TCS under Section 206C(1H) on e-Invoicing

TCS under Section 206C(1H) on e-Invoicing. The Indian government introduced a new provision under the Income Tax Act, 1961, through the Finance Act 2020. This provision, known as Section 206C(1H), deals with Tax Collected at Source (TCS) on the sale of goods. The main objective of Section 206C(1H) is to bring high-value transactions under tax monitoring and promote better tax compliance. This section became effective from 1st October 2020. It affects sellers and buyers involved in the sale of goods and also impacts the e-invoicing mechanism under GST.
What is Section 206C(1H) of the Income Tax Act?
Section 206C(1H) of the Income Tax Act mandates that sellers of goods whose turnover exceeds Rs 10 crore in the preceding financial year must collect TCS on receiving sale consideration exceeding Rs 50 lakh from a single buyer in a financial year. The TCS is applicable only on the amount exceeding Rs 50 lakh and is to be collected at the time of receipt of payment, not at the time of invoice generation.
This section was brought in to curb tax evasion and track large-scale business-to-business transactions. The collected tax has to be deposited with the government by the 7th of the following month. It is important to note that TCS under Section 206C(1H) does not apply to the export of goods, transactions already covered under other TCS provisions, or where TDS has been deducted by the buyer.
Applicability of TCS under Section 206C(1H)
TCS under Section 206C(1H) becomes applicable when two major conditions are fulfilled:

The seller's total sales, turnover, or gross receipts from the business exceed Rs 10 crore in the preceding financial year.

The aggregate value of sale consideration received from a buyer exceeds Rs 50 lakh in a financial year.

When both these conditions are met, TCS must be collected at 0.1% on the amount exceeding Rs 50 lakh. The provision applies to all types of goods except those explicitly exempted, such as goods already covered under Sections 206C(1), 206C(1F), or 206C(1G).
Non-Applicability of Section 206C(1H)
The following categories and transactions are excluded from the scope of Section 206C(1H) of the Income Tax Act:

Sellers with annual turnover below Rs 10 crore in the previous financial year.

Buyers from whom less than Rs 50 lakh is received during the financial year.

Sale of services is not covered under this section.

Export of goods outside India.

Transactions involving government bodies, embassies, and local authorities.

Goods covered under Section 206C(1) such as alcohol, tendu leaves, timber, scrap, and minerals.

Motor vehicle sales covered under Section 206C(1F).

Foreign remittance transactions under Section 206C(1G).

Imports made into India.

Rate of TCS under Section 206C(1H)
Under Section 206C(1H) of the Income Tax, the seller is required to collect TCS at the rate of 0.1% on the amount received over Rs 50 lakh from a buyer in a financial year. However, if the buyer fails to provide a valid PAN or Aadhaar, the TCS rate increases to 1%.
Additionally, as per recent updates, if the PAN and Aadhaar are not linked, the applicable TCS rate becomes 5%. This is a strict compliance measure to encourage PAN-Aadhaar linkage.
Due Date for TCS Deposit
The TCS collected by the seller must be deposited with the government by the 7th of the month following the month in which the tax was collected. For example, if TCS is collected in April, it must be deposited by the 7th of May. Delay in payment attracts interest at the rate of 1% per month or part thereof.
Who is a Buyer under Section 206C(1H)?
A buyer is defined as any person who purchases goods from a seller and the value of purchases exceeds Rs 50 lakh in a financial year. However, some buyers are excluded from this definition:

Central or State Government.

Embassies, High Commissions, Consulates.

Local authorities and trade representatives of foreign states.

Buyers involved in import transactions.

