Section 394 Collection of tax at source.

Income-tax Act, 2025

At a Glance

Clause 394 of the Income Tax Bill, 2025 sets out a statutory regime for collection of tax at source (TCS) on specified receipts by specified persons at prescribed rates. It identifies nine categories of receipts (sale of specified goods, certain remittances, overseas tour packages, use of parking/toll/mines) and prescribes collection obligations, exemptions on presentation of declarations, and limited interplay with other tax deduction obligations. The provision affects sellers, authorised dealers, licensors/lessors and buyers; effective/decision date: Not stated in the document.

Background & Scope

Statutory hook: Clause 394 (Deduction and collection at source) in the Income Tax Bill, 2025. The clause establishes a TCS framework: persons specified in column C of an accompanying Table are obligated to collect tax on receipts in column B at rates in column D and at the time specified in clause (1)(c). The Table enumerates nine receipt types, identifies the collector (seller, authorised dealer, licensor/lessor) and prescribes TCS rates. Definitions: "forest produce" is to have the same meaning as in any State Act for the time being in force or in the Indian Forest Act, 1927. The text includes procedural exemptions and limited interplays with other liabilities to deduct tax at source elsewhere in the Bill. The Bill version provides the operative words of the regime but omits certain implementation details and administrative timelines now present in the enacted text.

Statutory Provision Mode

Text & Scope

Clause 394(1) establishes three elements of the collection obligation: (a) the receipts on which TCS is to be collected (Table, column B); (b) the rate of collection (Table, column D); and (c) the timing - "at the time of debiting of the amount payable ... to the account of the buyer ... or at the time of receipt of such amount ... in cash or by way of a cheque of a draft or any other mode, whichever is earlier." The Table enumerates nine categories, including sale of alcoholic liquor for human consumption (1%), tendu leaves (5%), timber and other forest produce (2%), scrap (1%), specified minerals (1%), sale consideration exceeding Rs.10,00,000 for motor vehicles or other notified goods (1%), LRS remittances exceeding Rs.10,00,000 (5% for education/medical; 20% for other), overseas tour packages (5% up to Rs.10,00,000; 20% above), and use of parking/toll/mines/quarry (2%). Clause 394(6) prescribes the statutory meaning of "forest produce" by reference to state law or the Indian Forest Act, 1927.

Interpretation

The Bill frames TCS as a duty of the person effecting the receipt (seller, authorised dealer, licensor/lessor), with timing tied to debiting to account or actual receipt - a cash/book nexus that aims to align collection with actual cashflow or accounting recognition. The specified rates signal policy choices: low rates (1-2%) on certain commodities, higher rates (5%/20%) on cross-border remittances and tourism packages to operate as deterrents or pre-emptive collection mechanisms for potential tax leakage. The cross-reference to state definitions for "forest produce" indicates legislative intent to harmonise with existing local regimes rather than introduce a uniform federal definition.

Exceptions/Provisos

Clause 394(2) exempts collection for buyers who are Indian residents when they furnish a written declaration in duplicate in a prescribed form and manner, stating that the goods are to be utilised for manufacturing/processing/generating power and not for trading purposes. Clause 394(3) requires the collector to deliver one copy of the declaration to the Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner "on or before the seventh day of the month following the month of receipt of that declaration" in the enacted text; the Bill version simply requires delivery of one copy (the Bill does not state the exact timetable). Clause 394(4) (Bill) excludes collection by the authorised dealer on amounts for which tax has already been collected by the seller (serial 8). Clause 394(5) excludes collection in cases where the buyer is liable to deduct tax under other provisions and has done so. Clause 394(6) supplies the definition of "forest produce."

Illustrations

• Example 1: A seller sells scrap to a resident buyer for Rs.200,000 and debits the buyer's ledger the same day. Under Clause 394(1), seller must collect 1% TCS at the time of debiting/receipt. If the buyer furnishes the prescribed declaration (utilisation for manufacturing and not trading), the collector need not collect TCS (Clause 394(2)).
• Example 2: An individual remits Rs.1,500,000 under LRS for non-medical/non-educational purposes. The authorised dealer must collect 20% TCS on the remitted amount exceeding Rs.10,00,000 (Clause 394, serial 7(b)). If tax has already been collected by a seller under serial 8 on a related amount, appropriate non-duplication applies (Clause 394(4) in Bill limited to that interaction).
• Example 3: A licensor receives Rs.500,000 for permitting use of a private parking lot. Clause 394 (serial 9) prescribes 2% TCS collected by the licensor/lessor at time of debiting/receipt.

Interplay

Clause 394 interacts with other TDS/TCS provisions of the Bill (not reproduced in the document). Clause 394(5) expressly disapplies collection where the buyer is already liable to deduct tax under other provisions and has done so - a non-cumulation rule. The Bill's reference to "any other provisions of this Act" implies coordination across the deduction-and-collection regime but does not list the specific provisions. The Bill leaves administrative details (forms, manner, prescribed formats and verification) to subordinate rulemaking ("as prescribed"), which will govern practical compliance.

