TCS on Sale of Scrap: A Detailed Overview
Under Section 206C, the Indian government implemented TCS on scrap sales in order to track and collect data on an unorganized market segment. Section 206C of the Income Tax Act includes a wide range of goods, including wine, tendu leaves, forest fruit, and more, in addition to the sale of scrap. To learn about the TCS deduction on scrap under Section 206C, the tax rate, payment, and returns related to TCS, continue reading.
Table of Contents:
Meaning of Scrap under Section 206C of the Income Tax Act
According to Section 206C of the Income Tax Act, scrap is defined as trash or scrap that is thrown away as a result of manufacturing or mechanically processing non-usable materials. It is mostly caused by procedures like breaking and chopping. The government implemented TCS on scrap sales as a way to guarantee data availability in the economy's less organized sectors. Determining whether or not such scrap should be under TCS's jurisdiction is a highly subjective topic because different goods may be used in different forms. Therefore, what may be a raw material or useable form for one business may not be for another.
Meaning of Buyer and Seller
Buyer: A person who acquires the right to receive any of the items listed under Section 206C through any sale, auction, tender, or other method, but excludes public sector organizations, state governments and their embassies, high commissions, commissions, consulates, and trade representation of foreign states and clubs, or buyers in the retail sale of items they have bought for their own use
Seller: A seller includes the following:
Central Government
State Government
Any Local Authority
Corporation
Any Company
Firm
Co-operative society
Additionally, a seller is an individual or a HUF whose total sales, gross receipts, or turnover from their business or profession during the fiscal year immediately preceding the year in which the specified goods are sold exceed Rs. 1 crore for businesses and Rs. 50 lakhs for professions.
Provisions of Section 206C of the Income Tax Act
Products on which sellers are required to collect TCS (Tax Collected at Source) from their buyers are covered by Section 206C of the Income Tax Act of 1961. It only applies to certain products, though. Scrap, human-use alcohol, forest products, minerals such as iron ore and coal, lumber, and tendu leaves are all included. Every seller is required by this section to collect taxes from the consumer of items that the IT department specifically mentions. However, it must occur when the money paid by purchasers is deducted from the seller's account or when the seller receives the money from the buyer, whichever comes first. The following table shows the tax rate applicable on goods, including scrap, under Section 206C.
Nature of Goods | Taxable Rate |
Scrap | 1% |
Alcohol for human consumption | 1% |
Minerals including lignite, iron ore and coal | 1% |
Forest produce (excluding timber and Tendu leaves) | 2.5% |
Timber purchased under forest lease | 2.5% |
Timber purchased that is not under forest lease | 2.5% |
Tendu Leaves | 5% |
All sellers are required to collect taxes from their buyers under Section 206C. However, there are also some exceptions. TCS does not apply, for instance, if a person purchases items for personal use, manufacturing, or generating other goods rather than for selling. But a buyer has to file a declaration to show it. Additionally, they have to make reference to it and give an IT commissioner a copy. Within seven days following the end of the month in which the sale occurred, the procedure must be finished.
Applicability of TCS on Sale of Scrap
In order to decide whether scrap sales can be subject to TCS under Section 206C, the various Courts and Tribunals have generally established the following concept. Three requirements must be met by the goods being sold in order to qualify for TCS:
The material sold must be waste or scrap;
The material must have been produced during manufacturing or a mechanical process and have a direct connection to that process; and
The product cannot be used as is due to breakage, wear and tear, etc.
Non-Applicability of TCS under Section 206C
If a resident buyer provides the person in charge of collecting taxes with a written declaration in duplicate in the prescribed form and verified in the prescribed manner stating that the goods mentioned in Section 206C(1) are to be used for manufacturing, processing, or producing articles or things or for the purpose of generating power and not for trading purposes, no tax collection will be made under Section 206C(1).