Who is a Seller under Section 206C(1H)?
A seller is defined as a person whose total sales, gross receipts, or turnover exceeds Rs 10 crore during the immediately preceding financial year. This turnover is considered from the business carried out by the seller and does not include other income such as capital gains or rental income.
Examples for Better Understanding
Example 1: If seller A had a turnover of Rs 12 crore in FY 2023-24 and receives Rs 75 lakh from buyer B in FY 2024-25, then TCS is applicable on Rs 25 lakh (i.e., Rs 75 lakh minus Rs 50 lakh). TCS collected will be Rs 2,500 (0.1% of Rs 25 lakh).
Example 2: If seller C had a turnover of Rs 7 crore in FY 2023-24 and receives Rs 60 lakh from buyer D in FY 2024-25, then TCS is not applicable as the turnover condition is not met.
Format of TCS Invoice
If a seller opts to include the TCS in the invoice, it must be shown under "other charges." For instance:

Value of Goods: Rs 1,00,00,000

GST @18%: Rs 18,00,000

Total Invoice Amount (including GST): Rs 1,18,00,000

TCS @0.1% on Rs 1,18,00,000: Rs 11,800

Total Invoice Value: Rs 1,18,11,800

This amount will be reflected in the GSTR-1 as well, since the invoice value includes TCS.
Effect of Section 206C(1H) on e-Invoicing
E-invoicing is mandatory for businesses exceeding specified turnover thresholds. Initially, it applied to businesses with turnover above Rs 500 crore, then Rs 100 crore, Rs 50 crore, Rs 20 crore, Rs 10 crore, and now Rs 5 crore from August 1, 2023.
Section 206C(1H) affects e-invoicing as the TCS amount must be reported under the "other charges" column when generating Invoice Reference Numbers (IRN). Although TCS is not mandatory to be mentioned in the invoice, if included, it should be properly disclosed to avoid discrepancies in tax reporting.
Since TCS is collected on a receipt basis, it must also be collected on advances received. If a buyer pays an advance of Rs 60 lakh, TCS must be collected on Rs 10 lakh (amount exceeding the Rs 50 lakh threshold), even before the actual sale is invoiced.
Penalties for Non-Compliance with Section 206C(1H)
Failure to comply with the provisions of Section 206C(1H) of the Income Tax can lead to multiple penalties:

Non-Collection of TCS: A penalty equal to the amount not collected will be levied.

Non-Deposit of TCS: If the collected amount is not deposited, a penalty equal to the unremitted amount will be applicable.

Delay in Payment: Interest of 1% per month or part of a month is charged on late payment.

Delay in Return Filing: If Form 27EQ is not filed within the due date, a penalty of Rs 100 per day will be applicable until the failure continues.

