Section 206C(1H) vs Section 206C(1) TCS on Scrap & Goods: Iron & Steel Compliance

Industrial clusters in Chhattisgarh — Urla, Siltara, and Bhanpuri in particular — handle large-scale manufacturing and trading of sponge iron, billets, TMT bars, and ferrous scrap. For years, businesses in these clusters had to track two overlapping TCS provisions under the Income-tax Act, 1961: Section 206C(1) on scrap and specified goods, and Section 206C(1H) on the sale of any goods above a value threshold. That second provision no longer exists. Section 206C(1H) was omitted with effect from 1 April 2025 by the Finance Act, 2025, and any compliance checklist still built around it is now materially wrong. This note sets out what actually applies for FY 2025-26 (the year currently in progress) and what changes further from 1 April 2026.

1. Section 206C(1H) No Longer Exists — What Replaced It

Until 31 March 2025, a seller with turnover exceeding ₹10 crore in the preceding financial year had to collect 0.1% TCS on receipts exceeding ₹50 lakh from a single buyer under Section 206C(1H). This overlapped almost entirely with Section 194Q, under which a buyer with turnover exceeding ₹10 crore deducts 0.1% TDS on purchases exceeding ₹50 lakh from a single seller — creating duplicate compliance on the same transaction. The Finance Act, 2025 removed this duplication by omitting Section 206C(1H) entirely, along with the higher-rate provision for non-filers under Section 206CCA. Both omissions took effect from 1 April 2025.

Practical Note: For any sale of goods in FY 2025-26 that is not scrap or another specified item under Section 206C(1), sellers are not required to collect TCS at all — even if their turnover exceeds ₹10 crore and the buyer's payment exceeds ₹50 lakh. The compliance obligation on such general goods transactions now rests entirely with the buyer under Section 194Q. Continuing to collect TCS under a since-repealed 206C(1H) is an unnecessary — and incorrect — compliance step that also creates a mismatch in Form 26AS/AIS reconciliation for the buyer.

2. Section 206C(1) on Scrap: What Still Applies for FY 2025-26

Section 206C(1) — the original scrap and specified-goods TCS provision — is unaffected by the 2025 omission and continues to apply through FY 2025-26 (AY 2026-27). The statutory definition of "scrap" under Section 206C is:

"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."

Manufacturing Buyers vs Scrap Traders

• If a buyer purchases iron or steel scrap to use directly as raw material for manufacturing ingots, billets, or TMT bars, the buyer can furnish Form 27C to the seller declaring the goods will be used for manufacturing, processing, or production (not trading), which removes the TCS obligation on that transaction.
• The seller must forward the duplicate copy of Form 27C to the jurisdictional Principal Chief Commissioner or Chief Commissioner of Income Tax within seven days of the end of the month in which the declaration is received.
• Scrap sold to a trader for resale rather than manufacturing use does not qualify for the Form 27C exemption and attracts the mandatory 1% TCS.

Practical Warning: Accepting a Form 27C declaration without verifying that the buyer is genuinely a manufacturer — and retaining evidence of that end-use — is a common assessment-time trigger. If the buyer later turns out to be a trader, the Assessing Officer can treat the seller as an "assessee in default" for the TCS not collected, along with interest under Section 206C(7).

3. The Rate Is Changing From 1 April 2026 — And So Is the Section Number

Two separate developments affect scrap TCS from FY 2026-27 onward, and it is important not to conflate them with the FY 2025-26 position:

1. Rate rationalisation: Under proposals rationalising TCS rates, the rate on scrap (along with certain other specified goods including coal, lignite, and iron ore) is set to move from 1% to a uniform 2%, effective 1 April 2026.
2. Section renumbering: The Income Tax Act, 2025 — which governs income and compliance from Tax Year 2026-27 (1 April 2026) onward — consolidates all TCS provisions previously spread across Section 206C's sub-sections into a single Section 394 of the new Act. The scrap TCS provision that businesses know today as Section 206C(1) will be cited as Section 394(1) in returns, challans, and certificates issued for Tax Year 2026-27 onward.

Practical Note: For all TCS deposited, returns filed, and certificates issued in respect of FY 2025-26 (the year currently running), continue citing Section 206C(1) at the existing 1% rate under the Income-tax Act, 1961 — the Act that governs this financial year. The Section 394(1) citation and the 2% rate apply only once Tax Year 2026-27 begins.

4. Section 194Q Is Now the Primary Mechanism for General Goods Purchases

With Section 206C(1H) gone, Section 194Q stands alone as the compliance mechanism for purchases of general goods (i.e., goods other than scrap and the other items specifically listed under Section 206C(1)):

• A buyer with turnover exceeding ₹10 crore in the preceding financial year must deduct 0.1% TDS on the amount exceeding ₹50 lakh paid or credited to a resident seller for the purchase of goods in a financial year.
• Since Section 206C(1H) no longer exists, there is no longer any question of precedence or double compliance between TDS and TCS on such transactions — only Section 194Q applies.
• Section 194Q does not apply to scrap or the other items covered under Section 206C(1); those continue to attract TCS in the hands of the seller as described in Section 2 above, regardless of the buyer's turnover.

5. GST Treatment on Iron, Steel & Scrap After GST 2.0

GST 2.0, effective 22 September 2025, collapsed the earlier 12% and 28% slabs into a simplified three-rate structure of 5%, 18%, and 40%. Ferrous waste and scrap (HSN 7204) — the category most relevant to Chhattisgarh's steel and rolling-mill industry — continues to fall under the standard 18% slab after the reform; it was not moved into the merit 5% slab. Businesses dealing in iron and steel scrap should independently confirm the applicable HSN classification and rate for each specific product line at the time of invoicing, since finished steel products and certain iron categories have seen differential treatment under the revised structure.

6. Quarterly TCS Returns & Form 27D Certificates

1. TCS Deposit: Collected TCS on scrap under Section 206C(1) must be deposited with the Central Government by the 7th of the following month (and by 30th April for TCS collected in March).
2. Form 27EQ Quarterly Return: Due quarterly — 15th July, 15th October, 15th January, and 15th May (for the January–March quarter).
3. TCS Certificate (Form 27D): Must be downloaded from TRACES and issued to the buyer within 15 days of the due date for filing Form 27EQ for the relevant quarter.

7. Practical Compliance Checklist for FY 2025-26

1. Stop collecting TCS under Section 206C(1H) on general goods sales — the provision has been omitted since 1 April 2025.
2. Continue collecting 1% TCS under Section 206C(1) on all scrap sales unless a valid Form 27C is on file from a manufacturing buyer.
3. Reconcile Form 27C declarations against actual end-use periodically, and retain supporting documentation.
4. Where your business is a buyer of general goods (not scrap) with turnover exceeding ₹10 crore, confirm your Section 194Q TDS deduction workflow is active for purchases exceeding ₹50 lakh from any single seller.
5. Update internal invoicing templates and ERP tax codes to remove any residual 206C(1H) references before the FY 2025-26 year-end reconciliation.
6. Prepare for the Section 394(1) citation and the 2% scrap TCS rate applicable from Tax Year 2026-27 (1 April 2026) — but do not apply either to FY 2025-26 transactions.

Related Advisory Services & Practice Guides

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