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Introduction

We all are aware of the Income tax collection system of the Government of India in the form of Tax Deducted at Source (TDS) and Tax Collected at source (TCS). There are well laid down provisions in the Income tax Act, 1961 on various transactions on which TDS has to be deducted and TCS has to be collected. As the tax is being deducted/collected at source (at the time of payment/receipt), the government has been strongly using this mechanism as an armour against tax evasion. This also helps the taxpayer/assessees to relieve himself from the burden of paying the entire amount of taxes on their income at the end of financial year or at the time of self-assessment which may affect their working capital and cash flows very drastically.

A business concern is already exposed to various provisions of Tax Deducted at Source and Tax Collected at Source which gets attracted in many day to day transactions. There are a lot of expenses like Salaries paid to employees, payments made towards works done on contract basis, payments paid for professional services, rent payments, commission, so on and so forth which are already under the bracket of TDS. We all know that, TDS gets attracted when certain payments in specified nature is paid to a particular party exceeding a specified limit as mentioned in the provisions of the Income tax Act, 1961. The payments for those expenses on which TDS gets attracted, the payer is liable to deduct TDS @ prescribed rates and the balance needs to be paid to the payee. The TDS so deducted needs to be remitted to the Government and that's how TDS works.

Now, we have a new guest to be included into the TDS provisions and that's what we are going to discuss in this article. Section 194 Q - TDS on purchase of goods which came into effect from 01-07-2021 (01st July 2021). Since the introduction of the new section 194Q has created a lot of confusion and query among taxpayers and tax consultants including professionals, let's understand the section through an FAQ model.

A Reference Guide to Section 194Q of Income Tax Act, 1961

Extract of the Relevant section

[Deduction of tax at source on payment of certain sum for purchase of goods

194Q. (1) Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, shall, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 per cent of such sum exceeding fifty lakh rupees as income-tax.

Explanation .- For the purposes of this sub-section, "buyer" means a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the purchase of goods is carried out, not being a person, as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.

(2) Where any sum referred to in sub-section (1) is credited to any account, whether called "suspense account" or by any other name, in the books of account of the person liable to pay such income, such credit of income shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(3) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.

 

(4) Every guideline issued by the Board under sub-section (3) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and the person liable to deduct tax.

(5) The provisions of this section shall not apply to a transaction on which-

(a) tax is deductible under any of the provisions of this Act; and

(b) tax is collectible under the provisions of section 206C other than a transaction to which sub-section (1H) of section 206C applies. ]

Q1.When is the provision applicable from?

TDS Deduction under section 194Q comes into force with effect from 01st July 2021 (01/07/2021). ie, the liability to deduct applies to transactions occurring on or after 01st July 2021.

Q2.Who is liable to deduct TDS under section 194Q of Income Tax Act, 1961?

The tax shall be deducted under Section 194Q by a BUYER carrying on a business whose total sales, gross receipts or turnover from the business exceeds Rs.10 croresduring the financial year immediately preceding the financial year in which such goods are purchased.

Refer definition of 'buyer' in relevant section.

i.e, To check the applicability of Sec 194Q for a buyer for FY 2021-22, the turnover of the buyer from his/its business during the financial year . 2020-21 (period from 01st April 2020 to 31st March 2021) should exceed Rs.10 crores. For those buyers whose turnover is below Rs. 10 crores in FY 2020-21, Section 194Q shall not be applicable.

 

Q3.When shall this TDS provision be applicable?

This provision is applicable when a 'buyer'(as defined) purchases any goods from aRESIDENT seller amounting to an aggregate value exceeding Rs.50 lakhs in a financial year.

It is to be noted that Section 194Q shall not be applicable for import purchases and only purchases from a resident seller is subject to TDS under this section.

ie, If a buyer whose turnover during FY 2021-22 exceeds Rs. 10 crores and he has purchased any goods from a particular seller during the period starting from 01st April 2021 amounting to an aggregate value exceeding Rs 50 lakhs, then Section 194Q is applicable for that buyer.

Q4.What is the rate of tax applicable? On what amount the tax shall be deducted?

The TDS under section 194Q shall be deducted by the buyer of goods at the rate of 0.1% of the purchase value exceeding Rs. 50 lakhs if the seller has furnished his PAN.(Otherwise, the tax shall be deducted at the rate of 5%).

Please note that the deduction shall be on the purchase value exceeding Rs. 50 lakhs, ie, it starts from 50,00,001/- onwards. The deduction is only on such amount that exceeds Rs.50 lakhs.For example, if a buyer has purchased goods from a particular seller during the period from 01st April 2021 amounting to Rs. 57,00,000/-, the deduction shall be on the amount of Rs. 7,00,000/-(the amount which exceeds 50,00,000/-) and not on the entire Rs. 57,00,000/-.

Q5.What is the purchase value to be considered for TDS purposes - inclusive of GST or not?

In order to calculate the purchase value on which TDS has to be deducted, the purchase value excluding GST shall be considered. ie. No TDS on GST portion in the purchase invoice. For example, if the purchase invoice total is Rs. 10,00,000/- plus 5% GST Rs.50,000/-, 10,50,000/-, the purchase considered for TDS deduction shall be Rs. 10,00,000/- and not 10,50,000/-.

