Tax Collected at Source (TCS)

TCS is a tax payable by a seller under Section 206 of the Income Tax Act, 1961. It was originally introduced to curb tax evasion and money laundering by the Income Tax Department. Sellers of specified goods (or ‘Extraordinary Transactions’ defined above) are required to collect tax from the buyers, which is over and above the selling price of the goods. It then becomes the seller's liability to deposit this tax with the relevant governmental authority within the prescribed deadline. (Nowadays, the method of payment of taxes is done online. The seller is also required to get himself registered first before paying it online). Read on to understand further the type of goods that require TCS Collection, TCS under GST, and the new provisions under GST Applicable, applicable from 2020.

What is TCS?

TCS stands for Tax Collected at Source. Under the Income Tax Act, there are certain transactions (often referred to as ‘Extraordinary Transactions’ in which the seller is required to collect a stipulated percentage of tax from his buyers. These Extraordinary Transactions pertain to business transactions or regular trading transactions. The tax so collected by the buyers is collected at the time of sale itself.

Sellers who collect the stipulated tax do not keep that amount for themselves (or their businesses). They are required to pay that tax to the government. Therefore, in reality, the seller is acting only as an intermediary (or a middleman) between the buyer and the government.

Which type of goods requires the collection of TCS?

TCS is applicable to the goods that are employed for trading purposes. For example, the manufacturing and processing of liquor (for consumption by humans) are not chargeable under TCS. However, TCS will be applicable to the same liquor when the seller trades it. 
The rate of TCS is different for different goods. These goods have been specified under different categories, namely:-

1. Liquor (made for consumption by humans) - 1%
2. Timber wood under forest leased - 2.5%
3. Tendu leaves - 5%
4. Timber wood by any other mode - 2.5%
5. Scrap - 1%
6. Purchase of Motor Vehicles for over Rs. 10 lakh - 1%
7. Parking lot, Toll Plaza - 2%

Do you have to pay TCS on Scrap?

Scrap from Manufacturing- Scrap is defined as waste from the manufacture or mechanical working of materials that is not usable because of breakage, wear and tear or cut up.
Scrap, derived from manufacturing products, falls under Section 2(29BA) of the Income Tax Act, 1961. Therefore, TCS is applicable to the scrap obtained from Manufactured products in places such as factories or warehouses.

Mechanical working is not defined anywhere in the Income Tax Act. In general parlance, it is defined as material that is deformed into the desired shape (bending, cutting, hammering, etc.). The scrap derived from mechanical work is also subjected to TCS under Section 206C. Therefore, residual scrap derived from manual labour is equally taxed as a manufactured product under Section 2(29)BA of the Income Tax Act. 

For example, the sale of broken pipes or broken office items (computers, printers, etc.) is not Taxed under TCS (except sold by factories).
However, residual items sold out of manufacturing or material are subjected to TCS. 
TCS under GST

Under IGST Act, any seller or trader selling goods online would get their payment from the online platform after deducting an amount tax @ 1%- (breakup- 0.5% in CGST and 0.5% in SGST). Moreover, the seller must deposit the tax amount to the government by the 10th of the following month. However, before that, the seller or trader is required to get himself mandatorily registered under GST.

Example- Mr. X (seller) sells a new television online on Amazon to Mr. Y (buyer). The price of the television is Rs. 20,000. Therefore, Amazon will be collecting tax at the time of sale itself, of Rs. 200 (i.e., 1% of 20,000).
New provisions under GST.

Certain new provisions have been applicable from October 1, 2020. The provisions are as follows:-

• A dealer that receives an amount of Rs. 7 Lakh or greater than that in any foreign currency under Liberalized Remittance Scheme must collect tax at a stipulated 5%.


• All sellers who get a gross turnover of more than Rs. 20 Crores in the previous financial year- have the liberty to collect tax at 0.1%.