Jenipher Carlos Hosanna, MCom, MFM, MCS, LLM, MBA – Faculty of Commerce,

KNM Govt. Arts & Science College, Kanjiramkulam, University of Kerala, Trivandrum.
Email: ugcnet@in.com

Collection of Tax at Source (TCS) – Sec. 206C

Section Description
206C(1) Every person, being a seller of any of the specified goods, shall collect tax
on purchase value from the buyer as detailed here below:

Sl. Nature of Goods Percenta

No ge
1. Alcoholic liquor for human consumption 1%
2. Tendu leaves 5%
3. Timber obtained under a forest lease 2 ½%
4. Timber obtained by any mode other under a 2 ½%
forest lease
5. Any other forest produce not being timber or 2 ½%
tendu leaves
6. Scrap 1%

Such tax shall be collected by the seller either at the time of debiting the
account of the buyer or at the time of receipt, whichever is earlier. The
amount of tax so collected from the buyer shall be remitted by the seller
within 7 days from the end of the month in which tax was collected at
source to the credit of Central Government.

206C(1A) Tax shall not be collected at source in case the buyer, who is resident in
India furnishes to the person responsible for collecting tax, a declaration
in writing, stating that the goods referred above shall be utilized for the
purpose of manufacturing, processing or producing articles or things and
not for trading purposes.
206C(1B) The declaration referred above shall be delivered to the Chief
Commissioner or Commissioner, by the person responsible for collecting
tax within 7 days from the end of the month in which the declaration is
furnished to him.
206C(5) Every person collecting tax at source is required to furnish to the buyer, a
certificate to the effect specifying the amount collected, the rate at which
the tax has been collected and other prescribed particulars.

No certificate is required to be issued by the seller, in case where the tax

has been collected on or after 1-4-2010. The prescribed income-tax
authority or person authorised by such authority shall issue after the end
of each financial year, beginning on or after 1-4-2010, a statement in the
prescribed form, to the buyer, indicating the tax collected and other
prescribed particulars.
206C(3) Any person collecting any amount u/s. 206C(10 or 206C(1C) shall pay
& within the prescribed time, the amount so collected to the credit of the
206C(6) central government – 206C(3).

Every person collecting tax at source shall prepare and furnish quarterly
statements for the period ending on the 30th June, 30th September, 31st
 December and 31st March in each financial year to the prescribed income
tax authority.

In case the seller fails to collect such tax at source, he shall be liable to
pay the tax to the credit of the Central Government – 206C(6).

206C(6A) The person responsible to collect tax at source shall be deemed to be an

assessee in default, in case if he fails to collect the whole or any part of
the tax or aftr collecting fails to pay the tax.

Penalty u/s. 221 shall not be levied in case the A.O is satisfied that there
exists a good and sufficient reason for the failure to collect and pay tax.
206C(7) Any person responsible to collect the tax shall be liable to pay the tax to
the credit of the Central Government even if he fails to collect the tax. If
the seller does not collect the tax or does not remit the tax after
collection, he shall be liable to to pay interest @1% per month or part of
the month from the date of which such tax was collectible to the date on
which the tax is actually paid.

Such interest is required to be paid by the seller before furnishing the

quarterly statement for each quarter.
206C(8) Where the seller has failed to pay tax collected at source along with the
interest, the same shall be a charge on the assets of the seller.
206C(9) Where the A.O is satisfied that the total income of the buyer justifies the
collection of the tax at lower rate, a certificate to that effect can be issued
on an application made by the buyer.
206C(10) The person responsible for collecting the tax shall, unless such certificate
is cancelled by the A.O, collect the tax at the rates specified in such
certificate.

TDS Vs TCS

Tax deduction at Source (TDS)

Persons responsible for making payment of Income covered by the scheme of tax
deduction is are required to deduct tax at source at the prescribed rates. Tax so
deducted should be deposited within the prescribed time. Returns on TDS should be
submitted within the specified time.

The income tax is deducted at source on

• Salaries
• Interest on Securities
• Rent payments
• Payments to Contractors and sub contractors
• Payment of Commission or brokerage
• Payment of fees for Professional/Technical Services
• Payment of any income to Non Resident
Tax Collection at Source (TCS)

Tax Collection at Source arises on the part of the seller. The following goods when
sold must be subjected to TCS and the taxes collected thereon must be remitted into
department's accounts as done in the case of TDS

• Alcoholic liquor for human consumption and Tendu leaves

• Timber obtained under a Forest Lease
• Timber obtained by any mode other than under a Forest Lease
• Any other Forest produce not being Timber or Tendu Leaves
• Scrap (waste and scrap from the manufacture or mechanical working of
materials which is definitely not usable as such because of breakage, cutting
up, wear and other reasons

Double Tax Avoidance Agreements & Taxation

Meaning of Treaty:

In layman’s language, a treaty is a formally concluded agreement between two or

more independent nations. The Oxford Companion to Law defines a treaty as “an
international agreement, normally in written form, passing under various titles
(treaty, convention, protocol, covenant, charter, pact, statute, act, declaration,
concordat, exchange of notes, agreed minute, memorandum of agreement)
concluded between two or more states, on subject of international law intended to
create rights and obligations between them and governed by international law.
Examples of treaty include CTBT, Vienna Convention, and Tax Treaty such as DTAA
etc.

