Understanding Section 206C of the Income Tax Act 2020: A Comprehensive Guide to Tax Collection at Source

Section 206C of the Income Tax Act, 1961 was first introduced in 1988, with the aim of collecting taxes at source on specific transactions. The section was amended several times over the years to widen its scope and make it more effective. In 2020, the Income Tax Act was amended again, and section 206C underwent some significant changes. In this blog, we will discuss the latest version of Section 206C and its implications.

What is Section 206C of the Income Tax Act?

Section 206C of the Income Tax Act, 1961 deals with the collection of tax at source (TCS) on certain transactions. It is applicable to both individuals and companies who engage in specific types of transactions with other individuals or companies.

The objective of this section is to ensure that taxes are collected at the time of the transaction itself. This helps to prevent tax evasion and ensures that the government has a steady flow of revenue.

The latest amendment to Section 206C

The Finance Act, 2020 brought about some significant changes to Section 206C. The scope of the section was widened, and the rate of tax that needs to be collected was increased in some cases.

The main changes introduced by the 2020 amendment are:

1. New Transactions covered: The scope of Section 206C has been expanded to include new transactions, such as the sale of overseas tour packages and the sale of goods above Rs. 50 lakhs.
2. Rate of tax collection increased: The rate of tax collection has been increased in some cases. For instance, if the buyer does not provide a PAN or Aadhaar card, the tax collection rate will be 5% instead of 1%.
3. Exemption Limit Reduced: The exemption limit for collecting TCS has been reduced from Rs. 50 lakhs to Rs. 20 lakhs in the case of sale of goods.
4. Seller & Buyer both liable for non-collection or short-collection: The responsibility of collecting TCS has been placed not only on the seller but also on the buyer. In case of non-collection or short-collection, both the seller and the buyer will be liable to pay the tax.

Implications of the changes

The latest amendments to Section 206C are expected to have a significant impact on businesses and individuals who engage in the specified transactions. Let’s look at the implications of these changes in more detail:

1. Increased Compliance Burden: With the widening of the scope of Section 206C, more businesses will now be required to collect tax at source. This will increase the compliance burden for businesses, as they will need to ensure that they are collecting the correct amount of tax at the time of the transaction.
2. Increase in TCS rate: The increase in the TCS rate for non-PAN/Aadhaar transactions from 1% to 5% will impact small businesses and startups. These businesses may not have a large customer base and may find it challenging to collect the required documents from their customers.
3. Impact on Consumer demand: The reduction in the exemption limit from Rs. 50 lakhs to Rs. 20 lakhs is likely to impact consumer demand. This may lead to an increase in the cost of goods, as businesses will need to collect tax at source on transactions above Rs. 20 lakhs.
4. Increase in Revenue for the Government: The changes introduced to Section 206C are expected to increase revenue for the government. With the widening of the scope of the section, more businesses will now be required to collect tax at source, and the increase in the TCS rate will further boost revenue.

1. Transactions covered: Section 206C covers a range of transactions where tax needs to be collected at source. These transactions include the sale of alcohol, timber, scrap, minerals, and any other goods that the government may notify from time to time. The section also covers certain specified services such as payment made for remittance outside India or payment to a travel agent for purchase of overseas tour packages.
2. Collection of tax at source: Under Section 206C, the seller is required to collect tax at source from the buyer at the time of the transaction. The tax collected is then deposited with the government. The rate at which tax needs to be collected varies depending on the transaction and the identity of the buyer. In most cases, the rate is 1%, but it can go up to 5% if the buyer does not provide a PAN or Aadhaar card.
3. Liability for non-collection or short-collection: Section 206C makes both the seller and the buyer liable in case of non-collection or short-collection of tax. If the seller fails to collect the required tax at source, they will be liable to pay the tax along with interest and penalties. Similarly, if the buyer fails to provide their PAN or Aadhaar card, they will be liable to pay the tax along with interest and penalties.
4. Exemption limit: Section 206C provides for an exemption limit below which tax does not need to be collected at source. The exemption limit for the sale of goods has been reduced to Rs. 20 lakhs, which means that tax needs to be collected at source for transactions above Rs. 20 lakhs. However, the exemption limit for the sale of services remains unchanged at Rs. 50 lakhs.
5. Impact on businesses: The changes introduced to Section 206C are expected to impact businesses in several ways. Businesses will need to ensure that they are complying with the requirements of the section, which will increase their compliance burden. They will also need to ensure that they are collecting the correct amount of tax at the time of the transaction, failing which they will be liable to pay penalties and interest. The increase in the TCS rate may also impact consumer demand, which could in turn affect the sales of businesses.

In conclusion

Section 206C is an important provision under the Income Tax Act, which aims to prevent tax evasion and ensure that taxes are collected at the time of the transaction itself. The recent changes to the section are expected to have a significant impact on businesses and individuals who engage in the specified transactions. It is, therefore, essential for businesses to ensure that they are complying with the requirements of the section to avoid penalties and interest.

Read more useful content:

• section 234e of income tax act
• section 286 of income tax act
• section 90a of income tax act
• section 40a(7) of income tax act
• section 226(3) of income tax act
• section 24 of income tax act

Frequently Asked Questions (FAQs)

Q. What is Section 206C of the Income Tax Act 2020?
Answer: Section 206C of the Income Tax Act 2020 is a provision that requires the collection of tax at source for specified transactions such as the sale of certain goods and services. The tax collected at source is then deposited with the government.

Q. Which transactions are covered under Section 206C?
Answer: Section 206C covers a range of transactions including the sale of alcohol, timber, scrap, minerals, and any other goods that the government may notify from time to time. The section also covers certain specified services such as payment made for remittance outside India or payment to a travel agent for purchase of overseas tour packages.

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Q. Who is responsible for collecting tax at source under Section 206C?
Answer: The seller is responsible for collecting tax at source from the buyer at the time of the transaction. The tax collected is then deposited with the government.

Q. What is the rate at which tax needs to be collected at source under Section 206C?
Answer: The rate at which tax needs to be collected at source varies depending on the transaction and the identity of the buyer. In most cases, the rate is 1%, but it can go up to 5% if the buyer does not provide a PAN or Aadhaar card.

Q. Is there an exemption limit for tax collection at source under Section 206C?
Answer: Yes, Section 206C provides for an exemption limit below which tax does not need to be collected at source. The exemption limit for the sale of goods has been reduced to Rs. 20 lakhs, which means that tax needs to be collected at source for transactions above Rs. 20 lakhs. However, the exemption limit for the sale of services remains unchanged at Rs. 50 lakhs.

Q. What happens if tax is not collected at source or is short collected under Section 206C?
Answer: If tax is not collected at source or is short collected, both the seller and the buyer will be liable to pay the tax along with interest and penalties.

Q. What is the impact of Section 206C on businesses?
Answer: The changes introduced to Section 206C are expected to impact businesses in several ways. Businesses will need to ensure that they are complying with the requirements of the section, which will increase their compliance burden. They will also need to ensure that they are collecting the correct amount of tax at the time of the transaction, failing which they will be liable to pay penalties and interest. The increase in the TCS rate may also impact consumer demand, which could in turn affect the sales of businesses.