New TDS sections inserted by Union Finance Bill 2021 and audit implications

Introduction

The Finance Bill 2021 has introduced following new sections in relation to Tax Deducted at source (TDS) and Tax Collected at source (TCS):

• Section 194Q- TDS on purchase of goods
• Section 206AB: Higher rate of TDS for non filers of Income tax return & Section 206CCA: Higher rate of TCS for non filers of Income tax return
• Section 194 P: TDS in case of specified senior citizen

Out of the above 4 newly introduced sections, section 194Q, 206AB and 206CCA will have major impacts on the corporate entities. Section 194P majorly focuses on relief to senior citizens from filing of Income Tax return on satisfaction for certain specified conditions.

A. Section 194Q

This section, applicable from 1^st July, 2021, provides for deduction of tax at source on purchase of goods by the “buyer”, at the rate of 0.1%, at the time of credit of such sum to the account of the resident seller or at the time of payment thereof by any mode, whichever is earlier.

Further applicability of the section is explained below:

1. This section will apply to the buyer whose total sales, gross receipts or turnover from the business was more than Rs.10 crores in the previous financial year.
2. Such buyer is required to deduct the TDS of each such seller from whom the aggregate purchase value exceeds Rs. 50 lacs during the year.
3. TDS is to be deducted at 0.1% on the amount by which the aggregate purchase value is exceeding Rs. 50 lacs

Illustration: If purchases during the year of party A from party B is 55 lacs and turnover of party A in previous financial year is more than Rs. 10 crores then party A will have to deduct TDS of party B on Rs. 5 lacs (55-50) at the rate of 0.1%.

Interplay with section 206C(1H) relating to TCS

There is similar section inserted by the Finance Bill 2020, Section 206 C(1H). Comparative summary of this section with section 194Q is tabulated below:

In case of transactions falling under both the sections- 194Q and 206C(1H), provisions of section 194Q will prevail.

Illustrative Situations for applicability of TDS and TCS

Certain important interpretations

1. In case the buyer has not complied with section 194Q then the seller needs to collect TCS under section 206C(1H) on such transactions.
2. For the FY 20-21, aggregate value of purchase will be calculated from 1^st April, 2021, even though the section is applicable from 1^st July, 2021.
3. For the purpose of section 194Q, purchase will also include purchase of capital goods.

Implications of non compliances of section 194Q:

• Section 40a(ia): In case of default u/s 194Q, 30% of such purchase amount on which tax is deductible will be disallowed under section 40a(ia).
• Section 201(1A): In case of default in deduction of tax or in depositing the tax after deduction, the assess will be liable to pay simple interest

(i)  at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible/collectible to the date on which such tax is deducted; and

(ii)  at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid

• Section 271C: Penalty is levied under this section in case of failure to deduct tax at source, equivalent to the amount of tax which the person has failed to deduct or collect, which shall be imposed by the Joint Commissioner.

Audit procedures

Reconciliation of sales and purchases with Form 26 AS:

Before introduction of sections 194Q and 206C(1H), sale and purchases of goods were out of the purview of TDS/ TCS. However, now Form 26 AS can be an additional audit evidence to verify/ confirm the significant revenue and purchase of goods transactions.

Implications in tax audit:

Under clause 34a of the Form 3CD, where auditor is required to comment on overall TDS/ TCS compliances by the assessee, detailed reconciliation may have to be given for these newly added sections.

Implication on calculation of Income tax provision and interest thereon, if any:

Non compliances with these sections results into disallowances, interest and penalty as described in above paragraphs. Auditors need to diligently consider the same for creation of provision for taxes in the books of account and also for the calculation of Income Tax liability and its consequent impacts in deferred taxes.

B. Section 206AB and 206CCA

Section 206AB and 206CCA, effective from July 1, 2021, primarily requires for deduction (TDS) and collection (TCS) of tax respectively at higher rate* for the specified person.

Specified person is a person

1. Who has not filed Income tax return for 2 assessment years relevant to the previous years immediately prior to the previous year in which tax is required to be deducted/ collected
2. The due date to file such return of income, as prescribed under Section 139(1), has expired
3. The aggregate amount of tax deducted and collected at source is Rs. 50,000 or more in each of these 2 previous years.

*Higher rate of deduction:

Exception to these sections

Section 206AB will not be applicable if TDS is deductible under following sections

(a) Section 192: TDS on Salary;

(b) Section 192A: TDS on withdrawal from EPF;

(c) Section 194B: TDS on winning from lotteries, crossword puzzles, etc.

(d) Section 194BB: TDS on winning from racehorses;

(e) Section 194LBC: TDS on income in respect of investment in Securitization Trust;

(f) Section 194N: TDS on cash withdrawal.

Further, this section will not be applicable to non resident who does not have a permanent establishment in India

Certain important interpretations

1. As mentioned above, definition of specified person includes those person who has not filed the ITR for both the applicable assessment years. Hence if the person has filed return for even one of the two applicable assessment years, provision of this section would not apply.
2. This section does not give any exception of the persons who are not required to file ITR. Hence, this section will be applicable if the person has not filed ITR for the relevant applicable two assessment years, even though he may not be liable to file the ITR under the provisions of Income Tax Act, 1961.

Audit procedures

Auditors will need to verify the declarations taken by the Deductor from its deductee to ascertain the TDS/ TCS rate in compliance with section 206AB and 206CCA.

C. Section 194 P

This section is effective from 1^st July, 2021 and is applicable to an Indian resident having age of 75 or more years and receives income only in the form of pension and/or interest from specified bank. Eligible individual needs to file a declaration with the specified bank in the form and manner as prescribed and the specified bank will deduct TDS of such individual after giving effect to the deduction allowable under Chapter VI-A and rebate allowable under section 87A. 

If above conditions are fulfilled, such specified senior citizen is not required to file an income tax return for that previous year.