Lost Export Orders, Shrinking Margins: Government Support Indian Exporters Must Actually Use in 2026

 By CA Surekha S Ahuja

An exporter can have a good product, a confirmed overseas buyer and a competitive quotation—and still lose the order.

The reasons often lie beyond the selling price: expensive working capital, delayed collections, inland freight, international certification, compliance costs and geopolitical risks.

The Government's Export Promotion Mission (EPM), along with other export-support measures, seeks to address these pressures. But exporters need to understand what each scheme actually provides, how to qualify and, most importantly, how to receive the benefit.

1. Export Promotion Mission: Financial support and market access

With an approved outlay of ₹25,060 crore for FY 2025–26 to FY 2030–31, EPM operates through two sub-schemes:

• NIRYAT PROTSAHAN: Export credit, interest subvention, factoring, credit guarantees and other financial interventions.

• NIRYAT DISHA: Certification, logistics, market access, trade intelligence and overseas fulfilment support.

The support is not one universal subsidy. Each intervention has separate eligibility conditions, notified products, limits and procedures.

2. Interest subvention: 2.75%—and the bank must pass it on

Eligible MSME exporters can receive 2.75% annual interest subvention on qualifying pre-shipment and post-shipment rupee export credit, subject to a ceiling of ₹50 lakh per exporter per financial year.

A critical point is often overlooked: the bank is required to pass on the eligible benefit upfront. It subsequently claims reimbursement from the implementing agency. The bank's receipt of reimbursement is not a precondition for passing on the benefit.

However, an existing export-credit account does not automatically qualify.

The essential conditions are:

• Eligible MSME status, Udyam registration and IEC.

• Export of products covered by the notified positive list of six-digit HSN codes.

• Eligible rupee export-credit disbursement.

• Prescribed UIN generated and submitted to the bank on or before disbursement.

Credit disbursed before 2 January 2026 is outside the scheme. A UIN generated after disbursement cannot cure the omission. On renewal with a top-up, only the additional qualifying disbursement is treated as fresh credit exposure; the old outstanding balance does not automatically become eligible. The benefit also ceases from the date the account becomes an NPA.

What should an exporter do?

Generate the UIN before or on the date of fresh disbursement, submit it formally to the bank, retain acknowledgement and verify the interest statement. If the benefit is not passed on despite eligibility, seek the bank's written explanation and escalate through its grievance mechanism.

The implementing-agency role shifted from RBI to EXIM Bank with effect from 1 April 2026. This changes the reimbursement channel, not the bank's upfront pass-through obligation.

3. Factoring: Convert export receivables into working capital

Instead of waiting 60–120 days for an overseas buyer to pay, an exporter can use factoring to obtain finance against eligible export receivables.

EPM provides 2.75% subvention on eligible factoring costs, subject to a ceiling of ₹50 lakh per IEC.

Under DGFT Trade Notice No. 32/2026–27 dated 26 October 2026, the earlier UIN requirement for factoring has been removed. The factor uploads transaction details; the exporter verifies them and submits the consolidated claim through the prescribed process.

Eligible transactions are covered from 20 February 2026, subject to the notified conditions.

Factoring support can be combined with eligible interest subvention, but the same invoice or interest cost cannot be claimed twice.

4. Credit guarantees and e-commerce finance

For exporters unable to offer adequate collateral, EPM provides guarantee coverage to eligible lending institutions:

Enterprise	Guarantee coverage
Micro and Small	85%
Medium	65%

The maximum eligible credit limit is ₹10 crore per exporter, subject to scheme conditions.

This is a lender-side guarantee, not an 85% or 65% cash subsidy to the exporter. The borrower remains liable for repayment.

For eligible MSMEs exporting through e-commerce channels, the EXIM Bank framework also provides:

• Direct e-commerce credit with guarantee coverage up to 90%, capped at ₹50 lakh.

• Overseas inventory credit with guarantee coverage up to 75%, capped at ₹5 crore.

• Interest subvention of 2.75%, subject to an annual ceiling of ₹15 lakh per applicant.

Eligibility and facility approval conditions apply.

5. TRACE and LIFT: Recover eligible certification and transport costs

Two interventions can directly address costs that weaken export margins.

Intervention	Support	Key condition
TRACE – Testing and certification	60% of eligible cost; 75% for Priority Positive List certifications; annual ceiling ₹25 lakh	Notified certification and prescribed prior Intent-to-Claim
LIFT – Inland logistics	Up to 30% of eligible inland transport cost; annual ceiling ₹20 lakh	Notified products, districts, routes and prior Intent-to-Claim

These are reimbursement-based interventions. The exporter initially incurs the eligible expenditure and must follow the prescribed approval and claim process.

LIFT is not a blanket reimbursement of international ocean freight or every logistics expense. TRACE does not cover every certification obtained overseas.

6. RoDTEP and RELIEF: Remission and risk protection

RoDTEP: DGFT Notification No. 41/2026–27 dated 30 September 2026 extended the scheme up to 31 December 2026 for eligible DTA, Advance Authorisation, SEZ and EOU exports. It remits eligible embedded duties and taxes through transferable electronic scrips; it is not a cash grant.

RELIEF: Component II provides 95% risk coverage under specified ECGC arrangements for eligible shipments affected by the West Asia situation. DGFT Notification No. 37/2026–27 dated 30 September 2026 extended the relevant timelines up to 31 March 2027. This is specified risk protection, not a general reimbursement of freight increases or export losses.

7. Market access: Finding the next buyer

Reducing prices is not always the solution to lost orders. Exporters may need new markets, new buyers and credible international exposure.

EPM's Market Access Support facilitates eligible trade fairs, buyer-seller meets, trade delegations and reverse buyer-seller meets. Assistance is proposal- and institution-based; it is not an automatic reimbursement of every exporter's travel or exhibition expenses.

The relevant Export Promotion Council, Commodity Board or approved institution should be approached for eligible events and participation conditions.

8. What does the exporter actually receive?

This distinction should guide every exporter's financial planning.

Support	Actual benefit
Interest subvention	Upfront interest benefit through the bank
Factoring support	Subvention on eligible factoring cost
Credit guarantee	Protection to lender; not cash to exporter
TRACE / LIFT	Reimbursement after eligible expenditure
RoDTEP	Transferable duty-remission scrip
RELIEF	Specified ECGC risk coverage
Market Access Support	Approved institutional or event assistance

An exporter should never treat an announced allocation, a guarantee or a pending reimbursement as money already received.

9. Exporter's action checklist

Before relying on any scheme, the exporter should:

1. Verify IEC, Udyam and eligible HSN classification.

2. Check the relevant scheme's notified product, location and expenditure conditions.

3. Generate the UIN before or on fresh eligible credit disbursement.

4. Obtain written bank confirmation and verify the interest benefit in the loan statement.

5. Complete prior Intent-to-Claim requirements for TRACE and LIFT.

6. Track factor-uploaded transactions and submit factoring claims within the prescribed timeline.

7. Maintain invoices, transport records, shipping documents and claim acknowledgements.

8. Record separately the benefit eligible, claimed and actually received.

CA S.Ahuja Perspective

Export competitiveness is not determined by the selling price alone. It is determined by what remains after financing, logistics, compliance, currency and collection risks have been absorbed.

The Government has created several useful support mechanisms, but the route to each benefit is different. An exporter must identify the right intervention, satisfy its conditions and follow through until the benefit is actually secured.

The interest-subvention scheme illustrates the practical gap. The bank is required to pass on the eligible benefit upfront, but an existing banking relationship does not guarantee automatic implementation. The exporter must meet the UIN and disbursement conditions and verify the interest account.

Government support is useful only when the exporter is eligible, completes the prescribed process and actually receives the financial benefit.

Used-Car Dealers Under GST: Circular 265 on ITC for Repairs, Rent and Spares—and the Separate Test for Capital Goods

By CA Surekha S Ahuja

A used-car dealer may pay GST on the prescribed margin instead of the full selling price. However, where the applicable margin-scheme notification requires non-availment of ITC, the dealer cannot claim credit on the used vehicle purchased for resale.

Does this restriction also deny ITC on spare parts, repairs, rent, advertising, software, laptops, air-conditioners and other business assets?

No. The restriction on the used vehicle does not automatically extend to every business expense of the dealership.

CBIC Circular No. 265/11/2026-GST dated 28 October 2026 clarifies that the ITC restriction under the specified used-vehicle margin-scheme notifications does not apply to eligible inputs other than the used vehicles themselves and to input services.

Capital goods, however, require a separate examination under the CGST Act. This distinction is important for every used-car dealer reviewing ITC eligibility and earlier reversals.

1. What does Circular 265 actually clarify?

Issued under Section 168(1) of the CGST Act, 2017, following the 57th GST Council meeting held on 8 October 2026, the circular addresses the scope of the non-availment condition under the relevant margin-scheme notifications.

It clarifies that the restriction does not extend to ITC on:

• Spare parts and other inputs used in the dealership.

• Repairs and maintenance services.

• Technology services and software.

• Showroom and office rent.

• Marketing and advertising services.