The Double Tax Avoidance Agreement (DTAA)

The Double Tax Avoidance Agreement (DTAA) is essentially a bilateral

agreement entered into between two countries. The basic objective
is to promote and foster economic trade and investment between
two Countries by avoiding double taxation.

Objective of tax treaties:

International double taxation has adverse effects on the trade and services and on
movement of capital and people. Taxation of the same income by two or more
countries would constitute a prohibitive burden on the tax-payer. The domestic laws
of most countries, including India, mitigate this difficulty by affording unilateral relief
in respect of such doubly taxed income (Section 91 of the Income Tax Act). But as
this is not a satisfactory solution in view of the divergence in the rules for
determining sources of income in various countries, the tax treaties try to remove tax
obstacles that inhibit trade and services and movement of capital and persons
between the countries concerned. It helps in improving the general investment
climate.

The double tax treaties (also called Double Taxation Avoidance Agreements or
“DTAA”) are negotiated under public international law and governed by the principles
laid down under the Vienna Convention on the Law of Treaties.
Need for DTAA

The need for Agreement for Double Tax Avoidance arises because of conflicting rules
in two different countries regarding chargeability of income based on receipt and
accrual, residential status etc. As there is no clear definition of income and taxability
thereof, which is accepted internationally, an income may become liable to tax in two
countries.

In such a case, the two countries have an Agreement for Double Tax Avoidance, in
which case the possibilities are:

1. The income is taxed only in one country.

2. The income is exempt in both countries.

3. The income is taxed in both countries, but credit for tax paid in one country is
given against tax payable in the other country.

In India, The Central Government, acting under Section 90 of the Income

Tax Act, has been authorized to enter into double tax avoidance
agreements (hereinafter referred to as tax treaties) with other
countries.

Types of DTAA

DTAA can be of two types.

1. Comprehensive.
2. Limited

Comprehensive DTAAs are those which cover almost all types of incomes covered by
any model convention. Many a time a treaty covers wealth tax, gift tax, surtax. Etc.
too.

Limited DTAAs are those which are limited to certain types of incomes only, e.g.
DTAA between India and Pakistan is limited to shipping and aircraft profits only.

Role of tax treaties in international tax planning

A tax treaty plays the following role:

1. Facilitates investment and trade flow, preventing discrimination between tax

payers;
2. Adds fiscal certainty to cross border operations;
3. Prevents international evasion and avoidance of tax;
4. Facilitates collection of international tax;
5. Contributes attainment of international development goal, and
6. Avoids double taxation of income by allocating taxing rights between the
source country where income arises and the country of residence of the
recipient; thereby promoting cooperation between or amongst States in
carrying out their obligations and guaranteeing the stability of tax burden.
Choice of Beneficial Provisions under DTAA/Tax laws

The Provisions of DTAA override the general provisions of taxing statute of a

particular country. It is now well settled that in India the provisions of the DTAA
override the provisions of the domestic statute. Moreover, with the insertion of
Sec.90 (2) in the Indian Income Tax Act , it is clear that assessee have an option of
choosing to be governed either by the provisions of particular DTAA or the provisions
of the Income Tax Act, whichever are more beneficial.

For example under DTAA between Indian and Germany, tax on interest is specified @
10% whereas under Income Tax Act it is 20%. Hence, one can follow DTAA and pay
tax @ 10%. Further if Income tax Act itself does not levy any tax on some income
then Tax Treaty has no power to levy any tax on such income. Section 90(2) of the
Income Tax Act recognizes this principle.

Models of DTAA

There are different models developed over a period of time based on which treaties
are drafted and negotiated between two nations. These models assist in maintaining
uniformity in the format of tax treaties. They also serve as checklist for ensuring
exhaustiveness or provisions to the two negotiating countries.

OECD Model, UN Model, the US Model and the Andean Model are few of such models.
Of these the first three are the most prominent and often used models. However, a
final agreement could be combination of different models.

OECD Model- Organization of Economic Co-operation and Development (OECD)

Model Double Taxation Convention on Income and on Capital, issued in 1977, 1992
and 1995

OECD Model is essentially a model treaty between two developed nations. This model
advocates residence principle, that is to say, it lays emphasis on the right of state of
residence to tax.

