11 May Provision of TDS and TCS on Purchase & Sell of Goods
In the Indian tax system, two key concepts govern tax collection at source: Tax Deducted at Source (TDS) and Tax Collected at Source (TCS). While they share some similarities, they differ in who collects the tax and on what type of transactions they apply. This article focuses on TCS on the purchase and sale of goods, particularly transactions exceeding ₹50 lakhs.
Understanding TCS
TCS is a mechanism where the seller of specific goods is responsible for collecting tax at source from the buyer at the time of sale. This collected tax is then deposited by the seller to the government. The objective of TCS is to widen the tax net and ensure better tax compliance.
When does TCS apply on purchase of goods?
In India, TCS on the purchase of goods is governed by Section 206C(1H) of the Income Tax Act, 1961. This provision applies when the following conditions are met:
- Seller’s Turnover: The seller’s total sales, gross receipts, or turnover from the business exceed ₹10 Crore in the previous financial year ending on March 31st.
- Purchase Value: The value (or aggregate value) of goods purchased by a single buyer from the seller in a financial year exceeds ₹50 lakhs.
Understanding the Difference: TDS vs. TCS
- TDS (Tax Deducted at Source): This applies when a payer deducts tax from certain payments they make to a payee. The payer then deposits this deducted tax with the government on behalf of the payee. Common examples include TDS on salary, rent, and professional fees.
- TCS (Tax Collected at Source): Here, the tax is collected by the seller (collector) from the buyer (payer) at the time of sale. The seller then deposits this collected tax with the government.
Important Points to Remember:
- TCS is applicable on the amount exceeding ₹50 lakhs. So, if you purchase goods worth ₹60 lakhs, TCS will be calculated on ₹10 lakhs (₹60 lakhs - ₹50 lakhs).
- The current TCS rate (as of March 2024) is 0.1%.
- If the buyer fails to provide their Permanent Account Number (PAN) or Aadhaar number, the seller has to collect TCS at a higher rate of 1%.
Example:
Company A purchases goods worth ₹75 lakhs from Company B in a financial year. Company B has a turnover exceeding ₹10 Crore.
TCS will be applicable on the amount exceeding ₹50 lakhs, which is ₹25 lakhs (₹75 lakhs – ₹50 lakhs).
TCS rate = 0.1%
TCS amount = ₹25 lakhs * 0.1% = ₹2500
Who is Responsible for TCS Compliance?
- The seller is responsible for collecting the TCS at the time of receiving the payment from the buyer.
- The seller needs to have a Tax Collection Account Number (TAN) to deposit the collected TCS with the government.
- The seller must also file TCS return to report the collected tax.
What happens if the buyer does not provide PAN/Aadhaar?
If the buyer fails to provide their Permanent Account Number (PAN) or Aadhaar number, the seller is required to collect TCS at a higher rate of 1%.
Seller’s Responsibilities:
- Collect TCS from the buyer at the designated rate.
- Issue a certificate to the buyer mentioning the amount of TCS collected.
- Deposit the collected TCS to the government within the specified timeframe (usually by the 7th of the following month).
- File TCS return with the Income Tax Department.
Buyer’s Considerations:
While the seller collects TCS, the buyer can claim credit for this tax deducted at source while filing their income tax return, reducing the buyer’s overall tax liability.
The buyer needs to obtain a TCS certificate from the seller for claiming the credit.
Difference between TCS and TDS on purchase of goods:
There’s a common misconception that TDS applies to the purchase of goods. However, there’s no provision under the current tax laws for TDS on the purchase of goods. TDS is generally applicable on income payments such as interest, rent, and professional fees.
Key Differences Between TCS and TDS:
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Feature
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TCS
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TDS
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|---|---|---|
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Who deducts the tax?
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Seller
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Buyer
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On what type of transaction?
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Sale of specific goods (above Rs 50 Lakh)
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Payment for specific services, rent, interests
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Purpose
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To widen tax net and ensure advance tax collection
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To ensure the tax is deducted at source and deposited with the government
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Additional Considerations:
- TCS is a temporary tax collection mechanism. The buyer can claim credit for the collected TCS while filing their income tax return, subject to certain conditions.
- It’s crucial to maintain proper records of TCS deducted/collected for tax compliance purposes.
In Conclusion:
Understanding TCS on the purchase of goods, particularly for transactions above ₹50 lakhs, is crucial for businesses to ensure proper tax compliance. By being aware of the threshold limit, collection responsibility, and calculation methods, businesses can avoid penalties and contribute effectively to the tax system.
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