The practical position is:

Purchase or expenditure	ITC position
Used vehicle purchased for resale under the margin scheme	Restricted where the notification's non-availment condition applies
Spare parts and other business inputs	Eligible, subject to Sections 16 and 17
Repairs and maintenance services	Eligible, subject to Sections 16 and 17, including Section 17(5)(ab), where relevant
Rent, software and technology services	Eligible, subject to statutory conditions
Advertising and marketing	Eligible, subject to statutory conditions
Laptops, computers, ACs and workshop machinery	Independently examine under Sections 16 and 17

The circular removes the blanket denial of dealership ITC. It does not grant unconditional credit on every purchase.

2. Margin valuation: Do not confuse Rule 32(5) with the special motor-vehicle notification

Rule 32(5) of the CGST Rules provides a valuation mechanism for second-hand goods sold as such or after minor processing that does not change their nature, where ITC has not been availed on their purchase.

The value is generally the difference between the selling price and purchase price. A negative difference is ignored.

However, old and used motor vehicles covered by Notification No. 08/2018-Central Tax (Rate), as amended, have a specific valuation formula:

• Where depreciation under Section 32 of the Income-tax Act has been claimed: consideration received on sale less the depreciated value of the vehicle on the date of supply.

• In other cases: selling price less purchase price.

• Negative margin: ignored.

For example:

Particulars	Amount
Purchase price	Rs 8,00,000
Selling price	Rs 9,50,000
Margin, where depreciation has not been claimed	Rs 1,50,000

Repair expenditure does not reduce this prescribed margin. It must be examined separately for ITC eligibility.

The dealer must also verify that the vehicle and transaction satisfy the relevant notification conditions, including the non-availment condition on the vehicle itself. Rule 32(5) should not be mechanically substituted for the specific motor-vehicle notification formula.

3. What is the GST rate on qualifying used vehicles?

The normal GST rate structure for new motor vehicles changed with effect from 22 September 2025. Certain categories fall under an 18% schedule and specified larger or luxury vehicles under a 40% schedule.

These normal vehicle rates must not be confused with the special margin-scheme rate.

The relevant amendments include:

• Notification No. 04/2025-Central Tax (Rate) and Notification No. 04/2025-Integrated Tax (Rate), both dated 16 January 2025.

• Notification No. 12/2025-Central Tax (Rate) and Notification No. 12/2025-Integrated Tax (Rate), both dated 17 September 2025, effective from 22 September 2025.

For qualifying supplies covered by the amended used-vehicle margin-scheme notifications, the GST rate is 18% on the prescribed margin:

Nature of supply	GST
Intra-State supply	9% CGST + 9% SGST
Inter-State supply	18% IGST

Compensation Cess must be examined separately. Serial No. 42A of Notification No. 01/2018-Compensation Cess (Rate), as amended, provides a nil rate for qualifying old and used motor vehicles subject to its conditions, including non-availment of specified credit on the vehicle.

Therefore, a dealer should not automatically apply the normal 40% rate or Compensation Cess to a qualifying margin-scheme transaction.

4. Repairs, spares and business expenses: Where ITC can be claimed

Section 16(1) permits ITC on goods and services used or intended to be used in the course or furtherance of business, subject to the statutory conditions.

Section 16(2) requires compliance with the prescribed documentary, receipt, supplier-reporting, tax-payment and return-filing conditions.

Accordingly, ITC on spare parts, workshop consumables, rent, software, advertising and other eligible business expenses can be claimed even though the dealership sells used vehicles under the margin scheme.

One important qualification: Section 17(5)(ab) restricts credit on specified servicing, repair and maintenance services relating to motor vehicles covered by Section 17(5)(a) and (aa), subject to statutory exceptions.

Vehicles held for further taxable supply must be distinguished from vehicles used for staff or management transport. The further-supply exception under Section 17(5)(a) is relevant to the former. The corresponding restriction on repair services must be examined under Section 17(5)(ab).

Circular 265 does not override these restrictions.

5. Capital goods: Laptops, ACs and machinery need a separate test

Circular 265 expressly clarifies the position for inputs other than the used vehicles and for input services. It does not expressly grant a separate entitlement for capital goods.

Capital goods are separately defined under Section 2(19), while Section 2(59) excludes them from the definition of inputs.

Their ITC eligibility must therefore be examined independently under Sections 16 and 17.

Asset	General position
Laptops, desktops and servers	Generally eligible for business use
Printers and networking equipment	Generally eligible
Standalone movable ACs	Generally eligible, subject to facts
CCTV and security equipment	Generally eligible, subject to installation and use
Workshop machinery and diagnostic equipment	Generally eligible
Civil construction and structural works	Examine restrictions under Section 17(5)(c) and (d)

Section 16(3) prohibits ITC where depreciation has been claimed on the GST component of the asset's cost under the Income-tax Act.

Building-related expenditure requires particular care. Section 17(5)(c) and (d) restrict specified works contract and construction-related credits, subject to the statutory definition and exceptions for plant and machinery.

Further, Section 124 of the Finance Act, 2025 substituted “plant or machinery” with “plant and machinery” in Section 17(5)(d), with effect deemed from 1 July 2017. The amendment was brought into force from 1 October 2025.

The amendment must be read with Chief Commissioner of CGST v. Safari Retreats Pvt. Ltd., 2024 INSC 756. Dealers should not rely on the earlier wording or assume that the functionality test alone establishes eligibility under the amended provision.

A standalone movable AC and an integrated building HVAC installation may therefore require different treatment. Invoices, asset registers, technical specifications and installation records should be maintained.

6. Demo vehicles: A different ITC situation

CBIC Circular No. 231/25/2024-GST dated 10 September 2024 clarifies ITC on demo vehicles used by authorised dealers for trial runs and demonstrations.

Section 17(5)(a) generally blocks ITC on specified passenger motor vehicles, subject to exceptions, including use for making further supply of such vehicles.

The circular recognises that an authorised dealer using demo vehicles to promote further supply of similar vehicles can fall within this exception, subject to the facts.

However, the position is different where the dealer merely provides marketing or facilitation services for a manufacturer and is not itself making further supply of the vehicles.

Capitalisation of a demo vehicle does not, by itself, deny ITC. But Section 16(3) must be respected: depreciation cannot be claimed on the GST component where ITC is taken.

On subsequent sale of a demo vehicle on which ITC has been availed, Section 18(6), read with Rule 44(6), requires payment of the higher of:

1. ITC taken, reduced by 5 percentage points for every quarter or part thereof from the date of invoice; or

2. Tax on the transaction value.

A demo vehicle on which ITC has been claimed must not automatically be brought under the used-vehicle margin scheme. The notification's non-availment condition must first be examined.

7. Nil margin, common credit and earlier-period reversals

A nil or negative margin does not automatically make the supply exempt. It remains a taxable supply under the applicable margin valuation mechanism.

Consequently, a dealer should not reverse common ITC merely because a vehicle is sold at nil margin. Section 17(2) and Rules 42 and 43 continue to apply where there are actual exempt supplies or non-business use.

The Kerala AAR ruling in Goexotic Plus91 Motors Private Limited, KER/42/2025 dated 11 December 2025, is relevant. It considered ITC on direct expenses, common business expenses and capital goods of a second-hand motor-vehicle dealer and treated margin-scheme sales as taxable supplies.

The ruling binds only the applicant and the concerned or jurisdictional officer under Section 103. It may be persuasive elsewhere but is not a universally binding precedent.

Can earlier ITC reversals be reviewed?

Yes, but Circular 265 does not automatically reopen concluded assessments or create an unconditional refund entitlement.

Dealers should review:

• Whether credit was reversed only because the entire dealership was considered ineligible.

• Whether the underlying goods or services satisfy Sections 16 and 17.

• Whether any specific blocked-credit provision applies.

• Whether the time limit under Section 16(4) or a statutory exception under Sections 16(5) or 16(6) is available.

• Whether the matter has attained finality and what remedy remains legally available.

In Suchitra Components Ltd. v. CCE, Guntur, 2007 (208) ELT 321 (SC), the Supreme Court recognised the retrospective application of beneficial circulars in the circumstances considered by it.

Circular 265 supports the interpretation that the margin-scheme restriction does not extend to other eligible inputs and input services. However, statutory time limits, procedural requirements, final orders and refund conditions continue to apply.

8. Practical action checklist for used-car dealers

Area	Immediate action
Used vehicle purchases	Maintain vehicle-wise purchase records and evidence of non-availment of ITC
Margin computation	Apply the correct notification formula, including depreciation treatment where relevant
GST and cess	Verify the applicable margin-scheme rate and nil cess conditions
Spares and repairs	Identify eligible inputs and services; test Section 17(5)(ab)
Rent and advertising	Verify business use, invoices and Section 16 conditions
Capital goods	Maintain a separate asset-wise ITC register
Demo vehicles	Preserve authorisation, demonstration records and subsequent-sale computation
Common credit	Apply Rules 42 and 43 wherever required
Earlier reversals	Review the legal basis, limitation and available remedy

CA S.Ahuja Perspective

The real issue for a used-car dealer is not whether ITC can be claimed on the vehicle purchased under the margin scheme. Where the notification requires non-availment, it cannot.