UN Model- United Nations Model Double Taxation Convention between Developed

and Developing Countries, 1980

The UN Model gives more weight to the source principle as against the residence
principle of the OECD model. As a correlative to the principle of taxation at source
the articles of the Model Convention are predicated on the premise of the recognition
by the source country that (a) taxation of income from foreign capital would take into
account expenses allocable to the earnings of the income so that such income would
be taxed on a net basis, that (b) taxation would not be so high as to discourage
investment and that (c) it would take into account the appropriateness of the sharing
of revenue with the country providing the capital. In addition, the United Nations
Model Convention embodies the idea that it would be appropriate for the residence
country to extend a measure of relief from double taxation through either foreign tax
credit or exemption as in the OECD Model Convention.

Most of India’s treaties are based on the UN Model.

United States Model Income Tax Convention of September, 1996.

The US Model is different from OECD and UN Models in many respects. US Model has
established its individuality through radical departure from usual treaty clauses
under OECD Model and UN Model.

Tax Planning & Tax Management

Tax planning refers to an exercise carried out by a taxpayer to meet his tax obligations in
a proper, systematic and orderly manner availing all possible exemptions, reliefs and
deductions available under the statute as may be applicable to his case. For instance, a
tech savvy entrepreneur who wants to setup a software development and export centre in
India may plan to locate such undertaking in notified STPs in order to avail the benefit of
deduction u/s. 10A of the ITA.
Planning which leads to filing of various returns on time; compliance of the
applicable provisions of law and avoiding the levy of interest and imposition of penalty
can be termed as efficient “Tax Management”. Tax management is an exercise by which
one ensures that defaults are avoided and compliance of law in proper manner is
secured. Any delay in furnishing tax audit report u/s. 44AB attracts penalty upto Rs. 1
lakh, which can be avoided by proper tax planning and management. Similarly, borrowal
of loan otherwise than by account payee cheque or account payee bank draft attracts
equal amount of penalty and this can be avoided by conscious planning of the execution
of loan transactions. Planning is a perception conceived on legitimate grounds and
achieved through genuine transactions within the framework of law. E.g. contribution to
Public Provident Fund with a view to claim deduction u/s. 80C of the Income Tax Act.

Tax Management
The term “Tax management” refers to the areas of compliance with statutory
requirements of the tax laws, keeping close watch and monitoring the statutory
requirements of other laws, claiming due relief arising on account of double taxation
avoidance agreements. In simple words, tax management is concerned with compliance
with legal formalities for efficient working of the unit.

Tax Evasion entails the efforts that are made by trusts, individuals, firms, and various
other entities to avoid paying taxes by illegal and unfair means. The Evasion of Tax
usually takes place when taxpayers deliberately hide their incomes from the tax
authorities in order to reduce their liability of tax. When a taxpayer deliberately or
consciously conceals material particulars or furnishes false or inaccurate particulars or
attempts to defraud the State by violating any of the mandatory provisions of law, it shall
be termed as tax evasion.

Evasion Tax takes place when the people report dishonest tax that includes declaring
less gains, profits, or income than what has been actually earned and they even go for
overstating deductions. Tax Evasion is a crime in all major countries and the guilty
parties are subjected to imprisonment and fines. The various methods of Tax Evasion are:

• Smuggling
• Customs duty evasion
 • Value added tax evasion
• Illegal income tax evasion

Smuggling is a method of Tax Evasion, following which people export or import foreign
goods through routes that are unauthorized. People resort to smuggling for they want to
avoid paying total customs duties that are chargeable and also when they want to import
items that are contraband. Customs duty evasion is another method of Tax Evasion under
which the importers evade paying customs duty by false declarations of the description of
the product and quantity. The importers in order to evade paying customs duty also resort
to under-invoicing.
Another method of Tax Evasion is value added tax evasion under which the
producers who collect from the consumers the value added tax evade paying taxes by
showing less sales amount. Many people earn money by means that are illegal such as
theft, gambling, and drug trafficking and so they do not pay tax on this amount and thus
this is another method of Tax Evasion that is called illegal income tax evasion.
Tax Evasion results in the loss of revenue for the government and so ideally, no
one should be indulging in it and the Indian government must also take steps in order to
stop Evasion of Tax by the people.

Tax avoidance
Tax avoidance is a method of reducing tax incidence by availing certain loopholes in the
Tax laws without actually breaking the law. In other words, tax avoidance refers to an
attempt to prevent or reduce the tax liability by legal means by taking advantage of some
provisions in the law. It excludes fraud, concealment, or other illegal measures. Thus tax
avoidance is a device which technically satisfies the requirements of law but it is not in
accordance with the legislative intent.