Differences between Section 394 of the Income-tax Act, 2025 and Clause 394 of the Income Tax Bill, 2025 - (Old Version) 

• Drafting corrections and wording: The Bill (old version) in sub-clause (1)(c) reads "by way of a cheque of a draft" (typographical error). The enacted Section 394 corrects this to "by way of a cheque or a draft or any other mode".
  • Practical impact: clarification removes ambiguity about acceptable modes of receipt; no substantive tax consequence but reduces litigation risk from drafting ambiguity.
• Sub-section (2) - scope and framing: The enacted Section 394 introduces the prefatory phrase "Irrespective of anything contained in sub-section (1) (Table: Sl. Nos. 1 to 5)," before describing the exemption on presentation of a declaration; the Bill omits that prefatory phrase.
  • Practical impact: the enacted phrasing emphasizes that the exemption operates notwithstanding the collection obligation in sub-section (1), reinforcing that the declaration displaces the collection duty for the specified buyers; the Bill's omission leaves the relationship implicit and could have been relied upon for a narrower reading.
• Declaration procedure and delivery obligation (sub-section (3)): The Bill requires the person responsible to "deliver, one copy of the declaration" to the tax commissioner. The enacted Section 394 requires the person to "deliver or cause to be delivered, one copy of the declaration ... on or before the seventh day of the month following the month of receipt of that declaration."
  • Practical impact: enacted language adds a compliance timeline (7th day) and a causation clause ("or cause to be delivered") broadening responsibility where a third party may effect delivery; increased procedural clarity and a strict timeline for administrative receipt by the tax authority.
• Exception for remittances under LRS and loans for education (sub-section (4)): The Bill's sub-section (4) is limited to excluding collection "on such amount on which tax has been collected by the seller referred to in serial number 8." The enacted provision expands sub-section (4) to add a second clause: (b) exclusion where the remitted amount is a loan obtained from any financial institution as defined in section 129(3)(b) for the purpose of pursuing any education.
  • Practical impact: enactment introduces an additional exemption for LRS remittances funded by education loans from defined financial institutions, reducing tax collection at source burden for such remittances and creating an additional compliance and verification requirement for authorised dealers.
• Sub-section numbering/footnote and cross-reference language: The Bill's sub-section (6) references "For the purposes of this sub-section, 'forest produce'..." The enacted statute references "For the purposes of this section, 'forest produce'..." and includes a corrigendum note.
  • Practical impact: enacted change clarifies intended scope of the definition provision to the whole section rather than a single sub-section; corrigendum indicates a correction post enactment, reducing interpretive uncertainty regarding where the defined term applies.

Practical Implications

• Compliance and risk areas: Collectors (sellers, authorised dealers, licensors/lessors) must identify when receipts fall within the Table, determine the correct rate, and collect at the time of debiting or receipt. Risk areas include misclassification of receipts (e.g., whether a receipt is for "sale of minerals" versus other services), failure to obtain or preserve prescribed declarations, and duplicate collection where overlapping entries (serial 7 and 8) may apply.
• Record-keeping/evidence: Collectors should maintain copies of declarations (one copy to be delivered to tax authorities per Bill), evidence of debiting/receipt dates, and documentation to show exemption conditions (e.g., buyer's declaration of end-use). Payment records and ledger entries will be critical to demonstrate correct timing and rate application. Where cross-collection rules apply (serial 7 vs 8), proof of prior collection by the seller will be material to avoid collection by the authorised dealer.

Key Takeaways

• Clause 394 prescribes TCS on nine specified receipts, allocating collection obligations to sellers, authorised dealers or licensors/lessors at fixed rates.
• Timing of collection is anchored to debiting the buyer's account or actual receipt - creating a clear cash/book nexus for collection events.
• Buyers who are Indian residents can avoid collection on certain goods by furnishing a prescribed declaration of end-use (manufacturing/processing/generating power and not trading).
• Clause 394 attempts to prevent double collection by excluding authorised dealer collection where the seller has collected on related receipts; it also disapplies collection where the buyer has deducted tax under other provisions.
• The Bill provides limited definitional guidance (forest produce) and leaves procedural prescriptions (forms, manner) to rules/regulations ("as prescribed").
• Practical compliance will require robust documentation of debits/receipts, declarations, and coordination where multiple collection/deduction provisions could apply.
• Specific administrative timelines and an additional exemption (education loan LRS remittances) appear in the enacted text but are absent or less developed in the Bill-version, underscoring the importance of reading the enacted section and corrigenda.

Full Text:

Section 394 Collection of tax at source.