Quarterly Compliance through Form 27EQ
Sellers must file Form 27EQ quarterly to report TCS collected under Section 206C(1H). The certificate of TCS must be issued to the buyer within 15 days from the due date of the return filing. The returns for quarters ending June, September, December, and March must be submitted timely to avoid penalties.
Budget 2025 Update on TCS under Section 206C(1H)
In a major relief to businesses, the Union Budget 2025 announced the withdrawal of TCS on the sale of goods under Section 206C(1H), effective from April 1, 2025. This decision is expected to ease the compliance burden for businesses, especially MSMEs. However, it is still important to understand and comply with provisions for FY 2024-25 until the new changes are enforced.
Conclusion
Section 206C(1H) of the Income Tax Act brought a significant change to the way businesses handle high-value transactions and tax compliance. Even though it will no longer apply from FY 2025-26, for FY 2024-25 it remains important for businesses to understand the applicability, calculation, invoicing impact, and due dates under this provision.
Compliance Calendar LLP continues to assist businesses in streamlining TCS and e-invoicing processes while ensuring compliance with government norms and timelines. Proper implementation of TCS policies not only avoids penalties but also helps maintain transparency and trust with stakeholders and authorities.
Email: info@ccoffice.in
Call/Whatsapp: +91 9988424211
FAQs
Q1. When does TCS become applicable under Section 206C(1H)?
Ans. TCS under Section 206C(1H) becomes applicable when a seller, whose turnover exceeded Rs.10 crore in the previous financial year, receives sale consideration exceeding Rs.50 lakh from a buyer in a financial year. The tax is collected only on the amount exceeding Rs.50 lakh and must be collected at the time of receipt of payment, not at the time of invoicing.
Q2. Is TCS under Section 206C(1H) applicable on the sale of services?
 Ans. No, TCS under Section 206C(1H) is applicable only on the sale of goods. It does not apply to transactions involving the sale of services. Businesses that are engaged solely in providing services are not required to collect TCS under this section.
Q3. What is the applicable TCS rate if the buyer does not provide PAN or Aadhaar?
 Ans. If the buyer fails to provide their PAN or Aadhaar, the TCS rate increases from the standard 0.1% to 1%. Furthermore, if PAN and Aadhaar are not linked, the rate may go up to 5% as per applicable provisions.
Q4. Is TCS under Section 206C(1H) applicable to export or import transactions?
 Ans. No, this section is not applicable to transactions involving the export of goods. It is also not applicable on imports made by the buyer into India. Export and import transactions are excluded from the scope of Section 206C(1H).
Q5. Should TCS be collected on advances received from buyers?
 Ans. Yes, TCS under Section 206C(1H) is to be collected on a receipt basis, not on a sale basis. Therefore, if a seller receives an advance payment that exceeds the Rs.50 lakh threshold in a financial year, TCS is required to be collected on the amount received above the threshold, even if the sale has not yet been invoiced.
Q6. How should TCS be shown in the invoice under e-invoicing?
 Ans. Under the e-invoicing system, if TCS is charged in the invoice, it should be shown under the “other charges” section while generating the Invoice Reference Number (IRN). The total invoice value, including TCS, will be reflected in GSTR-1, which helps maintain consistency in GST reporting.
Q7. What are the consequences of failing to deposit or report TCS on time?
 Ans. Non-compliance with Section 206C(1H) can attract multiple penalties. If TCS is not collected, a penalty equal to the uncollected amount applies. If collected but not deposited, the same penalty applies along with interest at 1% per month. Delay in filing Form 27EQ also leads to a late fee of Rs.100 per day.

The Indian government introduced a new provision under the Income Tax Act, 1961, through the Finance Act 2020. This provision, known as Section 206C(1H), deals with Tax Collected at Source (TCS) on the sale of goods. The main objective of Section 206C(1H) is to bring high-value transactions under tax monitoring and promote better tax compliance. This section became effective from 1st October 2020. It affects sellers and buyers involved in the sale of goods and also impacts the e-invoicing mechanism under GST.

What is Section 206C(1H) of the Income Tax Act?

Section 206C(1H) of the Income Tax Act mandates that sellers of goods whose turnover exceeds Rs 10 crore in the preceding financial year must collect TCS on receiving sale consideration exceeding Rs 50 lakh from a single buyer in a financial year. The TCS is applicable only on the amount exceeding Rs 50 lakh and is to be collected at the time of receipt of payment, not at the time of invoice generation.

This section was brought in to curb tax evasion and track large-scale business-to-business transactions. The collected tax has to be deposited with the government by the 7th of the following month. It is important to note that TCS under Section 206C(1H) does not apply to the export of goods, transactions already covered under other TCS provisions, or where TDS has been deducted by the buyer.

Applicability of TCS under Section 206C(1H)

TCS under Section 206C(1H) becomes applicable when two major conditions are fulfilled:

The seller's total sales, turnover, or gross receipts from the business exceed Rs 10 crore in the preceding financial year.
The aggregate value of sale consideration received from a buyer exceeds Rs 50 lakh in a financial year.