The real issue is whether that restriction has been wrongly extended to the entire dealership.

Circular 265 draws an important boundary: the restriction on the used vehicle does not automatically travel to other inputs and input services. Capital goods must be tested independently under the Act.

Dealers should now review their ITC records, identify reversals based only on a blanket interpretation, separate eligible credits from blocked credits and document the legal basis for each category.

The vehicle may be under the margin scheme. The entire dealership is not outside the ITC framework.

That is the distinction Circular 265 brings into focus—and the distinction every used-car dealer should build into its GST controls.

GST TDS Under Section 51: The Complete 2026 Guide to Scrap Purchases, RCM, Registration and Compliance

 By CA Surekha S Ahuja

From 1 November 2026, GST TDS has been extended to additional categories of specified goods, while corresponding reverse-charge and registration changes affect suppliers and buyers. Businesses dealing in used cooking oil, plastic scrap, tyre scrap, metal scrap and electronic waste must now review their contracts, vendor registration, tax deduction and monthly compliance processes.

The change is more significant than an increase in the list of goods subject to TDS.

A registered buyer purchasing specified goods from a registered supplier may have to deduct GST TDS. A purchase from an unregistered supplier may instead attract reverse charge. At the same time, suppliers of the specified goods can no longer rely on the earlier special registration exemption merely because their supplies were taxable under reverse charge.

The correct treatment depends on the goods, supplier's registration status, recipient's status, contract value and place of supply. Applying TDS indiscriminately to every scrap purchase is as incorrect as overlooking the reverse-charge liability on purchases from unregistered suppliers.

1. What changed from 1 November 2026?

Three notifications dated 27 October 2026 form the principal framework for the new compliance requirements.

Notification	What it changes	Effective date
Notification No. 07/2026-Central Tax	Expands the notified category of recipients required to deduct TDS under Section 51 to specified goods purchased from registered suppliers	1 November 2026
Notification No. 04/2026-Central Tax (Rate)	Adds specified goods purchased from unregistered suppliers by registered persons to the reverse-charge framework	1 November 2026
Notification No. 06/2026-Central Tax	Restricts the special registration exemption under Notification No. 5/2017-Central Tax for persons engaged in supplying the specified goods	1 November 2026

The notifications operate independently and must not be confused:

• Registered supplier to registered buyer: TDS under Section 51 may apply.

• Unregistered supplier to registered buyer: Reverse charge may apply under Section 9(3), subject to the notified entry.

• Supplier dealing in specified goods: The special registration exemption under Notification No. 5/2017-Central Tax is no longer available for the specified goods; the supplier must reassess registration under the applicable provisions.

Metal scrap was already covered by the earlier 2024 framework. The 2026 change extends the notified treatment to additional categories.

2. Which goods are covered?

Notification No. 07/2026-Central Tax substitutes clause (d) of Notification No. 50/2018-Central Tax.

The notified goods are:

Goods	Customs Tariff classification
Used cooking oil	Heading 1518
Waste and scrap of plastics	Heading 3915
Waste and scrap of tyres	Heading 4004
Metal scrap	Chapters 72 to 81
Electrical and electronics waste and scrap	Heading 8549

The notified category covers a registered person receiving any of these goods from another registered person.

Metal scrap under Chapters 72 to 81 was already included through Notification No. 25/2024-Central Tax dated 9 October 2024. The 2026 amendment adds the other four categories.

Classification is the starting point. Commercial descriptions such as waste, scrap, used material or recyclable goods are not sufficient by themselves. The actual nature of the goods and their correct Customs Tariff classification must support the conclusion.

For example, plastic waste falling under heading 3915 is covered. A product described merely as plastic residue or recycled plastic should not automatically be treated as covered without checking its classification.

3. When is GST TDS required? Apply these five tests

Test 1: Is the recipient a notified deductor?

Notification No. 07/2026-Central Tax covers any registered person receiving the specified goods from another registered person.

Consequently, the obligation is not confined to Government departments, public-sector undertakings or Government agencies. A private registered business purchasing the notified goods from another registered business must also examine Section 51.

The recipient's registration status and the nature of the goods must be established before deciding the deduction obligation.

Test 2: Is the supplier registered?

The registration status of the supplier determines which tax mechanism must be examined.

Supplier	Recipient	Applicable treatment
Registered	Registered	Examine TDS under Section 51
Unregistered	Registered	Examine RCM under Notification No. 04/2026-Central Tax (Rate) and corresponding applicable tax notification
Registered	Buyer outside the notified category	Section 51 TDS does not arise merely because the goods are scrap

Do not deduct TDS from an unregistered supplier merely because the goods fall under a notified tariff heading. The recipient must instead examine the applicable reverse-charge entry.

Test 3: Does the total taxable value under the contract exceed Rs 2,50,000?

Section 51(1) prescribes the threshold where the total value of taxable supply under a contract exceeds Rs 2,50,000.

The test is contract-wise, not invoice-wise.

Total taxable value under the contract	TDS position
Rs 2,00,000	No TDS
Rs 2,50,000	No TDS
Rs 2,50,001	Threshold crossed
Rs 5,00,000	TDS applies, subject to the other statutory conditions

The word used in Section 51 is exceeds. A contract of exactly Rs 2,50,000 does not cross the threshold.

Practical implications:

• Examine the total taxable value under the contract, not each invoice independently.

• Aggregate supplies made under the same contract.

• Review master agreements, purchase orders, rate contracts, amendments and linked supply arrangements.

• Do not split invoices or purchase orders artificially to avoid the threshold.

• Where the contract value is already above Rs 2,50,000, the deduction obligation is relevant from the first payment or credit under that contract, subject to the other conditions.

• Where the contract is subsequently amended and its aggregate value crosses the threshold, document the amendment date, earlier credits and subsequent payment chronology. Do not assume that completed earlier payments can automatically be treated in the same manner as subsequent payments.

The threshold is not a per-invoice exemption.

Test 4: Exclude GST and cess from the TDS calculation

The explanation to Section 51(1) expressly excludes Central Tax, State Tax, Union Territory Tax, Integrated Tax and cess indicated in the invoice from the value of supply for TDS purposes.

TDS is calculated on the taxable value, not the gross invoice amount inclusive of GST.

Example: Delhi buyer purchasing plastic scrap from a Delhi supplier

Assume the contract value exceeds Rs 2,50,000 and the other statutory conditions are satisfied.

Particulars	Amount
Taxable value	Rs 4,00,000
CGST @ 9%	Rs 36,000
SGST @ 9%	Rs 36,000
Total invoice value	Rs 4,72,000
GST TDS @ 2% on taxable value	Rs 8,000
Net payment to supplier	Rs 4,64,000

The buyer deducts Rs 8,000, not 2% of Rs 4,72,000.

Test 5: Apply the place-of-supply exclusion

The proviso to Section 51(1) provides an important exception.

No TDS is required where both:

1. The location of the supplier; and

2. The place of supply,

are in a State or Union Territory different from the State or Union Territory in which the recipient is registered.

Both elements must be tested.

Example A: TDS applies

• Recipient registered in Delhi.

• Supplier located in Haryana.

• Place of supply is Delhi.

The supplier's location and place of supply are not both in a State different from Delhi. The statutory exclusion does not apply.

Example B: TDS does not apply

• Recipient registered in Delhi.

• Supplier located in Haryana.

• Place of supply is Haryana.

Both the supplier's location and place of supply are in Haryana, which is different from the recipient's registration State, Delhi. The proviso applies and TDS is not required.

A buyer should therefore not decide the TDS treatment merely by comparing the supplier's GSTIN State code with its own. The place of supply must also be established.

4. What is the GST TDS rate?

The applicable aggregate deduction is 2%.

Nature of supply	TDS rate
Intra-State supply	1% CGST + 1% SGST/UTGST = 2%
Inter-State supply	2% IGST

The deduction is calculated on the taxable value excluding GST and cess.

The place-of-supply exclusion must be tested before applying the rate. An inter-State transaction does not automatically mean TDS is payable.

5. Reverse charge on purchases from unregistered suppliers

Notification No. 04/2026-Central Tax (Rate) amends Notification No. 4/2017-Central Tax (Rate) by adding specified goods to the reverse-charge framework.

The new entries are:

Entry	HSN	Goods	Supplier	Recipient
2A	1518	Used cooking oil	Any unregistered person	Any registered person
3B	3915	Waste and scrap of plastics	Any unregistered person	Any registered person
3C	4004	Waste and scrap of tyres	Any unregistered person	Any registered person
9	8549	Electrical and electronics waste and scrap	Any unregistered person	Any registered person

The corresponding amendments under Notification No. 04/2026-Integrated Tax (Rate) and Notification No. 04/2026-Union Territory Tax (Rate) must also be considered for the applicable inter-State and Union Territory transactions.

Metal scrap was already covered under the earlier reverse-charge framework and should not be presented as a newly introduced 2026 category.

The recipient must discharge GST under the applicable reverse-charge mechanism. The rate depends on the correct classification and applicable rate notification; there is no single uniform rate for all these goods.

