For four years, businesses buying and selling goods in India ran two nearly identical compliance obligations side by side. One sat on the buyer, one on the seller, both at 0.1 per cent, both with a fifty lakh rupee threshold, and both triggered by a ten crore rupee turnover test. Deciding which applied to a given transaction consumed a great deal of accounting time and produced a great many mismatches.
That position has changed. TCS on the sale of goods under section 206C(1H) was omitted with effect from 1 April 2025. The overlap no longer arises prospectively.
But the provision has not disappeared from a business’s file. It governed four financial years that remain open to assessment, reassessment and processing, and mismatches from those years continue to surface. This article sets out where the position now stands, and what still needs attention for the years in which both provisions were live.
The overlap that existed until 2025
Section 206C(1H) was introduced with effect from 1 October 2020. It required a seller whose total sales, turnover or gross receipts in the immediately preceding financial year exceeded ten crore rupees to collect tax at 0.1 per cent on consideration received from a buyer, to the extent that consideration exceeded fifty lakh rupees in the financial year.
Section 194Q followed with effect from 1 July 2021. It required a buyer whose total sales, turnover or gross receipts in the immediately preceding financial year exceeded ten crore rupees to deduct tax at 0.1 per cent on the purchase of goods from a resident seller, on the value exceeding fifty lakh rupees in the financial year.
The two provisions could apply to the same transaction. Where both a large buyer and a large seller were involved in a sale above the threshold, the buyer’s deduction obligation and the seller’s collection obligation were both triggered.
The statute resolved this by giving the buyer’s obligation precedence: where tax was deductible under section 194Q and had been deducted, the seller was not required to collect under section 206C(1H). In practice this meant that the seller had to know whether the buyer had deducted, which is information a seller does not naturally possess. Declarations were exchanged, systems were configured to suppress one or the other, and reconciliation between purchase ledgers and Form 26AS became a routine year-end exercise.
There was also a timing difference that caused persistent confusion. Section 194Q operated on payment or credit, whichever was earlier. Section 206C(1H) operated on receipt of consideration. The same sale therefore attracted the two provisions at different moments, and in a year straddling those moments the amounts did not line up.
What was withdrawn and from when
The Finance Act, 2025 omitted section 206C(1H) with effect from 1 April 2025. The stated rationale was that the provision had become largely redundant once section 194Q covered the same transactions from the buyer’s side, and that maintaining both imposed a compliance and reconciliation cost without a corresponding revenue benefit.
Two points on scope are worth being precise about, because they are frequently confused:
Only sub-section (1H) went. Section 206C itself remains on the statute book. Collection of tax at source continues for the other categories the section covers — scrap, timber and forest produce, alcoholic liquor, tendu leaves, minerals, motor vehicles above the specified value, and remittances under the Liberalised Remittance Scheme and overseas tour packages. A business that reads “TCS on sale of goods withdrawn” as “TCS abolished” will under-collect.
Section 194Q was not withdrawn. The buyer’s deduction obligation on the purchase of goods continues unchanged. If anything it becomes more prominent, because it is now the only provision operating on ordinary sales of goods.
Neither change affects the wider income tax obligations attaching to the same transactions.
Where the position stands now
For a sale of goods between residents in the current year, the analysis is simpler than it has been since 2020:
- The seller has no collection obligation under section 206C(1H), because the provision no longer exists.
- The buyer deducts under section 194Q if the buyer’s turnover in the immediately preceding financial year exceeded ten crore rupees and purchases from that seller exceed fifty lakh rupees in the financial year.
- The precedence rule that once governed the interaction has no work left to do on ordinary goods.
Systems configured before April 2025 to test for the overlap should have had the 206C(1H) branch disabled. Where that configuration was left in place, the result is over-collection from customers — an amount collected without statutory authority, which then has to be refunded or adjusted, and which will not match the customer’s Form 26AS.
For most businesses this simplifies business taxation compliance on ordinary sales considerably.
Why 206C(1H) still matters for open years
The provision governed transactions from 1 October 2020 to 31 March 2025. Those years remain live for several purposes, and a repealed provision is fully enforceable for the period during which it applied.
