The Monstrosity that was 206C1H (with a heady mix of AB, CCA, and 194Q)

Or: How India wasted crores of hours on a tax provision that was quietly abolished 3 years later.

Let me start with a provision that actually made sense (if TDS/TCS make ANY sense at all - but that is a topic for another day).

In Oct 2020, the govt. introduced a TCS on sale of goods - Section 206C(1H). The rule was straightforward. If your turnover exceeded 10 crores and you sold more than 50 lakhs of goods to a customer in the year, you had to collect an additional 0.1% TCS on every invoice beyond that 50L threshold.

For e.g., you manufacture Water Bottles. Your annual turnover is 12 crores. You sell goods worth 65 lakhs to a distributor in Nashik during the year. Once you cross the 50L mark with that customer, you start collecting 0.1% TCS on the remaining 15 lakhs. The customer claims it back while filing returns. Done.

Why did this work? Because the vendor had exactly 2 variables before generating an invoice - his own turnover, and the customer's purchases from him. Both known. Both in his control.

It's a basic IF/ELSE condition. We implemented it in our ERP in a day. No user intervention needed. Technology doing what technology is supposed to do.

I did not sweat. This is how a half-decent tax policy works - you build it on variables that the taxpayer controls and knows. We welcomed E-Way Bill and E-Invoice for the same reason. Those were built with APIs. When there are APIs involved, even the most complex compliance becomes a background process. After the initial manual hiccups, software providers integrated the APIs and now, you don't even feel it.

Cool. So far so good.

Then came July 2021. Section 194Q entered the chat.

Under 194Q, if a customer with turnover above 10 crores purchased goods over 50L from you, the customer would deduct TDS before making payment.

So now you had two provisions. Vendor collects TCS. Customer deducts TDS. Both on the same transaction. Both above the same 50L threshold. Who does what?

The answer depends on the customer's turnover - which, obviously, is a variable that the vendor does not know.

If the customer's turnover exceeds 10 crores - customer deducts TDS, vendor does not collect TCS. If not - vendor collects TCS as before.

And this is where hell broke loose.

Earlier, I had 2 variables - my turnover and my customer's purchases. Both known. Now, I had a new variable - my customer's turnover. Which I do not know. Which I cannot know unless I ask them.

We were a small company back then. Significantly smaller than we are today. Even then, we had about 100 customers with annual purchases exceeding 50L. We now had to manually chase all 100 for signed turnover declarations. Every. Single. Year.

But it wasn't hell enough. Enter 206AB and 206CCA.

Under 206AB, if the customer had not filed their Income Tax Returns in the last 2 years, the TCS rate jumped from 0.1% to 5%. Fifty times higher.

So now, before generating invoices for a customer crossing the 50L threshold, I had yet another variable - has this customer filed their ITR for the last 2 years? Most MSMEs don't have this information readily available. It's usually with their CAs, who rightfully don't share it easily. So you're chasing the customer, who's chasing their CA, who's busy with 200 other clients.

Multiply this by every vendor-customer pair in the country.

Now imagine. A vendor's Accounts team - already juggling

• ledger reconciliations

• GST reco and returns

• TDS reco and returns

• stock audits

• financial statement audits

• Bank CC Renewal submissions

• Ministry of Statistics submissions (LOL!)

• and tens of other tasks

now also has to:

1. Get turnover declarations from all customers above the threshold

2. Get ITR filing confirmations for the last 2 years

3. Get signed indemnity letters protecting the vendor from wrongful deductions

4. Do this every year

5. Check every payment received to verify if TDS was correctly deducted

There were no APIs to verify turnover or ITR filing status. Even if there were, every API call would be charged.

Nothing is free, except Finshots and Money Stuff.

And here's the part nobody talked about - the ERP developers. Every few months, the government was asking them to build developments that shook their codebase. These are not cosmetic changes. These are structural. What works for a manufacturing firm doesn't work for an IT firm doesn't work for a trading firm. Even SAP's own updates came riddled with bugs and limitations that took months to fix.

Who pays for these overhauls? We do. The businesses.

Now, I had resources. I could handle this. But think about the lakhs of small businesses across the country who couldn't. The ones without a large accounts team, without a CA on speed dial. They were doing this manually. On Excel. On paper.

And then think about the other side. Thousands of large companies with tens of thousands of customers crossing that 50L threshold. They can afford to make people sit and do this dumb work. Hire 10 more clerks, throw bodies at the problem.

But can India afford it? Can we afford tens of thousands of people in hundreds of companies spending their working hours chasing declarations and matching TDS certificates instead of doing productive work?

We should create good jobs, not fake jobs.

Productivity wastage is not a line item in the Finance Ministry's budget. Nobody accounts for it. Nobody measures the crores of hours that useless compliance eats up across the country. It doesn't show up in any report. But every business owner feels it in their bones.

I genuinely could not understand the purpose of these provisions. I asked a bunch of CAs. I looked it up online. I couldn't find a single convincing argument for why this complexity was worth it. The amount of tax collected early (0 additional tax) was a rounding error compared to the time and money burned.

I wrote to The Ken about this. Laid out the entire thing - the variables, the implications, the ERP angle. No response. No article. Their editorial energy at the time was better spent bashing Swiggy and whatever hipster business narrative was trending that week. Those stories have their place. But when your readership has people earning their money from boring, grounded businesses - pipes, textiles, chemicals, FMCG distribution - it is a disservice to not cover the things that are actually eating their time.

My point was simple. Shouldn't we as a nation focus on saving man-hours so that people can create businesses, products, and jobs - instead of running around on useless compliance?

This FY, TCS on sale of goods - 206C(1H) - was abolished. Quietly. No fanfare. No acknowledgment. Just gone. At least now I don't have to worry about my customer's turnover. One variable eliminated after 3-4 years of pain.

But 206AB and 206CCA? Still active. Still a headache.

The government did eventually roll out a utility to check if a customer is on the "specified persons" list - basically, whether they've filed their ITR or not. So in theory, you don't need to chase customers for ITR declarations anymore. You can just check the portal.

In theory.

Here's what actually happened. Because no such utility existed immediately, businesses started collecting ITR declarations manually. They built processes around it. Trained their staff. Made it part of the annual cycle. And now, even though the utility exists, most businesses continue collecting declarations anyway. The manual process became the process. Nobody trusts a switch that was flipped a year late.

This is what happens when you roll out policy without planning. You force the market to build its own workaround. And once that workaround is built, it doesn't go away just because you finally got around to building the proper solution. The behavioral cost is permanent.

Le Chatelier's Principle says that when you disturb a system in equilibrium, the system adjusts to counteract the disturbance. Indian businesses adjusted. They hired compliance staff. They rewrote ERP modules. They chased declarations. They built manual processes where digital ones should have existed from day one.

206C1H was removed. But the scar tissue from 206AB and CCA remains. The declarations still flow. The man-hours still burn. The adjustment became the new equilibrium.

And the next time someone tells you Indian businesses are not productive enough, remember - a significant chunk of their energy goes into surviving provisions that either get abandoned after years of waste, or get half-fixed with utilities that arrive too late to change the behavior they created.

We are not just competing with other businesses. We are competing with the system.

[Attached: My original email to The Ken, July 2021 - laying out the exact problem. No reply received.]

Edit: Actually, I'm not attaching it. But trust me, it exists. Unlike my customers' ITR filing status, which I was somehow expected to verify.

Until next time.