TDS and RCM are two different mechanisms

Particulars	GST TDS	Reverse charge
Governing provision	Section 51	Section 9(3)
Supplier	Registered supplier	Unregistered supplier under the notified entry
Recipient	Notified registered recipient	Registered recipient specified in the notification
Tax payment	Deducted from supplier payment or credit	Paid by recipient to Government
Supplier's treatment	TDS credit in electronic cash ledger	Supplier does not receive TDS credit for RCM
Recipient's treatment	Deduction and reporting obligation	GST liability under RCM; eligible ITC subject to statutory conditions

The practical rule: first verify the supplier's registration status. If registered, examine TDS. If unregistered, examine RCM. Do not apply both mechanisms mechanically to the same purchase merely because the goods appear in both notification frameworks.

6. Registration implications for suppliers: Notification No. 06/2026-Central Tax

This notification requires careful attention.

Notification No. 5/2017-Central Tax had provided a special exemption from GST registration to persons exclusively engaged in making taxable supplies where the entire tax was payable by the recipient under reverse charge.

The exemption was already restricted for metal scrap through Notification No. 24/2024-Central Tax dated 9 October 2024.

Notification No. 06/2026-Central Tax dated 27 October 2026 substitutes the proviso to Notification No. 5/2017-Central Tax and provides that the special exemption will not apply to a person engaged in supplying:

• Used cooking oil under heading 1518;

• Waste and scrap of plastics under heading 3915;

• Waste and scrap of tyres under heading 4004;

• Metal scrap under Chapters 72 to 81; or

• Electrical and electronics waste and scrap under heading 8549.

The amendment is effective from 1 November 2026.

What does this mean for suppliers?

A supplier dealing in these goods can no longer rely on the special exemption under Notification No. 5/2017-Central Tax merely because its supplies are covered by reverse charge.

However, withdrawal of this specific exemption should not be confused with a blanket statement that every supplier must register irrespective of all other statutory provisions.

The supplier must reassess its position under:

• Section 22: turnover-based registration liability;

• Section 23: persons not liable for registration and applicable exemptions; and

• Section 24: compulsory registration categories.

The supplier should examine its aggregate turnover, nature of supplies, other business activities and any other applicable registration provision.

A supplier who previously relied on Notification No. 5/2017-Central Tax must reassess its registration position from 1 November 2026. Continuing to claim the withdrawn exemption without examining the revised law can create exposure.

7. Separate GST registration for TDS deductors: FORM GST REG-07

A person required to deduct tax under Section 51 must obtain registration as a TDS deductor under Section 24(vi), read with Rule 12 of the CGST Rules.

This is a separate registration requirement. An existing regular GST registration does not, by itself, replace the additional TDS registration.

The prescribed application is FORM GST REG-07. The registration certificate is issued in FORM GST REG-06 after verification.

GSTN Advisory No. 684 dated 1 November 2026 addresses the registration procedure for dealers in the newly notified categories.

The advisory instructs applicants dealing in the additional categories to:

1. Open Part B of Table 2 in FORM GST REG-07.

2. Select “Others” under the relevant Constitution of Business field.

3. Specify the applicable category in the text box, such as:

   • Used Cooking Oil Dealers;

   • Waste and Scrap of Plastics Dealers;

   • Waste and Scrap of Tyres Dealers; or

   • Electrical and Electronics Waste and Scrap Dealers.

4. Complete the remaining particulars and submit the application.

Businesses newly covered by the notification should not assume that their ordinary GSTIN automatically satisfies the TDS registration requirement.

Existing metal-scrap TDS deductors should also review their registration particulars and the GST portal requirements in light of the expanded categories.

8. When must TDS be deducted, deposited and reported?

Section 51(1) requires deduction from the payment made or credited to the supplier.

The trigger is the earlier of payment or credit. The deduction should therefore be integrated with both accounts payable and payment processing.

Waiting until the bank payment may result in a missed deduction where the supplier has already been credited in the books.

Deposit deadline

Under Section 51(2), the amount deducted must be paid to the Government within ten days after the end of the month in which the deduction is made.

Monthly compliance calendar

Compliance	Provision / form	Due date
Deposit of TDS	Section 51(2)	Within 10 days after month-end
Monthly TDS return	Section 39(3), Rule 66, FORM GSTR-7	On or before the 10th of the succeeding month
TDS certificate	Section 51(3), Rule 66, FORM GSTR-7A	Made available electronically on the portal on the basis of GSTR-7

An important change introduced through the Finance Act (No. 2), 2024 is that the TDS deductor must furnish GSTR-7 for every calendar month, whether or not any deduction has been made during that month.

Therefore, a nil GSTR-7 return should not be ignored merely because no TDS transaction occurred during the month. The applicable late-fee provisions and any specific waiver for nil returns should be checked separately.

The deductor should reconcile the amount deducted in the books, the amount deposited, the GSTR-7 return and supplier-wise details before filing.

9. How does the supplier claim TDS credit?

GST TDS is not input tax credit.

Section 51(5) provides that the supplier can claim credit of the amount deducted in its electronic cash ledger, once the deduction is reflected in the deductor's GSTR-7 return and the details are validated.

The distinction is important:

• GST TDS is not ITC.

• It is not credited to the electronic credit ledger.

• It is reflected in the electronic cash ledger.

• It can be used in accordance with the applicable GST provisions.

• Excess or erroneous deduction is dealt with under Section 51(8), read with Section 54, subject to the statutory conditions.

Supplier's reconciliation checklist

The supplier should periodically verify:

1. Whether the buyer deducted the correct amount.

2. Whether the buyer deposited the deducted amount.

3. Whether the deduction was reported against the correct GSTIN.

4. Whether the amount appears in the electronic cash ledger.

5. Whether the amount reconciles with the books and GST returns.

A deduction made by the buyer but not correctly reported or deposited can delay the supplier's ability to use the credit.

10. Consequences of non-compliance

GST TDS is not merely an accounting adjustment. Failure to deduct, deposit or report the tax can have statutory consequences.

Default	Relevant provision	Consequence
Failure to deduct or short deduction	Sections 51(1) and 122(1)(v)	Penalty exposure
Deduction made but amount not paid to Government	Sections 51(2), 51(6) and 50(1)	Tax recovery and interest
Amount in default	Section 51(7), read with Section 73, 74 or 74A, as applicable	Determination and recovery proceedings
Delay in filing GSTR-7	Sections 39(3) and 47, subject to applicable notifications	Late-fee exposure
Excess or erroneous deduction	Sections 51(8) and 54	Refund subject to statutory conditions

Interest

Section 51(6) specifically provides for interest under Section 50(1) where the deductor fails to pay to the Government the amount deducted as tax.

Determination and recovery

Section 51(7) provides that determination of the amount in default is to be made in the manner specified in Section 73, Section 74 or Section 74A, as applicable.

For periods from FY 2024-25 onwards, Section 74A is the relevant determination provision for the applicable categories of tax defaults.

Penalty

Section 122(1)(v) specifically covers failure to deduct tax under Section 51(1), deduction of an amount lower than required and failure to pay the amount deducted to the Government.

The penalty is governed by Section 122(1), including the prescribed minimum and the amount linked to the tax involved, whichever is higher, subject to the statutory conditions.

A missed TDS deduction should not be treated as a routine vendor-payment error. It can result in interest, penalty and recovery proceedings.

11. Practical controls every scrap buyer should implement

The most effective compliance system builds the legal checks into vendor onboarding, purchase orders and payment processing.

Stage	Control
Vendor onboarding	Verify GSTIN, legal name and registration status
Product classification	Confirm correct Customs Tariff heading and description
Purchase order	Identify whether TDS or RCM may apply
Contract review	Monitor total taxable value under the contract against Rs 2,50,000
Invoice booking	Exclude GST and cess from the TDS base
Place of supply	Verify supplier location, place of supply and recipient's registration State
Accounts payable	Deduct at the time of payment or credit, whichever is earlier
Tax payment	Deposit TDS within the prescribed period
Monthly return	File GSTR-7, including nil returns
Supplier reconciliation	Verify GSTR-7A and electronic cash-ledger credit

Transaction-level decision process

Step 1: Identify the goods and verify the tariff classification.

Step 2: Check whether the supplier is registered.

Step 3: If registered, determine whether the recipient is covered by the Section 51 notification.

Step 4: If unregistered, examine the applicable RCM entry and corresponding tax notification.

Step 5: For a TDS transaction, test whether the total taxable value under the contract exceeds Rs 2,50,000.

Step 6: Apply the place-of-supply exclusion.

Step 7: Calculate TDS on the taxable value excluding GST and cess.

Step 8: Deduct, deposit, report and reconcile within the prescribed timelines.

Step 9: Separately review the supplier's registration position after Notification No. 06/2026-Central Tax.

12. What businesses should do immediately

For buyers

• Identify all purchases of the notified goods from 1 November 2026.

• Segregate registered and unregistered suppliers.

• Review contracts and purchase orders exceeding Rs 2,50,000.

• Map the correct TDS or RCM treatment.

• Obtain separate TDS registration through FORM GST REG-07 where required.

