Income tax laws require a seller of certain goods and services to collect tax on the payment received above the specified amount. This is called tax collected at source (TCS). From October 1, 2023, a TCS rate of 20% will be applicable on foreign payments exceeding Rs 7 lakh in a financial year. Foreign payments made for medical and educational purposes have different TCS rates.
TCS is also applicable if you buy 'motor vehicles' costing above Rs 10 lakh. If the individual does not pay TCS, the seller of the motor vehicle will be classified as 'assessee in default'. Hence, buying a vehicle above Rs 10 lakh without paying TCS is next to impossible.
Rate of TCS on buying a motor vehicle
The rate of TCS on buying a motor vehicle is 1%. However, if the buyer does not provide PAN to the seller, then the TCS rate will be 20%. If an individual has not filed their income tax return (ITR) in the previous two financial years, then TCS can be applicable at the rate of 5%.
On what type of motor vehicles is TCS applied?
The Income-tax Act, 1961, does not define what is a motor vehicle on which TCS will be applicable. According to tax experts, the Income- tax Act refers to the definition provided under the Motor Vehicles Act (MVA) for defining the term 'motor vehicles'. However, the MVA covers a wide range of motor vehicles. The Income-tax Act levies TCS on few of them.
According to the Income-tax Act, following are the types of motor vehicles on which TCS is applied if the value exceeds Rs 10 lakh:
- Any vehicle with four or more wheels,
- Any Bikes,
- Any scooter, or
- Any custom vehicle which is fitted for road use legally.
All the vehicles, bikes, scooters or any custom vehicles mentioned above must have an engine with cubic capacity (CC) of 25CC or more. However, if the value of the vehicle does not exceed Rs 10 lakh or vehicle's engine is less than 25CC (even if cost exceeds Rs 10 lakh) then TCS is not applicable."Even electric vehicles (EVs) with four wheels or less, having engine's CC equal to or more than 25CC, would be subject to TCS provided the value of such vehicles exceeds Rs 10 lakh," says Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, a tax, and business consulting company. "However, high-end cycles costing above Rs 10 lakh are not covered as Income-tax Act levies TCS on engine-based vehicles only," adds Jhunjhunwala.
Places of buying a vehicle
An individual can buy a motor vehicle through multiple ways-
- Car/bike dealership,
- Secondhand market,
- Importing foreign vehicles via dealer,
Car/bike dealership: TCS is applicable if the value of a car or bike exceeds Rs 10 lakh. The dealer will add TCS to the invoice value of the car or bike.
Secondhand market: TCS is applicable when purchasing a motor vehicle exceeding Rs 10 lakh from the second-hand market (online as well as physical store).
"Section 206(1F) of the Income tax Act does not distinguish between new and used vehicles. This means that TCS will be applicable on buying of motor vehicle if its value exceeds Rs 10 lakh," says chartered accountant Sandeep Agrawal, Co-founder at Teamlease Regtech, a regulatory compliance platform.
Imported vehicle: TCS will be applicable on vehicles imported from abroad if it meets the specified criteria of vehicles. However, the Income-tax Act does not specify the procedure on how a foreign seller will collect TCS from a buyer. A foreign seller may not have necessary documents such as TAN, for collecting TCS from a buyer.
"The provisions of TCS would apply if the value of such motor vehicle exceeds Rs 10 lakh irrespective of whether the motor vehicle is purchased in India or imported from abroad in India," says Jhunjhunwala.
"The term 'seller' in the Income-tax Act does not provide a distinction between foreign and Indian sellers. This could technically mean that foreign sellers are also obligated to collect TCS on a sale of specified motor vehicles in India in the absence of any specific exemption. However, the income tax laws do not define the process of TCS compliances for a foreign person," says Pramod Achuthan, Partner, tax and regulatory services, EY India.
Who must deduct TCS?
"It is the responsibility of the seller of the motor vehicle to collect the correct TCS amount from the buyer. However, the term seller does not include every individual.
Explains Jhunjhunwala: The term 'Seller' for the purpose of complying with TCS provisions is defined in Section 206C(11)(c) of the Income-tax Act. It includes:
- Central Government, State Government
- Any local authority or corporation or authority established by or under a Central, or State Act
- Company
- Firm
- Co-operative Society
- An individual who has income from business or profession above a certain limit specified in the law.
An individual will be liable to collect TCS on the sale of a motor vehicle in the current financial year if total sales/turnover from business exceed Rs 1 crore in last financial year. For individuals with professional income, TCS will be applicable if gross receipts exceed Rs 50 lakh in the last financial year.
"An individual with no business or professional income or business or professional income below the threshold limits will not be required to collect TCS if they are selling second hand motor vehicles above Rs 10 lakh value," says chartered accountant Abhinit Singh, founder, Ready Accountant, a Kolkata- based tax and accounting education institution.
Higher rate of TCS can be applicable if
According to section 206CCA of the Income-tax Act, a higher rate of TCS would be applied if the following conditions are met:
- The buyer of the motor vehicle has not filed their ITR for the last two financial years preceding the current financial year in which TCS was supposed to be collected, and
- The total of TCS and TDS was more than Rs 50,000 in each of the last two financial years preceding the financial year in which TCS was supposed to be collected, and
"To check whether higher or normal TCS rate needs to be applied to the transaction or not, the seller can ask for copy of the ITR filed as per section 206CCA. If the seller fails to determine the correct rate of TCS, they will be considered as 'assessee in default'. With this in mind I don't think any motor vehicle dealership would want to sell a vehicle above Rs 10 lakh without first verifying the status (ITR and TDS/TCS amount) of the buyer. If any dealership is doing so then they are taking an unnecessary risk," says Singh.
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