TDS on Scrap Purchases: Who Must Deduct & When

Under Section 206C(1H) of the Indian Income-tax Act, any buyer whose total turnover, gross receipts, or sales exceeded ₹10 crore in the immediately preceding financial year must deduct tax at source (TDS) at 0.1% on purchases of scrap from a resident seller, provided the purchase amount exceeds ₹50 lakh in a single financial year. This applies to payments made on or after October 1, 2020, and the deduction is required at the time of payment or credit, whichever is earlier.

Background: Why Section 206C(1H) Was Introduced

Section 206C(1H) was inserted by the Finance Act, 2020, to widen the tax net for high-value transactions involving the purchase of goods (including scrap). The provision requires the buyer to collect TDS on payments to resident sellers, aiming to track large cash flows and ensure that sellers who may not file returns are brought into the tax system. The threshold of ₹50 lakh per financial year applies per seller, meaning the buyer must track cumulative purchases from each seller separately.

It is important to note that this section is separate from the earlier TCS (tax collected at source) provisions under Section 206C(1) for scrap, which applied to sellers. Under the new provision, the buyer is responsible for deducting TDS, shifting the compliance burden.

Who Exactly Must Deduct TDS?

The obligation applies to any person (individual, HUF, company, firm, etc.) whose total sales, turnover, or gross receipts from business or profession exceeded ₹10 crore in the immediately preceding financial year. This is a high threshold, so small businesses are generally exempt. However, once the threshold is crossed, the buyer must deduct TDS on all scrap purchases that exceed ₹50 lakh in a financial year, even if the buyer is otherwise not liable for tax audit.

When Does the Deduction Apply?

The deduction applies when all of the following conditions are met:

• The purchase is of scrap – defined as waste and scrap from the manufacture or mechanical working of materials, or any article that has become unfit for its original use.
• The seller is a resident of India.
• The payment is made on or after October 1, 2020.
• The aggregate amount of scrap purchased from a single seller exceeds ₹50 lakh in the financial year.
• The buyer’s turnover exceeded ₹10 crore in the previous financial year.

If any of these conditions is not met, TDS is not required. For example, if the buyer’s turnover is ₹9 crore, no deduction is needed. Similarly, if purchases from a seller are only ₹40 lakh, no deduction applies.

How to Deduct and Deposit TDS

When the threshold is crossed, the buyer must:

1. Deduct TDS at 0.1% on the amount paid or credited (whichever is earlier).
2. Deposit the TDS with the government by the 7th of the following month (for non-government deductors).
3. File Form 27Q (for payments to residents) quarterly, and issue Form 16A to the seller.
4. Mention the TDS deduction in the buyer’s books of accounts.

Note that the TDS is deducted on the gross amount of the purchase, not on the profit or margin. For example, if scrap is bought for ₹60 lakh, TDS is ₹6,000 on the full ₹60 lakh.

Common Mistakes and Misconceptions

• Applying TDS to all purchases: The ₹50 lakh threshold is per seller, not aggregate. If a buyer purchases ₹30 lakh from Seller A and ₹30 lakh from Seller B, no TDS is required because neither exceeds ₹50 lakh.
• Ignoring the turnover threshold: Some buyers assume they must deduct TDS on any scrap purchase, but the ₹10 crore turnover test is a prerequisite. A small trader with ₹5 crore turnover is not covered.
• Confusing with TCS: Sellers of scrap were earlier required to collect TCS at 1% under Section 206C(1). That provision still exists, but Section 206C(1H) is a separate buyer-side obligation. If both apply, the buyer deducts TDS and the seller may also collect TCS, but the buyer can claim credit for TDS.
• Not deducting on advances: If the buyer pays an advance for scrap, TDS must be deducted at the time of payment, not when the scrap is delivered.

Exemptions and Special Cases

Certain payments are exempt from TDS under Section 206C(1H):

• Payments for scrap purchased from a seller who is a non-resident (TDS under other sections may apply).
• Payments made for personal use (not for business or profession).
• If the buyer is the Central or State Government or an embassy, the provision does not apply.
• If the seller is a public sector company or a notified entity, the buyer may not need to deduct TDS, but this requires notification by the government.

Also, if the buyer fails to deduct TDS, the buyer may be treated as an assessee-in-default and may be liable for interest and penalties. However, if the seller has already paid tax on the income, the buyer may not be held liable, but this is determined on a case-by-case basis.

How to Track and Report

To ensure compliance, maintain a ledger of scrap purchases per seller. Once the cumulative amount for a seller crosses ₹50 lakh, start deducting TDS on the excess amount (or on the entire amount? The law says “shall deduct an amount equal to 0.1% of such sum exceeding fifty lakh rupees” – meaning TDS is only on the amount above ₹50 lakh, not on the entire purchase). For example, if purchases from a seller are ₹60 lakh, TDS is 0.1% of ₹10 lakh = ₹1,000, not ₹6,000. This is a common error.

The correct TDS for ₹60 lakh total is ₹1,000.

Frequently Asked Questions

Is TDS deductible on scrap purchases if my turnover is ₹9 crore?

No, because the turnover threshold is ₹10 crore. Only buyers with turnover exceeding ₹10 crore in the previous financial year are required to deduct TDS under Section 206C(1H).

What if I purchase scrap from multiple sellers?

The ₹50 lakh limit applies per seller. You must track purchases from each seller separately. If you buy ₹30 lakh from one seller and ₹30 lakh from another, no TDS is required because neither seller exceeds ₹50 lakh.

Do I deduct TDS on the entire purchase amount or only the amount above ₹50 lakh?

Only on the amount exceeding ₹50 lakh. For example, if you purchase ₹60 lakh from a seller, TDS is 0.1% of ₹10 lakh (₹1,000), not on the full ₹60 lakh.

What is the TDS rate for scrap purchases?

The rate is 0.1% under Section 206C(1H). This rate is lower than the TCS rate of 1% that sellers may collect under Section 206C(1).

When should I deposit the TDS?

You must deposit the TDS by the 7th of the following month. For example, if you deduct TDS in March, you must deposit it by April 7. The due date may vary for government deductors.

Can I claim credit for TDS deducted?

Yes, the TDS deducted is a tax payment on behalf of the seller. The seller can claim credit for this TDS in their income tax return. You, as the buyer, do not claim credit; you only deposit it.

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