• Configure the accounting system to deduct TDS at the correct event and on the correct value.

• Establish monthly GSTR-7 and electronic cash-ledger reconciliation.

• Review RCM reporting and payment separately from TDS compliance.

For suppliers

• Verify the tariff classification of goods supplied.

• Identify customers likely to deduct TDS.

• Review whether supplies are covered by reverse charge.

• Reassess registration eligibility after Notification No. 06/2026-Central Tax.

• Reconcile TDS deductions appearing in the electronic cash ledger.

• Maintain contracts, invoices, weighment records, delivery challans and classification documents.

CA S. Ahuja Perspective

The November 2026 changes are not simply an extension of GST TDS to four additional categories of scrap and waste. They create a connected compliance framework involving TDS on purchases from registered suppliers, reverse charge on specified purchases from unregistered suppliers and a revised registration position for suppliers who previously relied on the special exemption for exclusively reverse-charge supplies.

For businesses dealing in scrap, recycling, used materials and waste, the first question should not be whether the deduction rate is 2%.

The real question is whether the transaction has been correctly classified and placed under the right statutory mechanism.

A wrong decision at vendor onboarding can flow into the purchase order, invoice booking, payment, GSTR-7, RCM liability and supplier's cash-ledger reconciliation.

The safest approach is to classify first, verify the supplier's registration status, test the contract threshold, determine the place of supply and only then decide whether TDS or RCM applies.

Compliance is not achieved merely by deducting tax. It is achieved when the buyer deducts the correct amount, the supplier receives the proper credit and the transaction is supported by a defensible legal and documentary trail.

FAST-DS 2026: Before You Disclose, Establish the Default, Test the Exemptions and Measure the Legal Exposure

 By CA Surekha S Ahuja

Part 2 of our FAST-DS 2026 series

Read Part 1: FAST-DS 2026: ₹1 Lakh or 60%? The Foreign Asset Decision Every NRI, Student & Overseas Investor Must Get Right

A foreign bank account, overseas shares, ESOPs, RSUs or inherited property does not automatically mean that the entire asset represents undisclosed income. The decisive questions are: how was it acquired, when did the income arise, what was the taxpayer's residential status, was the source already taxed in India, and what exactly was omitted from the return?

An asset-reporting lapse is not necessarily an income-tax default. An explained investment does not automatically explain untaxed dividends or interest. And the ₹20 lakh relief under the Black Money Act is not a general exemption.

The Foreign Assets of Small Taxpayers–Disclosure Scheme, 2026 (FAST-DS) offers a time-bound opportunity to resolve specified legacy defaults. But the benefit depends on correct classification, eligibility, valuation, payment and completion of the prescribed forms.

The correct sequence is:

Identify the default → Test legal relief → Establish eligibility → Value and substantiate → Declare in Form 1 → Pay → File Form 3 → Obtain Form 4.

1. Identify the default before valuing the asset

Prepare a year-wise record for each foreign asset and income source.

Test	What must be established
Residential status	Status in the year of acquisition and the year income arose
Ownership	Legal and beneficial ownership
Source	Salary, savings, investment, inheritance, gift or other source
Tax treatment	Whether the underlying income was taxable and offered to tax in India
Reporting	Whether the asset or income was correctly disclosed in the return and Schedule FA
Subsequent income	Dividends, interest, rent, capital gains or other income generated

Residential status and Schedule FA

Section 131 of Chapter IV of the Finance Act, 2026 provides the residential-status framework for FAST-DS. It covers specified persons who were resident in the relevant previous year and certain persons who are non-resident or RNOR in that year but were resident in the year to which the undisclosed income relates or in which the asset was acquired.

Current residential status or passport status alone does not decide eligibility. Examine the relevant year of acquisition or income.

Schedule FA reporting is based on the relevant calendar-year period ending 31 December, not the financial year. Under the applicable return instructions, non-residents and RNORs are not required to fill Schedule FA; ROR taxpayers are generally required to report relevant foreign assets and interests. This reporting rule does not, by itself, determine whether foreign income is taxable in India.

Practical control: Reconcile residential status, asset acquisition, source, tax treatment and Schedule FA reporting year by year. A current bank balance cannot establish the historical default.

2. Test the ₹20 lakh relief and BMA exposure

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA) separately addresses tax, penalties and prosecution.

The ₹20 lakh relief is limited to specified asset-related defaults

The Finance (No. 2) Act, 2024 amended sections 42 and 43 of the BMA with effect from 1 October 2024. Section 160 of the Finance Act, 2026 extended corresponding relief to prosecution under sections 49 and 50, retrospectively from 1 October 2024.

The provisos cover foreign assets, other than immovable property, where their aggregate value does not exceed ₹20 lakh.

Issue	Legal position
Threshold	Aggregate ₹20 lakh, not per asset or account
Covered assets	Foreign assets other than immovable property
Immovable property	Excluded, irrespective of value
Penalty	Relevant relief under sections 42 and 43
Prosecution	Corresponding relief under sections 49 and 50
Foreign income	No automatic relief for a separate income-disclosure default
BMA tax	No general exemption from tax under section 3
FAST-DS	Separate limits of ₹1 crore and ₹5 crore apply

The threshold cannot be extended to foreign immovable property or treated as a blanket exemption for taxable foreign income omitted from the return.

Penalty and prosecution must be distinguished

Provision	Default	Consequence
Section 41	Undisclosed foreign income or asset	Penalty equal to three times tax computed under section 10
Section 42	Specified failure to furnish return involving foreign assets or income	Penalty of ₹10 lakh, subject to statutory conditions and relief
Section 43	Failure to furnish or inaccurate particulars concerning foreign assets or income	Penalty of ₹10 lakh, subject to statutory conditions and relief
Section 49	Wilful failure to furnish return relating to foreign income or assets	Prosecution, subject to statutory safeguards
Section 50	Wilful failure to disclose foreign assets or foreign-source income in the return	Prosecution, subject to statutory safeguards

Two points are critical:

• Sections 42 and 43 do not expressly require wilfulness for the penalty provisions. Their individual statutory conditions must be tested.

• Sections 49 and 50 expressly require wilfulness for prosecution.

Section 49 also provides a specific safeguard where the return under section 139(1) is furnished before expiry of the relevant assessment year. It is not a general immunity for every reporting omission.

Section 41 penalty is not automatic. The procedure under section 46, including show-cause notice, opportunity of hearing and applicable approval requirements, must be considered.

Professional test: Identify the exact default, the applicable provision, available relief and procedural stage. Neither an automatic three-times-tax penalty nor a blanket penalty-free conclusion is legally sound.

3. Establish FAST-DS eligibility

FAST-DS is contained in Chapter IV, sections 130–144, of the Finance Act, 2026. The Rules were notified through CBDT Notification No. 114/2026, G.S.R. 732(E), dated 14 August 2026. The Scheme commenced on 16 August 2026.

Form 1 deadline: 31 December 2026. Valuation date: 31 March 2026.

Section 132 covers specified cases involving failure to furnish a return, omission of foreign assets or income in a return filed before commencement of the Scheme, or income or assets escaping assessment under section 147.

The two categories

Particulars	Category 1	Category 2
Nature	Undisclosed foreign asset or untaxed foreign income	Explained-source asset omitted from the relevant Schedule
Qualifying circumstances	Unexplained asset source or foreign income taxable in India but not offered to tax	Asset acquired from qualifying non-resident-period foreign income or income already offered to tax in India
Aggregate limit	₹1 crore	₹5 crore
Amount payable	30% plus an equal amount	Fixed fee of ₹1 lakh

Category 1: The aggregate value of undisclosed foreign assets as at 31 March 2026 and undisclosed foreign income must not exceed ₹1 crore. The amount payable is 30% plus an equal amount—effectively 60%.

Category 2: The aggregate value of qualifying assets must not exceed ₹5 crore. The prescribed fee is ₹1 lakh.

A gift, inheritance, loan or family transfer does not automatically qualify for Category 2. The asset must satisfy the specific statutory conditions.

Separate the asset from the income it generates. Shares acquired from salary already taxed in India may qualify under Category 2 if omitted from Schedule FA and all conditions are met. Dividends from those shares, if taxable in India but not offered to tax, require separate examination under Category 1.

Exclusions and pending proceedings

Section 140 excludes specified cases, including proceeds of crime where proceedings have been initiated or are pending under the Prevention of Money-laundering Act, 2002, and assets or income relating to an assessment year for which assessment has been completed under the BMA.

Under section 141, pending assessment proceedings under the Income-tax Act or BMA must take the declaration into account while being completed. This does not automatically stay or close the proceedings.

4. Value and substantiate the declaration

Rule 3 prescribes asset-specific valuation as at 31 March 2026. The method must be selected asset by asset.

Asset	Valuation focus
Bank account	Generally, aggregate deposits from opening up to valuation date, subject to prescribed adjustments
Immovable property	Prescribed fair-market-value and cost comparison
Quoted shares/securities	Prescribed market-value and acquisition-cost comparison
Unquoted shares	Prescribed net-asset method and cost comparison
Jewellery/artistic work	Prescribed valuation and cost comparison
Other assets	Applicable prescribed method

Bank accounts and reinvestments

For a foreign bank account, Rule 3 generally requires aggregation of deposits from the date of opening up to 31 March 2026—not merely the closing balance. Prescribed adjustments apply to qualifying redeposits of withdrawals from the same account and specified amounts previously declared under the BMA.

