Tax Collected at Source on Sale of Goods: A Detailed Guide

The finance team at a manufacturing business with ₹12 crore in annual turnover discovers mid-year that it crossed the ₹50 lakh consideration threshold with a key buyer three billing cycles ago. TCS was not collected on any of those invoices. The accountant now faces the task of reconciling the missed TCS collection, raising corrected documentation, and reconfiguring the AR workflow before the next billing cycle — work that could have been avoided had the invoicing system been flagging the per-buyer threshold cumulatively. The statutory obligation under Section 206C(1H) of the Income Tax Act applies not at year end but at the point each qualifying consideration receipt crosses the threshold.

Tax collected at source on sale of goods has applied from 1 October 2020 under Section 206C(1H). For finance teams at businesses whose gross receipts in the preceding financial year exceeded ₹10 crore, the provision creates a per-buyer compliance obligation that must be tracked continuously. This guide explains the statutory framework, the ₹50 lakh threshold mechanics, the applicable rate, worked examples, and how ERP-driven workflow supports reliable TCS collection across the financial year. The broader ERP compliance context for operational businesses treats TCS monitoring as part of the receivables and statutory reporting discipline.

Quick note on accuracy and current applicability

This guide is a refreshed version of an earlier Exactlly article and has been updated for current operational relevance.

This article explains the operational treatment of TCS on sale of goods under Section 206C(1H) of the Income Tax Act 1961. The core provision, threshold, and base rate described here reflect the statutory framework as it has applied from 1 October 2020. Tax rates, CBDT circulars, and compliance treatment may change. Finance teams should verify the current applicable rate, any active relief provisions, and the latest CBDT position with their tax advisor or from CBDT's published guidance before acting on any specific figure cited here.

What is TCS on sale of goods under Section 206C(1H)?

Tax collected at source is a levy that a seller collects from a buyer at the point of receipt of consideration for the sale of goods and deposits with the Government on the buyer's behalf. The seller accumulates TCS at the prescribed rate and remits it to the Government treasury, after which the buyer can claim it as a credit against their tax liability.

Section 206C(1H) was introduced by the Finance Act 2020 as a new subsection to the existing TCS framework under Section 206C of the Income Tax Act. It extended the TCS mechanism — which already covered specific goods such as timber, coal, iron ore, alcoholic liquor, tendu leaves, and motor vehicles at prescribed rates — to cover the general sale of goods where the seller's turnover and the per-buyer consideration meet specified thresholds.

The provision applies to "goods" as defined under the Sale of Goods Act, 1930: every type of moveable asset other than money and actionable claims, including shares and stocks, grass, and land produce contracted for sale. Services are not covered. The provision applies to both resident and non-resident sellers subject to the threshold conditions.

When does TCS on sale of goods apply?

Section 206C(1H) applies when two conditions are satisfied simultaneously for a financial year.

Seller turnover condition. The seller's gross receipts or turnover from business for the immediately preceding financial year must have exceeded ₹10 crore. A business that crossed this threshold in the prior year is obligated to collect TCS on qualifying receipts in the current year. Newly incorporated entities with zero prior-year turnover are not covered under the provision in their first year of operation — the sales for the immediately preceding financial year are zero, so the threshold is not met.

Per-buyer consideration condition. The aggregate consideration received from a single buyer must cross ₹50 lakh in the financial year. TCS is not applicable on the first ₹50 lakh received from each buyer — only on the amount crossing that threshold. Each buyer's limit is tracked independently using the buyer's PAN as the identifier. Whether a buyer is a resident or non-resident is not a statutory exclusion under the provision, though this remains a point of interpretation for non-resident buyer scenarios.

The following transactions are excluded: export of goods, and goods already covered under other TCS provisions under Section 206C (such as timber, coal, iron ore, tendu leaves, alcoholic liquor, and motor vehicles). These goods continue to attract TCS at their pre-existing rates under the respective subsections. Real estate is excluded because it falls outside the definition of goods under the Sale of Goods Act, 1930.

How the ₹50 lakh threshold works

The ₹50 lakh limit applies per buyer per financial year, tracked cumulatively. TCS is levied only on consideration that exceeds this limit — not on the full amount once the threshold is crossed.

