Understanding Section 206CQ of the Income Tax Act: What You Need to Know

March 22, 2023

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Understanding Section 206CQ of Income Tax Act

The Indian Income Tax Act, 1961, contains several provisions that regulate tax deductions and collections. Section 206CQ is one such provision that deals with tax collected at source (TCS) on the sale of goods. This section was introduced in the Income Tax Act by the Finance Act, 2020, and it became effective from 1st October 2020. In this blog, we will discuss what Section 206CQ is, its applicability, and how it affects businesses and taxpayers.

What is Section 206CQ of Income Tax Act?

Section 206CQ of the Income Tax Act, 1961, mandates tax collection at source on the sale of goods. Under this section, a seller of goods is required to collect tax at the rate of 0.1% from the buyer if the sale consideration exceeds Rs. 50 lakhs in a financial year. This provision is applicable to both individuals and businesses and covers both resident and non-resident buyers.

Applicability of Section 206CQ

Section 206CQ applies to all sellers of goods, including individuals, Hindu Undivided Families (HUFs), companies, and partnerships. The section applies to all sales of goods, including exports and supplies made to the Government, except for the following:

Goods on which other provisions of TCS are applicable: If any other provision of TCS is applicable to the sale of goods, then Section 206CQ will not apply.
Goods for personal consumption: If the buyer purchases goods for personal consumption and not for business purposes, then Section 206CQ will not apply.
Goods purchased for resale: If the buyer purchases goods for resale or for use in manufacturing or processing, then the provisions of Section 206CQ will not apply.
Goods covered under other sections: If the goods are covered under any other section of the Income Tax Act, then Section 206CQ will not apply.

Impact of Section 206CQ on businesses and taxpayers

Section 206CQ has a significant impact on businesses and taxpayers. The provision places an additional compliance burden on businesses, as they are required to collect tax at the time of sale and remit it to the Government. Businesses must also maintain records of all sales covered under this provision.

For taxpayers, this provision may increase the cost of goods, as sellers may pass on the additional tax burden to buyers. Taxpayers who purchase goods for business purposes will also have to ensure that they do not exceed the Rs. 50 lakh threshold in a financial year to avoid the TCS provision.

How does Section 206CQ work?

Under Section 206CQ, the seller of goods is required to collect tax at the rate of 0.1% (0.075% till 30th June 2021) of the sale consideration from the buyer if the aggregate value of goods sold or likely to be sold to the buyer during the financial year exceeds Rs. 50 lakhs. The seller must collect the tax at the time of receipt of the amount or at the time of debiting the buyer’s account, whichever is earlier. If the buyer fails to provide the Permanent Account Number (PAN) or the Aadhaar number to the seller, then the tax rate increases to 1%. However, if the buyer is not liable to obtain PAN or Aadhaar, then no tax shall be collected under this section.

The seller must furnish a statement in Form 27EQ to the Income Tax Department within 10 days from the end of the month in which the tax is collected. The statement must contain details of the tax collected and remitted to the Government, as well as the PAN or Aadhaar of the buyer.

Consequences of non-compliance

If a seller fails to collect tax under Section 206CQ or fails to remit the collected tax to the Government, then they may be subject to penalty and interest under Section 271CA and Section 220 respectively. The penalty amount may range from Rs. 10,000 to Rs. 1,00,000, depending on the duration of default. Moreover, the seller may also lose the right to collect tax at source under other provisions of the Income Tax Act.

However, if a buyer fails to furnish the correct PAN or Aadhaar to the seller, then the buyer may be subject to a penalty of Rs. 10,000 under Section 271H.

Exceptions and challenges

Although Section 206CQ exempts certain types of goods and transactions from its scope, its application can still be challenging for businesses. For example, businesses may find it difficult to track the cumulative value of sales to a buyer across different branches or channels. Moreover, businesses may face practical difficulties in collecting tax from buyers who do not have a PAN or Aadhaar, or whose PAN or Aadhaar is not linked to their mobile number. In such cases, businesses may have to rely on alternative means of identifying the buyer and collecting the tax.

Conclusion

Section 206CQ is a new provision in the Income Tax Act that aims to widen the tax base and discourage cash transactions in the sale of goods. The provision requires sellers to collect tax at source at the rate of 0.1% if the sale consideration exceeds Rs. 50 lakhs in a financial year. The provision applies to all sellers of goods, except for certain exceptions. Businesses and taxpayers must be aware of the provisions and comply with them to avoid penalties and interest. As the implementation of the provision may pose challenges, businesses may need to adopt efficient and reliable systems to ensure compliance.

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Frequently Asked Questions (FAQs)

What is Section 206CQ of the Income Tax Act?
Answer: Section 206CQ is a new provision that requires sellers of goods to collect tax at source from buyers if the sale consideration exceeds Rs. 50 lakhs in a financial year.

When did Section 206CQ come into effect?
Answer: Section 206CQ came into effect from 1st October 2020.

What is the tax rate under Section 206CQ?
Answer: The tax rate under Section 206CQ is 0.1% (0.075% till 30th June 2021) of the sale consideration.

When should a seller collect tax under Section 206CQ?
Answer: A seller should collect tax under Section 206CQ at the time of receipt of the amount or at the time of debiting the buyer’s account, whichever is earlier.

What is the threshold limit for applicability of Section 206CQ?
Answer: The threshold limit for applicability of Section 206CQ is Rs. 50 lakhs in a financial year.

Who is liable to collect tax under Section 206CQ?
Answer: The seller of goods is liable to collect tax under Section 206CQ.

What happens if a buyer does not provide PAN or Aadhaar to the seller?
Answer: If a buyer does not provide PAN or Aadhaar to the seller, then the tax rate under Section 206CQ increases to 1%.

What is Form 27EQ?
Answer: Form 27EQ is a statement that a seller must furnish to the Income Tax Department within 10 days from the end of the month in which tax is collected under Section 206CQ.

What are the consequences of non-compliance with Section 206CQ?
Answer: Non-compliance with Section 206CQ may result in penalty and interest under Section 271CA and Section 220 respectively.

What are the exceptions to Section 206CQ?
Answer: Section 206CQ exempts certain types of goods and transactions from its scope, such as exports, imports, and transactions in securities and commodities.