Where funds move through sale, withdrawal and reinvestment, trace the transaction chain and apply the prescribed adjustments to avoid double counting.

Foreign-currency conversion must follow the mechanism in Rule 3, including the RBI reference rate where applicable. Retain the exchange-rate source and calculation.

Limited 20% valuation protection

Rule 5(2) provides a limited protection where the difference between declared and authority-determined fair market value does not exceed 20%, for assets other than bank accounts.

It does not apply to bank accounts and does not protect incorrect ownership, source, category or other material misstatements.

Essential evidence

Matter	Records to retain
Residential status	Passport, travel history, visa, employment records and day-count computation
Bank account	Account-opening details and complete statements
Shares/ESOPs/RSUs	Grant, vesting, broker, payroll and sale records
Foreign income	Employment records, foreign returns and tax-payment evidence
Property	Purchase documents, payment trail and valuation report
Inheritance/gift	Succession or gift documents and source evidence
Indian tax payment	Returns, computations and tax-payment records
Currency conversion	Applicable exchange-rate source and working

Ownership and source are separate questions. Establish both.

5. Form 1: declaration workflow

The Income Tax Department's Form 1 User Manual sets out the following portal process.

Step 1: Prepare the information

Keep ready:

• PAN registered on the e-filing portal;

• Year-wise residential-status computation;

• Asset and income particulars;

• Rule 3 valuation workings;

• Source and tax-payment evidence;

• Passport details, where relevant; and

• Supporting documents and e-verification facility.

The portal manual permits PDF or ZIP attachments up to 5 MB each.

Step 2: Open Form 1

Log in and follow:

e-File → Income Tax Forms → File Income Tax Forms → Forms as per other Acts

Select FOREIGN ASSETS OF SMALL TAXPAYERS' DISCLOSURE SCHEME 2026 (Form 1 of FADS 2026) and click File Now.

Confirm the PAN, Online submission mode and Original filing type. Click Continue, then Let's Get Started.

Step 3: Complete the eight tabs

Section	Particulars
Part A	Declarant's name, address and PAN
Part B	Applicable declaration category
Annexure 1	Undisclosed foreign assets
Annexure 2	Undisclosed foreign income
Annexure 3	Qualifying assets acquired from foreign income during non-resident period
Annexure 4	Qualifying assets acquired from income already offered to tax in India
Parts C and D	Value summary and amount payable
Verification	Confirmation and electronic verification

Step 4: Select the applicable category in Part B

The four choices are:

1. Undisclosed asset located outside India.

2. Undisclosed foreign income.

3. Asset acquired from foreign income while non-resident but omitted from the relevant Schedule after becoming resident.

4. Asset acquired from income already offered to tax in India but omitted from the relevant Schedule.

Select only categories supported by the facts and statutory conditions. Save Part B to enable the relevant annexures.

Step 5: Complete the annexures

The portal uses these codes:

Code	Category
A1	Bank account
A2	Immovable property
A3	Jewellery
A4	Artistic work
A5	Shares and securities
A6	Any other asset
I1	Any income

All four annexures contain asset categories A1–A6. Annexures 1 and 2 also contain I1; Annexures 3 and 4 do not.

Use + Add Details to enter individual asset or income records. The portal allows entries to be edited or deleted before submission. Attach a separate computation where the detailed valuation differs from the aggregate displayed.

Step 6: Reconcile Parts C and D

The portal generates a summary from the annexures.

Part C displays the category-wise asset and income values and the aggregate limits.

Part D displays the Category 1 amount at 60%, the Category 2 fee, where applicable, and the total amount payable.

Independently reconcile these figures with the eligibility and valuation workings. A system-generated computation does not validate the legal classification or source of funds.

Step 7: Preview, verify and submit

1. Confirm declarant details and place of declaration.

2. Ensure all mandatory sections show Completed.

3. Click Preview and review the complete declaration.

4. Correct errors using Edit, if required.

5. Download a copy for records.

6. Click Proceed to E-Verify.

7. Complete verification through the permitted method—Aadhaar OTP, DSC or EVC, as applicable.

8. Confirm successful submission.

A green Completed status does not mean the declaration is legally correct. Successful electronic verification and submission are essential.

Resubmission: Form 1 may be resubmitted only until Form 2 is issued. The latest submission replaces the earlier declaration and carries its own submission date and legal consequences. After Form 2 is issued, resubmission is not permitted.

6. Form 2: obtain the amount determination

The prescribed authority issues Form 2 determining the amount payable, ordinarily within one month from the end of the month in which Form 1 is submitted.

Check the order against the categories, values and computation declared. Form 2—not merely the amount displayed in Part D—is the basis for payment.

7. Pay through ITNS 289

Make payment after Form 2 through the e-filing portal using Challan ITNS 289.

Particulars	Corporate PAN	Non-corporate PAN
Major head	0020	0021
Minor head	115	116
Assessment year	2026–27	2026–27

AY 2026–27 is prefilled irrespective of the year of acquisition or income.

Critical: Payment under an incorrect minor head cannot be corrected or refunded under the prescribed FAST-DS payment process. Verify the PAN category and challan particulars before payment.

Payment deadline and interest

Section 135(2) provides for payment within two months from the end of the month in which Form 2 is received. Section 135(3) permits a further period of up to two months, with simple interest at 1% for every month or part thereof on the outstanding amount.

The CBDT FAQ describes the Form 3 outer period as four months from the end of the month in which Form 2 is issued. Where issue and receipt dates differ, diarise both and ensure compliance with the statutory payment period and Form 3 deadline. Do not assume that a later receipt date automatically extends the outer period.

8. Form 3: intimate payment

After payment, electronically submit Form 3, with challan proof and applicable interest computation, within the prescribed period.

Retain Form 2, ITNS 289 challan, payment confirmation, interest computation and Form 3 acknowledgement.

Payment alone does not complete the Scheme. Form 3 is mandatory.

9. Form 4: obtain the certificate

After receiving Form 3, the prescribed authority issues Form 4, ordinarily within one month from the end of the month in which Form 3 is received.

Verify the declarant's name, PAN, declaration and payment particulars. Section 135(6) gives the certificate conclusive effect in respect of the matters stated in it.

Preserve Forms 1–4, challan, valuation workings and supporting evidence together. The compliance file should be closed only after Form 4 is obtained and checked.

10. Scope and limits of immunity

Subject to valid declaration and prescribed payment:

• Section 136 excludes the declared income or investment in the declared asset from total income under the Income-tax Act, 1961 or the BMA.

• Section 139 provides specified immunity from further tax, penalty and prosecution under the BMA in respect of the declared subject matter.

• Section 140 prescribes exclusions.

• Section 141 governs the treatment of pending assessment proceedings.

The immunity is limited to the income or asset declared. It does not provide blanket protection under FEMA, PMLA, foreign laws or for unrelated defaults.

Sections 137 and 138 also impose finality: amounts paid are non-refundable, and the specified rectification, revision, set-off or relief in respect of the declared subject matter is restricted.

Final decision checklist

Before submission	Confirm
Default	Asset omission, income omission or both
Residential status	Relevant acquisition and income years
Relief	₹20 lakh asset-related provisions and separate income exposure
Eligibility	Sections 131, 132 and 140
Category	Category 1 or 2, asset by asset
Threshold	₹1 crore and ₹5 crore limits separately
Valuation	Rule 3 as at 31 March 2026
Evidence	Ownership, source, tax treatment and valuation
Form 1	Correct categories and annexures
Form 2	Authority's determination
Payment	Correct ITNS 289 heads and timely payment
Form 3	Payment intimation and proof
Form 4	Certificate obtained and verified

CA. S.Ahuja Perspective

The costliest mistake may not be failure to disclose a foreign asset. It may be paying under the wrong category—or assuming that an explained investment also explains the income it generates.

FAST-DS should not begin with Form 1. It should begin with the facts: residential status, source, tax treatment, reporting history and legal exposure.

A taxpayer should not pay 60% where the statutory conditions support the ₹1 lakh route. Equally, the ₹1 lakh route must never be claimed merely because the original investment appears explained.

The real protection is a correctly classified and substantiated declaration, followed by timely payment, Form 3 and Form 4.

That is the difference between uploading a form and completing FAST-DS.

Contract Cancellation Charges under the Income-tax Act, 2025: When Is a Business Loss Treated as Speculative Loss

 By CA Surekha S Ahuja

A business enters into a contract to purchase or sell goods. The market moves, the customer defaults, the supplier fails to deliver, or commercial circumstances make performance impossible. The contract is cancelled and one party pays compensation or cancellation charges to the other.

The payment may be commercially genuine, supported by contractual documents and recorded in the books. Yet, for income-tax purposes, a critical question remains:

Is the payment an ordinary business loss arising from breach of contract, or is it a speculative loss because the underlying contract was settled without actual delivery?