The first year of implementation, FY 2020-21, required a specific calculation to incorporate opening receivables and advances carried in as at 1 April 2020. For subsequent financial years, the threshold is the sum of advances received and invoices raised during the year. The table below shows the threshold calculation components:

The limit is checked on a year-on-year basis and per buyer. How the cumulative threshold tracks across invoices depends on the invoicing workflow configured in the ERP, which must maintain buyer-wise AR balances to flag the threshold crossing at the correct point.

What rate applies for TCS on sale of goods?

The standard rate under Section 206C(1H) is 0.1% of the sale consideration exceeding ₹50 lakh from each buyer in the financial year.

A temporary reduced rate of 0.075% was applicable from 1 April 2020 through 31 March 2021, announced as part of the Government's COVID-19 economic relief measures to support businesses and the economy. That temporary rate has since expired. The standard rate of 0.1% applies for all periods from 1 April 2021 onwards. Finance teams configuring their ERP invoicing workflow should verify the current applicable rate from the latest CBDT notification or their tax advisor before setting the TCS computation.

TCS is collected on the gross invoice amount inclusive of GST. Unlike TDS provisions under Chapter XVII-B where CBDT circulars have clarified the exclusion of the service tax component from the deduction base, TCS provisions fall under Chapter XVII-BB, and CBDT's position is that TCS collection applies on the gross amount inclusive of taxes.

Where a buyer does not furnish a valid PAN or Aadhaar, a higher rate applies under Section 206CC. The current applicable higher rate should be verified from CBDT guidance before applying it in the invoicing workflow.

How to calculate TCS on sale of goods

TCS under Section 206C(1H) arises at the point of receipt of consideration from the buyer. The practical recommendation is to configure the levy at the point of invoice issuance, while accounting for the timing of consideration receipt — particularly for scenarios where the ₹50 lakh threshold is crossed mid-year.

Freight charges and incidental expenses included in the invoice are part of the TCS base. Every item appearing on the invoice is subject to TCS levy.

Sale returns: Where a buyer returns goods before consideration has been received, TCS is applicable only on the net consideration. Where goods are returned after consideration has already been paid, the Government returns the TCS collected to the seller as a TCS refund.

Example: Assume a seller whose aggregate receipts from a buyer in FY 2020-21 cross the ₹50 lakh threshold: ₹6 lakh of those receipts arrive before 1 October 2020 and ₹2 lakh after 1 October 2020. TCS under Section 206C(1H) applies only to the ₹2 lakh received after the effective date — and only to the amount that exceeds the ₹50 lakh threshold in the year.

Practical scenarios for finance teams

The table below illustrates four scenarios with different opening balance and invoice combinations. Values are in INR lakh, inclusive of GST. The seller's gross receipts exceeded ₹10 crore in the prior year. All invoices are raised in FY 2020-21 with Section 206C(1H) effective from 1 October 2020.

Note: The scenario table above reflects the first-year FY 2020-21 treatment as understood from the initial guidance. Finance teams working with opening AR balances or advance receipt scenarios should verify the specific threshold calculation against applicable CBDT circulars or their tax advisor before configuring the ERP workflow.

The core operational discipline is that the finance team must maintain a running cumulative AR balance per buyer to correctly identify the invoice and the exact amount at which the ₹50 lakh threshold is crossed. For businesses with high buyer volume, manual tracking of this threshold is operationally fragile.

How ERP supports TCS on sale of goods tracking

ERP-driven receivables management typically reduces the dependency on manual tracking of per-buyer cumulative consideration — which becomes unreliable as buyer volume grows and billing frequency increases. exactllyERP is designed to support the finance team's invoicing and receivables operations, including workflow configuration for statutory compliance requirements in the billing and AR modules.

Whether TCS threshold monitoring and collection runs automatically or through a workflow-triggered step depends on configuration — the ERP supports the process, and the finance team's governance determines how the collection is applied in each billing scenario. Finance teams should validate the ERP configuration against their tax advisor's guidance on the current statutory treatment before the invoicing workflow goes live.

The exactllyERP product page covers the finance, billing, and statutory compliance modules relevant to TCS and GST statutory reporting. The input tax credit set-off framework and the basics of GST input tax credit address the complementary GST compliance disciplines that finance teams managing TCS obligations typically also own. The GST registration framework covers the registration and compliance context for businesses subject to these statutory provisions.