Non-Applicability of Section 206C(1H)

The following categories and transactions are excluded from the scope of Section 206C(1H) of the Income Tax Act:

Sellers with annual turnover below Rs 10 crore in the previous financial year.
Buyers from whom less than Rs 50 lakh is received during the financial year.
Sale of services is not covered under this section.
Export of goods outside India.
Transactions involving government bodies, embassies, and local authorities.
Goods covered under Section 206C(1) such as alcohol, tendu leaves, timber, scrap, and minerals.
Motor vehicle sales covered under Section 206C(1F).
Foreign remittance transactions under Section 206C(1G).
Imports made into India.

Rate of TCS under Section 206C(1H)

Under Section 206C(1H) of the Income Tax, the seller is required to collect TCS at the rate of 0.1% on the amount received over Rs 50 lakh from a buyer in a financial year. However, if the buyer fails to provide a valid PAN or Aadhaar, the TCS rate increases to 1%.

Additionally, as per recent updates, if the PAN and Aadhaar are not linked, the applicable TCS rate becomes 5%. This is a strict compliance measure to encourage PAN-Aadhaar linkage.

Due Date for TCS Deposit

The TCS collected by the seller must be deposited with the government by the 7th of the month following the month in which the tax was collected. For example, if TCS is collected in April, it must be deposited by the 7th of May. Delay in payment attracts interest at the rate of 1% per month or part thereof.

Who is a Buyer under Section 206C(1H)?

A buyer is defined as any person who purchases goods from a seller and the value of purchases exceeds Rs 50 lakh in a financial year. However, some buyers are excluded from this definition:

Central or State Government.
Embassies, High Commissions, Consulates.
Local authorities and trade representatives of foreign states.
Buyers involved in import transactions.

Who is a Seller under Section 206C(1H)?

A seller is defined as a person whose total sales, gross receipts, or turnover exceeds Rs 10 crore during the immediately preceding financial year. This turnover is considered from the business carried out by the seller and does not include other income such as capital gains or rental income.

Examples for Better Understanding

Example 1: If seller A had a turnover of Rs 12 crore in FY 2023-24 and receives Rs 75 lakh from buyer B in FY 2024-25, then TCS is applicable on Rs 25 lakh (i.e., Rs 75 lakh minus Rs 50 lakh). TCS collected will be Rs 2,500 (0.1% of Rs 25 lakh).

Example 2: If seller C had a turnover of Rs 7 crore in FY 2023-24 and receives Rs 60 lakh from buyer D in FY 2024-25, then TCS is not applicable as the turnover condition is not met.

Format of TCS Invoice

If a seller opts to include the TCS in the invoice, it must be shown under "other charges." For instance:

Value of Goods: Rs 1,00,00,000
GST @18%: Rs 18,00,000
Total Invoice Amount (including GST): Rs 1,18,00,000
TCS @0.1% on Rs 1,18,00,000: Rs 11,800
Total Invoice Value: Rs 1,18,11,800

This amount will be reflected in the GSTR-1 as well, since the invoice value includes TCS.

Effect of Section 206C(1H) on e-Invoicing

E-invoicing is mandatory for businesses exceeding specified turnover thresholds. Initially, it applied to businesses with turnover above Rs 500 crore, then Rs 100 crore, Rs 50 crore, Rs 20 crore, Rs 10 crore, and now Rs 5 crore from August 1, 2023.

Section 206C(1H) affects e-invoicing as the TCS amount must be reported under the "other charges" column when generating Invoice Reference Numbers (IRN). Although TCS is not mandatory to be mentioned in the invoice, if included, it should be properly disclosed to avoid discrepancies in tax reporting.

Since TCS is collected on a receipt basis, it must also be collected on advances received. If a buyer pays an advance of Rs 60 lakh, TCS must be collected on Rs 10 lakh (amount exceeding the Rs 50 lakh threshold), even before the actual sale is invoiced.