The distinction is financially significant. An ordinary business loss can generally be adjusted against eligible business profits, while a speculation loss can be adjusted only against profits of another speculation business. The latter also carries a shorter carry-forward period.

A company earning substantial profits from its regular business may therefore have to pay tax on those profits even while carrying an unabsorbed speculation loss arising from a genuine commercial transaction.

The Income-tax Act, 2025 retains this important distinction. The correct treatment depends not merely on the fact that goods were not delivered, but on the legal character of the transaction, the manner in which the contract came to an end and the evidence supporting the payment.

1. The statutory test under the Income-tax Act, 2025

Section 66(31) defines a speculative transaction as a transaction in which a contract for the purchase or sale of a commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrips.

However, the definition specifically excludes four categories:

Statutory exclusion	Nature of transaction
Section 66(31)(a)	Specified derivative transactions covered by section 66(33).
Section 66(31)(b)	Contracts relating to raw materials or merchandise entered into in the course of manufacturing or merchandising business to guard against future price fluctuations in respect of contracts for actual delivery of goods manufactured or merchandise sold.
Section 66(31)(c)	Contracts in stocks and shares entered into by a dealer or investor to guard against price fluctuations in their holdings.
Section 66(31)(d)	Jobbing or arbitrage transactions entered into by a member of a forward market or stock exchange in the ordinary course of business to guard against loss.

Section 66(33) separately defines specified derivative transactions and lays down the prescribed conditions relating to the nature of the derivatives, the recognised exchange or permitted intermediary and the time-stamped contract documentation identifying the client and PAN.

The starting point, therefore, is not simply whether the contract was completed. The tax officer must examine whether the transaction falls within the statutory definition and whether any of the specific exclusions applies.

A contract involving goods that are not ultimately delivered does not automatically become speculative. Equally, describing a payment as cancellation charges does not automatically make it an ordinary business loss.

2. Cancellation charges: breach of contract or settlement without delivery?

This is the most important distinction.

A contract may come to an end in different ways:

• A party may fail to perform its contractual obligation, resulting in a breach.

• The parties may mutually agree to terminate the contract and accept a payment in discharge of their obligations.

• The parties may settle the original transaction by paying or receiving the difference between the agreed price and the prevailing market price without actual delivery.

• A contract may contain a cancellation clause prescribing an amount payable upon termination.

These situations may have different legal and tax consequences. The accounting description or the use of the expression "cancellation charges" cannot decide the tax treatment.

The distinction under the Indian Contract Act, 1872

Two provisions are particularly relevant:

Section 63 – Promisee may dispense with or remit performance

A promisee may dispense with or remit performance of a promise, wholly or in part, or accept any satisfaction which the promisee thinks fit.

Section 73 – Compensation for loss or damage caused by breach of contract

Where a contract is broken, the party suffering from the breach is entitled to compensation for loss or damage caused by that breach, subject to the statutory principles governing such compensation.

The distinction matters because a contract being discharged by an agreed alternative satisfaction is not necessarily the same as a claim for damages arising from breach of contract.

A payment genuinely arising as compensation for breach may not amount to settlement of the original purchase or sale contract within the meaning of the speculative transaction definition.

However, where the parties effectively close out the original contract by paying the price difference instead of delivering the goods, the transaction may attract the speculative transaction provisions.

A pre-agreed cancellation clause also requires careful examination. The existence of such a clause does not, by itself, settle the tax classification. Its operation, the parties' conduct and the actual nature of the payment must be established.

3. Supreme Court ruling: Damages for breach are not automatically speculative loss

In CIT v. Shantilal (P.) Ltd. (1983) 144 ITR 57 (SC), the Supreme Court examined whether compensation awarded for breach of a commodity contract amounted to settlement of the contract otherwise than by actual delivery.

The assessee had contracted to sell 200 kg of folic acid at ₹440 per kg. The market price subsequently increased substantially, reportedly reaching approximately ₹2,000 per kg. The assessee could not fulfil the contract. The dispute resulted in an arbitration award of ₹1.50 lakh as damages, which was made a rule of the court by consent.

The Supreme Court distinguished between:

• A contract being settled by accepting an alternative satisfaction in place of performance; and

• A dispute arising because of breach of contract, where damages become payable under section 73 of the Contract Act.

The Court held that an award of damages for breach of contract is not the same as the promisee accepting an alternative satisfaction in place of the original contractual performance. What was settled was the dispute between the parties, not the original commodity contract in the statutory sense.

The loss was consequently held not to be speculative.

Practical principle: A genuine claim for damages arising from breach of a commercial contract should not be treated as speculative merely because the goods were not delivered and compensation was paid.

The judgment was delivered under section 43(5) of the Income-tax Act, 1961. Its reasoning is highly relevant to the corresponding definition in section 66(31) of the 2025 Act, whose central test similarly concerns settlement otherwise than by actual delivery. The facts and contractual arrangements must nevertheless be examined in each case.

4. Recent Gujarat High Court order: DML Exim and cancellation charges in export business

In Pr. CIT v. DML Exim Pvt. Ltd., R/Tax Appeal Nos. 115 and 116 of 2021, common order dated 21 October 2026, the Gujarat High Court considered Revenue appeals involving substantial contract cancellation charges.

DML Exim was engaged, among other activities, in trading agricultural products and exporting cotton and other agricultural commodities.

The relevant amounts included:

Assessment year	Cancellation charges involved
AY 2011–12	₹10,04,33,270
AY 2012–13	₹2,80,05,500

The Assessing Officer had questioned the genuineness of the cancellation charges for AY 2011–12 and treated the amount for AY 2012–13 as speculative, contending that the contracts had been settled without delivery and that the loss was not part of the export business.

The assessee explained that it entered into export contracts with proposed foreign purchasers, specifying the goods, supply period and agreed rates. Failure to fulfil the contractual terms resulted in settlement with the proposed purchaser and payment of cancellation charges. The goods involved were those dealt with in the ordinary course of its business.

The CIT(A) allowed the claim and the Tribunal upheld the relief.

The Revenue carried the matter to the Gujarat High Court. The Court dismissed both appeals and declined to admit the proposed questions of law.

Important legal qualification: The High Court's order should not be represented as a fresh substantive ruling that all export contract cancellation charges are non-speculative. The relevant proposed questions were not admitted for consideration. The order is useful as a factual illustration of the controversy, but it does not lay down a new ratio deciding the speculative character of cancellation charges.

The case nevertheless highlights the importance of establishing the connection between the cancelled contract, the goods dealt with by the assessee, the export business and the actual reason for payment.

5. Ordinary business loss versus speculation loss: the actual tax difference

The classification is not merely a technical accounting or legal issue. It directly determines how much of the business profit can be reduced for tax purposes.

The Income-tax Act, 2025 provides different treatment under sections 112 and 113.

Particulars	Ordinary business loss	Speculation business loss
Governing provision	Section 112	Section 113
Current-year adjustment	Subject to the normal set-off provisions, can be adjusted against eligible income.	Can be adjusted only against profits of another speculation business.
Adjustment against ordinary business profit	Generally permitted under the applicable set-off provisions.	Not permitted.
Adjustment against speculation profit	Permitted, subject to normal provisions.	Permitted.
Carry-forward period	Up to 8 succeeding tax years.	Up to 4 succeeding tax years.
Future-year adjustment	Against profits and gains of any business or profession carried on by the taxpayer.	Only against profits and gains of speculation business.
Commercial consequence	The loss can reduce eligible taxable business income.	The loss may remain unabsorbed despite substantial profits from ordinary business.

Section 112(1) deals with business losses other than losses sustained in speculation business. Section 112(2) permits carry-forward for eight succeeding tax years.

Section 113(1) restricts the set-off of speculation loss to profits and gains of another speculation business. Section 113(2) provides for carry-forward of the unabsorbed amount, and section 113(3) limits the period to four succeeding tax years.

The difference is therefore both in the scope of adjustment and the time available to utilise the loss.

Numerical illustration: Same loss, different tax exposure

Assume a company has the following results:

Particulars	Amount
Profit from regular business	₹5 crore
Contract cancellation loss	₹1 crore
Other income	Nil

Case A: Cancellation charges treated as ordinary business loss

Assuming the loss is otherwise allowable and eligible for adjustment:

Particulars	Amount
Regular business profit	₹5 crore
Less: Ordinary business loss	₹1 crore
Taxable business income	₹4 crore

The company gets the benefit of the genuine business loss against its eligible business profits.

Case B: Cancellation charges treated as speculation loss

Particulars	Amount
Regular business profit	₹5 crore
Speculation loss	₹1 crore
Adjustment against regular business profit	Not permitted
Taxable business income	₹5 crore
Speculation loss carried forward	₹1 crore

The company remains taxable on ₹5 crore of regular business profit. The ₹1 crore speculation loss can be carried forward for adjustment only against eligible speculation profits within the prescribed four-year period.

The difference is ₹1 crore in taxable income, even though the commercial loss incurred by the company is identical in both cases.

This illustration assumes the loss is otherwise deductible, there are no other adjustments and the company has no speculation-business profits. Actual tax payable will depend on the applicable tax rate, surcharge and cess.