Distinction between “Tax Planning” and “Tax Evasion”

Tax Planning
1. It is an act within the four corners of
the Act to achieve certain objective. It
is not a device to avoid tax.
2. It is a legal right and a social
responsibility.
3. It requires complete knowledge of
the relevant Acts, Social and economic
situation of the country.
4. It helps in the economic
development of the country by
providing additional funds for
investment.
5. A tax planner enjoys his fruits freely
without any mental pleasure.
Tax Evasion
1. It is a deliberate attempt on the part of
taxpayer by falsification of accounts,
misrepresentation of facts, etc.
2. It is a legal offence coupled with penalty
and prosecution.
3. It requires boldness to infringe the law.
4. It generates black money which may be
utilized for smuggling, bribery, luxury, etc.
5. A tax evader always remains in anxiety
of search and seizure.

Distinction between “Tax Planning” and “Tax Management”

Tax Planning Tax Management
1. It is a wide term and 1. It is a first step towards tax planning
includes tax management.
2. Its object is to minimize
the incidence of tax.
3. It is not a must for every
assessee
4. It is a guide for decision
making
5. In tax planning, the
taxpayer studies alternative
economic activities and
selects the activity with least
incidence of tax.
6. It mainly looks at future
benefits out of present
actions
2. Its main object is compliance with legal formalities.
3. It is essential for every person otherwise he may
be liable for penal interest, penalties and
prosecution.
4. It is a regular feature of a business undertaking.
5. The main activities of this area are maintenance of
accounts in prescribed form, auditing of these
accounts, filing of the required forms and returns,
payment of taxes, etc.
6. It relates to past, present and future. For e.g., it
deals with past in respect of appeals, revision,
rectification of mistakes, etc. Maintenance of records,
self assessment, filing of returns and other
documents are present activities. Follow up plans are
in future.

Books of account and Document – Sec. 2(12A) & Sec. 2(22AA)

The expression ‘books of account’ is defined to include ledgers, day books, cash books,
account books and other books, whether kept in the written form or as print outs of data
stored in a floppy, disc, tape or any other form of electronic magnetic data storage device
– Se. 2(12A).
The term ‘document’ includes an electronic record as defined u/s. 2 of the Information
Technology Act, 2000 – Sec. 2(22AA)

Keyman Insurance Policy

Keyman insurance policy is a policy taken on the life of one person by another person in
whose organization the first mentioned person plays a key role. The relationship between
these two persons could be that of employer-employee or that of a principal and agent or
a contractor and contractee. Where a premium is paid on such a policy, it can qualify for
deduction as business expenditure if it can be established that the policy has been taken
on the life of such person in the interest of the business.
As regards the treatment of the maturity proceeds of a keyman insurance policy, Sec.
2(24) treats it as income for the purpose of Income Tax Act. The exemption available in
respect of the maturity proceeds of a Life Insurance Policy is not extended to proceeds of
a Keyman insurance policy. It is therefore taxable. If the policy matures in the hands of
the person who has taken the policy, it is taxable u/s. 28 as “profits and gains of business
or profession’. If the policy is assigned to the employee in whose name it has been taken,
then the maturity proceeds is taxable under the head “salaries” as it is included as part of
“profits in lieu of salary” u/s. 17(3). If the maturity of the policy is in the case of any
other person (other than the employer or employee) in whose name the policy has been
taken or to whom the policy has been assigned, then it is taxable under the head “Income
from other sources” u/s. 56.
Fringe Benefit Tax (FBT)
The Finance Act, 2005, has introduced a new chapter XII-H, for “Fringe Benefit Tax”
comprising of sections 115W to 115WL. As per this scheme of taxation, the incidence
of taxability of certain perquisites hitherto charged to tax as salary in the hands of
the employees have been shifted to the employers. Accordingly, in case where the
employer is chargeable under fringe benefit tax in respect of any benefit or amenity
provided to the employee, the same shall not be subject to tax in the hands of the
employee.
Fringe benefit tax (FBT) is an additional Income tax charged for every
assessment year in respect of fringe benefits provided or deemed to be provided by
the employer to his employee during the previous year. FBT shall be levied @ 30% on
the value of fringe benefits.

Definition of Fringe Benefit – Sec. 115WB

Sec. 2(23B) defines fringe benefits to mean any fringe benefits referred to in Sec.
115WB. Any fringe benefits provided by employer may be classified into the following
two categories:
a) Direct fringe benefits; and
b) Deemed fringe benefits
The significant difference between the classification of Fringe Benefits into Direct and
Deemed is with respect to the qualifying amount taxable under chapter XII-H. While
Direct fringe benefits are 100% taxable, Deemed fringe benefits are taxed at the
prescribed rates for various categories.