Penalties for Non-Compliance with Section 206C(1H)

Failure to comply with the provisions of Section 206C(1H) of the Income Tax can lead to multiple penalties:

Non-Collection of TCS: A penalty equal to the amount not collected will be levied.
Non-Deposit of TCS: If the collected amount is not deposited, a penalty equal to the unremitted amount will be applicable.
Delay in Payment: Interest of 1% per month or part of a month is charged on late payment.
Delay in Return Filing: If Form 27EQ is not filed within the due date, a penalty of Rs 100 per day will be applicable until the failure continues.

Quarterly Compliance through Form 27EQ

Sellers must file Form 27EQ quarterly to report TCS collected under Section 206C(1H). The certificate of TCS must be issued to the buyer within 15 days from the due date of the return filing. The returns for quarters ending June, September, December, and March must be submitted timely to avoid penalties.

Budget 2025 Update on TCS under Section 206C(1H)

In a major relief to businesses, the Union Budget 2025 announced the withdrawal of TCS on the sale of goods under Section 206C(1H), effective from April 1, 2025. This decision is expected to ease the compliance burden for businesses, especially MSMEs. However, it is still important to understand and comply with provisions for FY 2024-25 until the new changes are enforced.

Conclusion

Section 206C(1H) of the Income Tax Act brought a significant change to the way businesses handle high-value transactions and tax compliance. Even though it will no longer apply from FY 2025-26, for FY 2024-25 it remains important for businesses to understand the applicability, calculation, invoicing impact, and due dates under this provision.

Compliance Calendar LLP continues to assist businesses in streamlining TCS and e-invoicing processes while ensuring compliance with government norms and timelines. Proper implementation of TCS policies not only avoids penalties but also helps maintain transparency and trust with stakeholders and authorities.

Email: info@ccoffice.in

Call/Whatsapp: +91 9988424211

FAQs

Q1. When does TCS become applicable under Section 206C(1H)?

Ans. TCS under Section 206C(1H) becomes applicable when a seller, whose turnover exceeded Rs.10 crore in the previous financial year, receives sale consideration exceeding Rs.50 lakh from a buyer in a financial year. The tax is collected only on the amount exceeding Rs.50 lakh and must be collected at the time of receipt of payment, not at the time of invoicing.

Q2. Is TCS under Section 206C(1H) applicable on the sale of services?

Ans. No, TCS under Section 206C(1H) is applicable only on the sale of goods. It does not apply to transactions involving the sale of services. Businesses that are engaged solely in providing services are not required to collect TCS under this section.

Q3. What is the applicable TCS rate if the buyer does not provide PAN or Aadhaar?

Ans. If the buyer fails to provide their PAN or Aadhaar, the TCS rate increases from the standard 0.1% to 1%. Furthermore, if PAN and Aadhaar are not linked, the rate may go up to 5% as per applicable provisions.

Q4. Is TCS under Section 206C(1H) applicable to export or import transactions?

Ans. No, this section is not applicable to transactions involving the export of goods. It is also not applicable on imports made by the buyer into India. Export and import transactions are excluded from the scope of Section 206C(1H).

Q5. Should TCS be collected on advances received from buyers?

Ans. Yes, TCS under Section 206C(1H) is to be collected on a receipt basis, not on a sale basis. Therefore, if a seller receives an advance payment that exceeds the Rs.50 lakh threshold in a financial year, TCS is required to be collected on the amount received above the threshold, even if the sale has not yet been invoiced.

Q6. How should TCS be shown in the invoice under e-invoicing?

Ans. Under the e-invoicing system, if TCS is charged in the invoice, it should be shown under the “other charges” section while generating the Invoice Reference Number (IRN). The total invoice value, including TCS, will be reflected in GSTR-1, which helps maintain consistency in GST reporting.

Q7. What are the consequences of failing to deposit or report TCS on time?

Ans. Non-compliance with Section 206C(1H) can attract multiple penalties. If TCS is not collected, a penalty equal to the uncollected amount applies. If collected but not deposited, the same penalty applies along with interest at 1% per month. Delay in filing Form 27EQ also leads to a late fee of Rs.100 per day.