Income Tax Act includes provisions for Tax Collection at Source (TCS), where certain individuals are mandated to collect a specified percentage of tax from their purchasers on specific transactions, mainly related to trade or business activities. These provisions typically do not impact the general public. Explore further to gain a deeper understanding!

In recent updates, the Tax Collection at Source (TCS) rate for foreign remittances under the Liberalized Remittance Scheme (LRS) was increased from 5% to 20% in the Budget of 2023. This change will apply to various international transactions such as travel expenses, money transfers abroad, and other remittances, with exemptions for education and medical purposes. The implementation of this new regulation is scheduled for July 1, 2023.

What is Tax Collected at Source (TCS)?

Tax Collected at Source (TCS) refers to the tax that sellers collect from buyers during a sale, which is subsequently deposited with the tax authorities. Section 206C of the Income-tax Act delineates the goods on which sellers must collect tax from buyers. To engage in TCS collection, individuals must possess a Tax Collection Account Number (TCAN).

For instance, if a box of chocolates is priced at Rs. 100, the buyer pays Rs. 20 as the tax at the point of sale. These funds are then remitted to an authorized branch of a bank designated to accept such payments. The seller's role is solely to collect this tax from the customer; they are not responsible for remitting it themselves. The tax is meant to be collected during the sale of goods, transaction execution, receipt of cash payment from the buyer, or issuance of a cheque or draft, whichever occurs first.

This provision is outlined in Section 206C of the Income Tax Act of 1961.

Who Can Collect TCS?

Certain goods are subject to Tax Collected at Source (TCS), where sellers collect tax from buyers in addition to the price of the goods or services. A buyer is defined as an individual who acquires specific goods through a sale or gains the right to receive goods through methods like tender or auction.

TCS Rates for Specific Goods

• In the case of selling a motor vehicle, Tax Collected at Source (TCS) is collected when the buyer pays for the vehicle.
• Taxes are applicable when goods are used for trading, not for manufacturing or processing. The seller collects the tax at the point of sale.
• Here are the TCS rates for specific categories of goods:
  

When will the Higher TCS Rate Apply?

Under Section 206CCA, a higher tax rate (different from the rates listed above) will be levied on the buyer if the buyer:

1. Has not filed Income Tax Returns (ITR) for the two preceding financial years before the relevant financial year in which TCS collection is due.
2. Has exceeded the time limit to file ITR.
3. The total of Tax Collected at Source (TCS) and Tax Deducted at Source (TDS) was over Rs. 50,000 in each of these two financial years.

The higher TCS rate will be the greater of the following two rates:

1. Twice the TCS rate specified in the Income Tax Act (as listed above).
2. 5% TCS.

In specific cases outlined in Section 206C(1G), a 5% TCS rate applies when an authorized dealer facilitates remittances exceeding Rs. 7 lakh in a financial year from a buyer of foreign currency under the Liberalized Remittance Scheme (LRS), excluding overseas tour program packages. If Aadhaar or PAN details are unavailable, the TCS rate is 10%. This tax is collected upon debiting the buyer's account or upon receipt of funds.

Seller Classification for TCS

Only specific individuals or entities are categorized as sellers for Tax Collected at Source. Other sellers are not authorized to collect TCS from buyers, except for the following entities:

1. Central Government
2. State Government
3. Local Authority
4. Statutory Corporation or Authority
5. Company registered under the Companies Act
6. Partnership firms
7. Co-operative Society
8. Individuals or Hindu Undivided Families (HUFs) subject to an audit of accounts under the Income-tax Act for a specific financial year.

Classification of Buyers for TCS

A buyer is someone who acquires specific goods through various means like auction or tender. Certain buyers are exempt from TCS (Tax Collected at Source) collection:

• 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
• Residents using purchases for manufacturing, processing, or power generation purposes with a written declaration

Example of TCS calculation

• If a buyer buys a car worth Rs.11 lakh from a showroom, the showroom collects Rs.11,000 as TCS. The total amount the buyer needs to pay is Rs.11,11,000 (11,00,000 + 11,000).
• The customer receives an invoice for Rs.12,000, with 1% TCS amounting to Rs.120. Therefore, the total amount due from the customer is Rs.12,120 (12,000 + 120).

TCS Payments & Returns

• All sums collected by a government office must be deposited on the same day.
• The seller needs to deposit the TCS amount in Challan 281 within 7 days from the end of the month when the tax was collected.
• If a tax collector fails to collect or pay the tax to the government on time, they will incur a 1% interest per month or part thereof.
• Every tax collector must file a quarterly TCS return, Form 27EQ, for the tax collected in that quarter. The interest for delayed TCS payment must be settled before filing the return.

TCS Certificate

When a tax collector submits Form 27EQ for quarterly TCS return, they must give a TCS certificate to the buyer. Form 27D is the certificate issued for filed TCS returns. This certificate includes:

• Name of the Seller and Buyer
• TAN of the seller who files TCS returns quarterly
• PAN of both seller and buyer
• Total tax collected by the seller
• Date of collection
• Rate of Tax applied

This certificate should be given within 15 days from the quarterly TCS return filing date. Below are the summarized TCS due dates:

• When a tax collector submits Form 27EQ for quarterly TCS return, they must provide a TCS certificate to the buyer.
• Form 27D is the certificate given for filed TCS returns, comprising specific details.
  

