Section 206C(1H) of Income Tax Act – Meaning, Scope and Challenges
What is Section 206C(1H) ?
A new Section 206C(1H) was introduced with effect from October 1, 2020 by virtue of which TCS @0.1% (0.075% for Fy 2020-21) is required to be collected by those Sellers whose aggregate turnover exceeds Rs. 10 Crores and the receipts from a buyer against sales consideration exceeds Rs.50 lacs in any previous year.
There is a big challenge in complying this section as sellers are required to keep track of receipts from each customer. Therefore, in order to avoid any non-compliance under this section, sellers have made a practice of collecting/charging TCS on each invoices issued to probable eligible customer. The main reason behind this is that the Income Tax department is only concerned with collection of TCS on receipt of consideration and deposit of such amount into government exchequer.
Challenges in collecting TCS on Invoice
The practice of charging/ collecting TCS on Invoice may lead to many challenges to sellers like:
1. Receipt of Advance amount
Where a Seller receives advance amount from buyer then he may choose to deposit TCS at the time of receipt of advance and thereafter adjust the amount of TCS while raising Invoice. However, in case where he does not deposit TCS at the time of receipt of advance and collects TCS and deposit it on invoice then it amounts to delay in collection of TCS and depositing it.
2. Goods Returned
Where buyer returns goods to seller then Seller is required to issue credit note whereas buyer is required to issue debit note otherwise Seller have to bear the amount of TCS out of his own pocket.
3. Credit Sales
There is a general trade practice of selling goods on credit with credit period ranging from 30 days to 90 days. Now, suppose a Seller sells goods on March 01, 2021 on a credit period of 45 days and charge TCS@0.075% on Invoice. In this case, seller will receive the payment after 45 days i.e. on April 15, 2021. But with effect from April 01, 2021, effective TCS rate will be 0.1%. In this case, applicable TCS rate must be 0.1% instead of 0.075% as the receipt of transaction is after April 01, 2021 and since the TCS collected/charged on invoice is 0.075% therefore, penalty and interest shall be charged from the seller.
So, Seller must be careful in charging the TCS on transactions and keep in mind the date of receipt and TCS rate applicability on such receipts.
4. Default in payment by Buyer
Where Buyer defaulted in payment to Seller then Seller will be in adverse position as he might have deposited TCS out of his own pocket which was charged on Invoice.
In such case, Seller is required to issue credit notes for reversal of TCS but it might not be an easy task as there may be disputes in between seller and buyer which may go for long and after a certain period reversal of TCS will not be available. This may lead to loss of TCS amount deposited by seller on behalf of buyer.
5. Replacement of goods under warranty
Where the goods are under warranty and seller replaces his goods with new ones then there are chances that Seller issues another invoice and deposits the amount of TCS twice despite the fact that sales consideration is received only once. Therefore, in such circumstances, Seller must be extra cautious and must issue credit note well in time.
6. Sale of Goods before October 01, 2020
Where the Seller sells goods on or before October 01, 2020 but the sales consideration received on or after October 01, 2020 then in such cases Seller is required to collect the amount of TCS by issuing debit note of the amount of TCS.
7. Higher rate of TCS – New Section 206CCA
A new section 206CCA is introduced in the budget for the year 2021-22 whereby it is provide to charge higher rate of TCS where Income Tax Returns has not been filed. Therefore, in order to comply with this section, seller would require confirmation from buyer regarding his filing of ITR and Seller would require documentary evidences for it like acknowledgment of filing of ITR. And there are chances that Seller might not have requisite confirmation/documents of buyer, which may lead to charging of lesser amount of TCS by Seller and which in turn into arising of disputes in between Buyer and Seller.
8. Blockage of Working Capital
Where in case, Seller charge TCS on invoice and deposit the same out of his own pocket but the buyer delays in payment to seller, then in such circumstances the working capital of seller upto the amount of TCS paid by seller gets unnecessary blocked. This blockage of funds will result into extra burden of cost of interest. Therefore, in such circumstances, it would be advisable that seller should charge TCS at the time of receipt of consideration.