What if the company has speculation profits?

Suppose the company also earns ₹30 lakh from another speculation business.

Particulars	Amount
Ordinary business profit	₹5 crore
Speculation business profit	₹30 lakh
Speculation loss	₹1 crore
Loss adjusted against speculation profit	₹30 lakh
Balance speculation loss carried forward	₹70 lakh

The ₹30 lakh speculation profit can be absorbed by the speculation loss. However, the remaining ₹70 lakh cannot be adjusted against the company's ₹5 crore ordinary business profit.

It remains subject to the four-year carry-forward restriction.

Is speculation loss taxed at a higher rate?

No. The distinction does not create a separate tax rate for speculation loss.

The disadvantage is the restriction on utilisation. Where a speculation loss cannot be adjusted against ordinary business profits, the taxpayer's current taxable income remains higher. The loss may also expire if the taxpayer does not earn sufficient speculation profits within the permitted carry-forward period.

For a business with substantial regular profits but no independent speculation activity, this can create a significant cash-flow and tax-planning disadvantage.

6. Speculation business is computed separately

Section 26(3), read with the provisions governing computation of speculation business income, requires the profits and losses of speculation business to be dealt with separately.

This separation is important. A loss classified as speculation loss cannot be merged with the ordinary business result merely because both arise from transactions connected with the taxpayer's overall commercial operations.

The tax computation should therefore clearly distinguish:

• Ordinary business income and expenditure;

• Speculation business income and expenditure;

• Current-year speculation loss;

• Brought-forward speculation loss; and

• Eligible speculation profits available for adjustment.

The classification should be established before the return is prepared. A mere ledger description or accounting entry cannot override the statutory character of the transaction.

7. Special rule for companies dealing in shares

Section 113(5) contains a separate deeming provision for a company where any part of its business consists of the purchase and sale of shares of other companies. To that extent, the company is deemed to carry on speculation business.

However, section 113(6) provides exceptions where:

• The company's gross total income consists mainly of income chargeable under the heads of house property, capital gains or other sources; or

• Its principal business is trading in shares, banking, or granting loans and advances.

This is a specific statutory rule concerning certain share transactions. It should not be confused with the general test for determining whether cancellation charges under a commodity or merchandise contract are speculative.

8. When is a cancellation payment allowable as business expenditure?

Even if a payment is not speculative, its deductibility must independently satisfy the conditions for business expenditure.

For tax years governed by the Income-tax Act, 2025, section 34(1) permits expenditure laid out or expended wholly and exclusively for the purposes of business or profession, subject to the statutory exclusions.

The payment should therefore be:

• Incurred wholly and exclusively for business;

• Connected with the taxpayer's existing business operations;

• Revenue in nature and not capital or personal expenditure;

• Genuine and supported by evidence; and

• Not incurred for a purpose prohibited by law.

Section 34(2) excludes specified categories, including expenditure incurred for an offence or purpose prohibited by law, corporate social responsibility expenditure covered by the provision and political-party publication advertisements. Section 34(3) further explains certain categories of prohibited expenditure, including specified unlawful benefits, compounding of offences and settlements of proceedings relating to notified legal contraventions.

The fact that a payment is contractually described as compensation does not, by itself, establish deductibility. Its commercial purpose, genuineness and legal character must all be demonstrated.

9. Evidence that can protect the business from an adverse classification

The most effective defence is built when the contract is entered into and the cancellation occurs—not after a tax notice is received.

The finance team should maintain the following records:

Evidence	What it should establish
Original purchase or sale contract	Goods, quantity, price, delivery terms and contractual obligations.
Purchase order, proforma invoice or export order	Commercial purpose and connection with actual business operations.
Correspondence with the counterparty	Reason for non-performance, default, dispute or cancellation.
Cancellation agreement or termination notice	Legal basis on which the contract came to an end.
Debit note, credit note or compensation working	How the amount payable was calculated.
Arbitration award, settlement agreement or legal correspondence, where applicable	Whether the payment represents damages for breach or an agreed alternative settlement.
Bank payment proof and ledger entries	Actual payment, identity of the recipient and accounting treatment.
Management approval and internal note	Commercial rationale, business necessity and decision-making trail.

The evidence should establish a clear sequence:

Original contract → commercial obligation → failure or breach → legal basis for compensation → calculation of loss → actual payment.

If the payment is merely a price difference on a contract closed without delivery, the tax officer may have grounds to examine it as a speculative settlement. If it is genuine compensation for breach, supported by contractual and legal evidence, the taxpayer has a stronger basis to claim ordinary business loss.

10. Common situations that can trigger tax disputes

Situation	Principal tax risk	Recommended examination
Buyer defaults and seller receives damages	Whether payment is damages for breach or settlement of the original contract	Examine breach, claim, settlement and legal basis.
Seller fails to deliver and pays compensation	Whether payment is compensation or price-difference settlement	Examine contractual obligations and computation of damages.
Parties mutually cancel a contract at a fixed amount	Whether the parties have accepted alternative satisfaction in place of performance	Examine cancellation clause and actual conduct.
Contract is closed by paying the market-price difference	Risk of speculative transaction	Examine whether the original contract was settled without delivery.
Export order is cancelled by foreign buyer	Risk of disallowance or speculative classification	Establish export-business nexus, buyer default and compensation terms.
Cancellation charges are paid to related parties	Risk of genuineness and commercial-purpose challenge	Establish independent commercial rationale, basis of computation and actual payment.
Cancellation charges are booked through journal entries without settlement evidence	Risk of disallowance	Obtain counterparty confirmation, settlement documents and payment evidence.

11. Practical action plan for directors, CFOs and tax teams

Before accepting or paying cancellation charges, the business should undertake a structured review.

At the contract stage

• Draft clear delivery, default, termination and compensation clauses.

• Distinguish damages for breach from an agreed price-difference settlement.

• Retain evidence of the underlying commercial purpose and expected delivery.

At the cancellation stage

• Record the actual reason for non-performance.

• Obtain written confirmation from the counterparty.

• Determine whether the payment is compensation for breach or consideration for agreed discharge of contractual obligations.

• Document the calculation of the amount.

At the accounting and tax-computation stage

• Record the payment under an appropriate ledger head.

• Reconcile the amount with the original contract and settlement documents.

• Examine deductibility under section 34.

• Apply the speculative transaction test under section 66(31).

• Maintain separate computation and carry-forward records if the amount is classified as speculation loss.

Before filing the return

The CFO and tax adviser should be able to answer five questions:

1. Was there a genuine contract for purchase or sale of goods?

2. Was the contract connected with the ordinary business of the taxpayer?

3. Why was the contract not performed?

4. Was the payment compensation for breach or settlement of the original contract without delivery?

5. Does the evidence support the amount, its commercial purpose and its legal character?

If these questions cannot be answered with documentary evidence, the claim is exposed to avoidable tax litigation.

12. Transition from the Income-tax Act, 1961 to the Income-tax Act, 2025

The new Act came into force on 1 April 2026. The applicable law must be identified by reference to the tax year in which the relevant income or loss arose.

Period	Applicable law
FY 2025–26 and earlier	Income-tax Act, 1961
Tax Year 2026–27 beginning 1 April 2026 and later	Income-tax Act, 2025

Accordingly, a cancellation loss arising in FY 2025–26, corresponding to AY 2026–27, continues to be governed by the 1961 Act, even if the assessment or appeal takes place after 1 April 2026.

Section 536(2)(c) preserves the application of the repealed Act to pending proceedings and proceedings initiated after commencement in respect of tax years beginning before 1 April 2026. The relevant saving provisions also preserve the original character of eligible brought-forward losses. An ordinary business loss does not become a speculation loss merely because the new Act has commenced, and a speculation loss does not become an ordinary business loss.

The Income-tax Department's transition guidance specifically confirms that losses under the old Act retain their original character and continue under the corresponding provisions of the new Act, subject to the applicable conditions and remaining carry-forward period.

13. The real tax risk is classification, not merely cancellation

A business may incur cancellation charges because of genuine commercial difficulties—customer default, supply-chain disruption, export restrictions, price volatility or failure of contractual performance.

The tax treatment should follow the legal and commercial substance of the transaction, not merely the fact that delivery did not take place.

The Supreme Court's decision in Shantilal provides an important distinction between damages for breach and settlement of a contract otherwise than by delivery. The DML Exim litigation demonstrates how substantial cancellation claims can become the subject of scrutiny when the business connection, genuineness and nature of settlement are questioned.

For directors and CFOs, the practical lesson is clear:

• Do not assume every cancellation payment is a business loss.

• Do not accept every tax officer's conclusion that non-delivery automatically makes the loss speculative.

• Establish the contractual facts, legal basis and commercial purpose.

• Preserve evidence at the time of cancellation.

• Assess the tax impact before finalising the return.

The real question is not simply whether the contract was cancelled. It is whether the business suffered damages because the contract was breached, or whether the parties settled the original transaction without delivery. That distinction can determine whether a ₹1 crore loss reduces taxable business profits today or remains locked in a separate speculation-loss account, subject to a four-year utilisation window.