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.

In simpler terms, tax collection at the source is not required in two situations: when someone uses the goods for themselves and when a buyer purchases goods to make things, not to sell them.

 TCS Provision under GST for E-commerce Sales 

Any dealer or trader selling goods online on the e-commerce platform would receive payment after deducting a 1% tax under the IGST Act (0.5% CGST & 0.5% SGST). This tax must be paid to the government by the 10th of the following month. All dealers/traders must be registered under GST. These rules came into effect on 1 October 2018.

• Any dealer or trader selling goods online on the e-commerce platform would get the payment after deducting a 1% tax under the IGST Act (0.5% CGST & 0.5% SGST).
• The tax amount must be deposited to the government by the 10th of the next month.
• All dealers/traders are required to be registered under GST.
• These regulations became effective on 1 October 2018. For example, Mr. Raj, a seller, sells clothes online on Flipkart. If he receives an order for Rs. 10,000, inclusive of commission, Flipkart would deduct Rs. 100 as tax (1% of Rs. 10,000).

TCS Provision in Foreign Remittance Transactions

When individuals transfer funds overseas for various purposes such as remittances, travel expenses, asset acquisitions, shopping, and investments, they are subjected to a tax termed TCS, or Tax Collected at Source. These transfers are facilitated through the Liberalised Remittance Scheme (LRS). The TCS rate for most remittances (excluding those for medical and educational purposes) was raised from 5% to 20% in the 2023 Union Budget. This adjustment aims to boost tax revenue and encourage domestic expenditure. While the TCS rate for education and medical remittances remains at 5% for amounts exceeding 7 lakhs, the new 20% TCS rate will come into effect on October 1, 2023. Taxpayers can claim TCS deductions as refunds or credits when filing income tax returns, helping to reduce their tax liabilities. Managing tax responsibilities effectively in cross-border transactions necessitates a comprehensive understanding of TCS.

For example, suppose you decide to remit 5 lakhs for investments in the US stock market. The TCS on this remitted amount would be 1,00,000. Assuming your total tax liability or advance tax dues for the financial year amount to 3,00,000, you can utilize the TCS amount to offset your outstanding tax liabilities. Consequently, your new tax liability would be reduced to 2,00,000.

Submission of Form 24G

When tax has been paid by an office of the Government to the credit of the Central Government without presenting a challan related to the tax deposit in a bank, the following adjustments to the regulations necessitate the submission of Form 24G:

Rules where TDS is Deposited without Challan (changes to Rule 30)

• If Tax Deducted at Source (TDS) has been deposited without a challan, the individual responsible for reporting and depositing the TDS to the government must submit a statement in Form 24G to the agency authorized by the Principal Director of Income Tax (Systems) [Rule 30(4)].
• This Form 24G must be submitted and issued within 15 days from the end of the relevant month. For example, for the month of March, the form should be submitted by April 30, 2019.
• Form 24G must be submitted in one of the following ways: (a) electronically under digital signature, (b) electronically along with verification in Form 27A, or (c) verified through an electronic process as prescribed.
• The individual mentioned in the first point must also inform the Book Identification number generated to each of the deductors for whom the deducted sum has been deposited.
• The Principal Director General of Income Tax (Systems) will outline the procedure for furnishing and verifying Form 24G statements.

Rules where TCS Under Section 206C is Deposited without Challan (changes to Rule 37CA)

If Tax Collected at Source (TCS) has been deposited without a challan, the individual to whom the collector has reported the TCS for depositing to the government must submit Form 24G to the agency authorized by the Principal Director of Income Tax (Systems).
Form 24G must be submitted within 15 days from the end of the relevant month. For instance, if Form 24G pertains to March, it must be submitted on or before April 30.
Form 24G must be issued in one of the following ways:

• Electronically under digital signature
• Electronically along with verification in Form 27A or
• Verified through an electronic process as prescribed

The individual mentioned in the first point must also inform the Book Identification number generated to each of the deductors for whom the deducted sum has been deposited.

The Principal Director General of Income Tax (Systems) will outline the procedure for furnishing and verifying Form 24G statements.

Interest Charged on Failure to Remit TCS to Government

In cases where a tax collector fails to collect the tax or neglects to remit it to the government within the stipulated due dates, they will incur an interest charge of 1% per month or part thereof.

Penalty for Incorrect TCS Return Filing

As per Section 271H, a penalty may be imposed if the tax collector submits an inaccurate TCS return. The penalty ranges from a minimum of Rs. 10,000 to a maximum of Rs. 1,00,000.

Distinguishing TCS from TDS

Here are the distinctions between TCS and TDS:

• TDS, or Tax Deducted at Source, pertains to tax withheld from various payments made by a company to an employee, regulated by the Income Tax Act of 1961. Conversely, TCS, or Tax Collected at Source, is collected by the seller from the buyer during the sale of specific specified goods.
• TCS is applicable to the sale of specific items like scrap, wood, tendu leaves, minerals, etc., while TDS is deducted from various sources such as wages, interest, dividends, leases, professional fees, brokerage, commission, etc.
• TDS is deducted when payments reach a certain threshold, whereas TCS is applied regardless of the payment amount. TCS is collected at a fixed rate based on the type of product being sold.