Processing intimations. Statements of tax collected at source continue to be processed, and intimations raising short-collection or late-payment demands for those quarters continue to be issued. A demand for financial year 2023-24 is not answered by pointing out that the section was later omitted.
Assessee-in-default proceedings. A seller who failed to collect where collection was required remains exposed for those years, subject to the relief available where the buyer has itself paid the tax and furnished the prescribed certification.
Interest. Interest for failure to collect or to pay over what was collected runs on the old obligation and is not affected by the omission.
Credit mismatches. Buyers claiming credit for tax collected in those years depend on the seller having correctly reported the collection against the buyer’s PAN. Where a seller suppressed 206C(1H) on the assumption that the buyer had deducted under 194Q, but the buyer had not, neither obligation was discharged and both parties have an exposure.
Tax audit reporting. Audit reports for those years carry clause-level reporting on TDS and TCS compliance. Errors identified now feed back into that reporting.
For the same reason, a business closing its books or responding to a notice for those years should read the provision as it stood in the relevant year, not as the position stands today. Our note on discrepancies found in tax audits deals with the wider point.
Where a demand has already been raised for one of those years, it is contested as ordinary tax litigation rather than answered by the current position.
The 194Q conditions that still catch businesses out
With 194Q now standing alone, the conditions that generate disputes deserve restating.
The turnover test looks backwards. It is the buyer’s total sales, turnover or gross receipts from business in the financial year immediately preceding the year of purchase. A business that crosses ten crore rupees in the current year does not become liable in that year.
The threshold is per seller, per financial year. Fifty lakh rupees is tested seller by seller and is cumulative across the year, not per invoice and not per order. Deduction applies to the value exceeding fifty lakh rupees, not to the whole amount.
The trigger is payment or credit, whichever is earlier. Credit to the seller’s account — including credit to a suspense or any other account — triggers the obligation even if payment follows much later.
Goods only. Section 194Q applies to the purchase of goods. Services attract the provisions applicable to them. Composite arrangements need to be examined rather than assumed.
Resident sellers only. A purchase from a non-resident seller falls outside section 194Q and is examined under the provisions governing payments to non-residents.
No PAN means a higher rate. Where the seller has not furnished a PAN, the elevated rate under the section dealing with failure to furnish PAN applies. Vendor master hygiene therefore has a direct rate consequence.
Purchase returns and credit notes. Where tax has already been deducted on a purchase that is subsequently returned or the price renegotiated, the adjustment has to be traced through both the deduction record and the seller’s credit. Leaving it untraced is the most common source of a year-end mismatch.
Reconciliation points for older years
Where financial years 2020-21 to 2024-25 are being closed out, checked for a notice, or reviewed before an assessment, four reconciliations are worth running:
- Purchase ledger against tax deducted under 194Q — seller by seller, against the fifty lakh threshold, for each year in which the buyer met the turnover test.
- Sales ledger against tax collected under 206C(1H) — buyer by buyer, on a receipts basis, for each year the provision was in force and the seller met the turnover test.
- Both against Form 26AS — confirming that what was deducted or collected was reported against the correct PAN and appears in the counterparty’s statement.
- Declarations on file — the buyer declarations relied on to suppress collection. Where a seller suppressed collection on the strength of a declaration, the declaration is the defence, and it needs to exist.
Findings from these reconciliations feed directly into the tax audit process for the years concerned.
What changes again from 1 April 2026
From 1 April 2026 the Income-tax Act, 2025 governs sums paid or credited on or after that date. The withholding obligations that were spread across the 194 series have been consolidated, with section 393 read together with the relevant schedule carrying the deduction provisions.
The substance of the buyer’s obligation on the purchase of goods is carried forward, but the reference by which it is cited changes. Deduction masters, vendor communications and challan narrations that quote “194Q” by number will need to be revisited, and any reply or certificate relating to a payment made on or after 1 April 2026 should cite the new provision. Sums paid or credited on or before 31 March 2026 continue to be governed by the 1961 Act and are correctly cited as 194Q.
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