Conclusion
The trade of scrap is an intriguing topic that has often come up. Notably, a trader buys the scrap from a company that manufactures it or from another dealer who may have purchased it from the manufacturer rather than producing it themselves. In either scenario, the merchant does not engage in any manufacturing or mechanical processes that would be accountable for the production of such scrap. Traders can seek expert advice to understand the tax treatment in terms of TCS on the sale of scrap.
FAQ
Q1. Is GST inclusive while calculating TCS?
When the buyer's account is debited for the amount owed or when the buyer provides the money, whichever comes first, the tax should be collected. Therefore, TCS should be collected with GST included.
Q2. What is the TCS rate on the sale of scrap?
Under Section 206C of the Income Tax Act, the TCS rate on scrap sales is 1%.
Q3. Are there any exemptions from penalties?
If the TCS amount was credited to the government on time or the delay was caused by a justifiable cause, the taxpayer can escape penalties under section 271H.
Q4. Is TCS applicable to the scrap not generated from manufacturing or mechanical work?
If the item sold as scrap is not the result of manufacturing or mechanical work, TCS could not be relevant.
Q5. Is TCS refundable?
If the TCS paid exceeds the actual tax liability, then the TCS can be returned. By submitting an Income Tax Return (ITR), one might request a refund.
Q6. How and where to check the details of TCS credit?
The seller's Tax Collected at Source (TCS) information is shown on Form 26AS. Details about the vendor, including PAN, name, gross amount, section, and tax amount, will be shown.
Q7. Does the government charge any penalty for incorrect TCS return filing?
According to Section 271H of the Income Tax Act, a tax collector who files an improper TCS return faces a minimum penalty of Rs. 10,000 and a maximum penalty of Rs. 1,00,000.
Q8. How does TCS on scrap sales impact a business’s cash flow?TCS increases the immediate cash outflow for buyers, as they must pay tax upfront and claim credit later while filing ITR.
Q9. Is TCS applicable on all types of scrap materials?
No, TCS applies only to specified scrap under Section 206C, generally covering waste or discarded materials from manufacturing.
Q10. Can businesses claim a refund on TCS collected on scrap sales?
Yes, buyers can adjust the TCS paid against their total tax liability when filing their income tax return.
Q11. Does TCS on scrap apply to GST-registered businesses?
Yes, TCS is applicable even if the buyer or seller is registered under GST. Both taxes must be complied with separately.
Q12. Is there any turnover threshold for TCS applicability on scrap sales?
Yes, TCS applies only if the seller's total turnover in the previous financial year exceeded ₹10 crore.
Q13. How is TCS on scrap different from GST on scrap sales?
GST is a consumption tax on goods and services, while TCS is collected by the seller from the buyer and deposited with the government.
Q14. Can TCS be exempted if the buyer provides a lower deduction certificate?
Yes, buyers can apply for a lower or nil deduction certificate from the Income Tax Department if eligible.
Q15. Are government entities required to deduct TCS on scrap purchases?
No, TCS is not applicable if the buyer is the government, embassies, or similar notified organizations.
Q16. How does TCS on scrap affect ITR filing?
Buyers must include the TCS amount in their total tax payment and claim credit while filing their income tax return.
Q17. What is the due date for depositing TCS collected on scrap sales?
TCS must be deposited by the 7th of the following month, and quarterly returns (Form 27EQ) must be filed.
Q18. Can TCS on scrap be avoided in B2B transactions?
If the buyer provides a declaration stating that scrap is used for manufacturing, TCS may not apply as per exemptions.
Q19. What happens if a seller fails to collect or deposit TCS on scrap?
The seller will be liable for interest, penalties, and possible disallowance of expenses in tax calculations.
Q20. Does TCS apply to imported scrap?
No, TCS applies only to sales within India. Import transactions are not subject to TCS.
Q21. How do I verify if TCS has been deposited correctly?
Buyers can check their Form 26AS or AIS (Annual Information Statement) on the Income Tax portal.
Q22. Does TCS apply to unregistered businesses selling scrap?
Yes, if the seller meets the turnover criteria, they must collect and deposit TCS, even if the buyer is unregistered.
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