Major Update: Section 206C(1H) TCS Collection Ends from April 2025

Overview

Tax Collected at Source (TCS) is a crucial aspect of compliance under the Income Tax Act of 1961, impacting both businesses and taxpayers. A notable update has been made regarding Section 206C(1H), which requires TCS to be collected on the sale of goods. As of April 1, 2025, taxpayers will be exempt from collecting TCS under this provision. This article explores the specifics of the amendment, its effects, and key information for taxpayers to understand.

What Does Section 206C(1H) Entail?

Section 206C(1H) was enacted through the Finance Act 2020 and took effect on October 1, 2020. It mandated that sellers collect TCS at a rate of 0.1% on goods sold surpassing ₹50 lakh in a financial year if their total sales, turnover, or gross receipts exceeded ₹10 crore in the preceding year.

• Applicability: This section applies to sellers whose turnover in the previous fiscal year was over ₹10 crore.
• TCS Rate: A rate of 0.1% applies to the amount beyond ₹50 lakh in a financial year (1% if PAN/Aadhaar is not provided).
• Collection Method: TCS was to be collected at the time payment was received from the buyer.
• Exemptions: TCS was not applicable to exports, goods subject to different TCS sections, and transactions already subject to TDS.

Various challenges emerged following the implementation of Section 206C(1H), prompting its repeal:

• Heightened Compliance Burden: Numerous businesses encountered difficulties in tracking and collecting TCS from purchasers.
• Complexity in Execution: The multitude of transactions and necessary adjustments complicated compliance.
• Overlap with Other Tax Regulations: Several transactions were already governed by TDS or other indirect tax laws, resulting in confusion.
• Improving Business Operations: The repeal seeks to streamline tax compliance for businesses, thus enhancing the ease of conducting business in India.

The repeal of TCS under Section 206C(1H) will take effect starting April 1, 2025. After this date, businesses and taxpayers will no longer be required to collect or remit TCS on the sale of goods under this provision.

1. Benefits for Sellers:

• No obligation to collect, deposit, or submit TCS returns for transactions falling under this section.
• Decreased administrative load in maintaining records related to buyers.

2. Effects on Buyers:

• Buyers will not experience TCS deductions on their purchases.
• There will be no need to claim credits for TCS in their tax filings.

3. Adjustments to Accounting and ERP Systems:

• Businesses must revise their ERP and accounting software to eliminate TCS calculations from invoices following April 1, 2025.
• Effective communication with buyers regarding the changes in tax regulations is necessary.

• Evaluate Current TCS Compliances: Confirm that all TCS obligations according to Section 206C(1H) are met by March 31, 2025.
• Revise Contracts and Invoices: Eliminate TCS-related stipulations from sales agreements and invoices for transactions taking place post-April 1, 2025.
• Notify Buyers: Inform frequent customers about the upcoming changes to prevent any confusion concerning tax calculations.
• Adjust Accounting Systems: Companies relying on automated invoicing and accounting software must modify their systems to reflect the new regulation.

The decision to abolish Section 206C(1H) starting April 1, 2025, is a positive development that will alleviate compliance burdens and reduce unnecessary financial strains on businesses. This aligns with the government's aim to simplify tax processes and promote ease of business operations. Taxpayers should ensure a smooth transition by adjusting their accounting, invoicing, and compliance methods in advance of the effective date.

For additional guidance, taxpayers can seek advice from their Chartered Accountants or tax professionals to ensure they remain compliant with the new regulations.

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