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Reference: As per para 4.3.2 of Circular No: 13 of 2021 dated 30th June of 2021, the Income Tax Department had given clarification for the above query as under:

'4.3.2 Accordingly with respect to TDS under section 194Q of the Act, it is clarified that when tax is deducted at the time of credit of amount in the account of seller and in terms of the agreement or contract between the buyer and the seller, the component of GST comprised in the amount payable to the seller is indicated separately, tax shall be deducted under section194Q of the Act on the amount credited without including such GST. However, if the tax is deducted on payment basis because the payment is earlier than the credit, the tax would be deducted on the whole amount as it is not possible to identity that payment with GST component of the amount to be invoiced in future .'

Q6. How is the fifty lakhs threshold calculated?

As per the provisions of Section 194Q, the liability to deduct arises when a buyer purchases goods of aggregate value exceeding Rs. 50 lakhs in A FINANCIAL YEAR. Hence, for FY 2021-22, even though the section is applicable only from 01st July 2021, for the purpose of applicability of Section 194Q, the purchase value from a seller during the period starting from 01-04-2021 shall be considered.

However, the threshold limit of fifty lakh rupees (that stimulate the TDS u/s 194Q) has to be calculated from the start of every financial year i.e., 1st April every year. It also means that even though the deduction was made for a particular seller in the previous financial year, the deduction shall not be automatic from 01st April of next financial year for the same party. In every financial year, the deduction is applicable only when the purchase value from a seller during that financial year exceeds Rs. 50,00,000/-.

In the year of introduction (FY 2021-22), as the TDS section was made applicable on 1st July 2021, there are certain relief/clarification/explanations issued by ITD which is as follows;

  • 194Q requires deduction of TDS at the time of credit or payment whichever is earlier, if either of the two events have happened before 1st July 2021, such transaction would not be subjected to the provisions of section 194Q of the Act.
  • The threshold limit of Rs50 Lakhs is to be considered from 01-04-2021 and if the credit in the account or payment had already exceeded 50L before 01-07-2021, all transactions thereon are subjected to TDS.
  • No TDS is required on any amount outstanding towards purchases as on 30-06-2021, even though Rs. 50 lakhs threshold has been crossed. Only prospective transactions from 01.07. 2021 is subject to TDS u/s 194Q.
  • No TDS is required on any purchases made during the period 01-04-2021 to 30-06-2021. Such transactions shall be considered only for the purpose of calculating the threshold limit of Rs. 50 lakhs for a financial year.

Reference

'4.2.2 It hereby clarified that, -

(i) Since section 194Q of the Act mandates buyer to deduct tax on credit of sum in the account of seller or on payment of such sum, whichever earlier, the provision of this subsection shall not apply on any sum credited or paid before 1st July 2021. If either of the two events had happened before 1st July 2021, that transaction would not be subjected to the provisions of section 194Q of the Act.

(ii) Since the threshold of fifty lakh rupees is with respect to the previous year, calculation of the sum for triggering TDS under section 194Q shall be computed from 1st April, 2021. Hence, if a person being buyer has already credited or paid fifty lakh rupees or more up to 30th June 2021 to a seller, the TDS under section 194Q shall apply on all credit or payment during the previous year, on or after 1st July 2021, to such seller.'

Q7. TDS u/s 194Q on purchase of goods vs TCS u/s 206C(1H) on sale of goods - What happens when both sections overlaps?

When we read these sections, we can understand that the provisions, criteria and even the transactions are 2 sides of the same coin and there is a situation where both TDS and TCS shall be applicable on the same transaction. ie, for the same transaction, the buyer will deduct 0.1% TDS u/s 194Q and the seller will collect0.1% TCS u/s 206C(1H).

On a careful reading, we will get to know that there is a tricky but significant difference between these 2 sections on the point of deduction/collection. 206C(1H) is attracted only at the time of receipt of consideration for sale, but 194Q is attracted at the time of credit/payment whichever is earlier. Hence, liability to deduct TDS u/s 194Q shall be applicable at the time of receiving goods and the purchase invoice is accounted in the books of accounts or at the time of payment of advance to the suppliers, whichever is earlier. Whereas, liability to collect TCS u/s 206C(1H) is not attracted at the time of sales or raising the sale invoice, but only at the time of receipt of the consideration for the sale.

However, by going through the relevant provisions of sec 194Q and sec 206C(1H), we can understand that when there are any transactions where the two sections interplay, Sec 194Q has the leverage over the other.ie, the primary responsibility in such case would be for the buyer who is liable to deduct TDS u/s 194Q.

Let's understand in detail.

The sub-section 5 of Section 194Q clearly states that it is applicable even when 206C(1H) is applicable. Reproducing the marking provision below.

194Q. (1) Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, shall, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 percent of such sum exceeding fifty lakh rupees as income-tax.

…………….

(5) The provisions of this section shall not apply to a transaction on which-

(a) tax is deductible under any of the provisions of this Act; and

(b) tax is collectible under the provisions of section 206C other than a transaction to which sub-section (1H) of section 206C applies.]'

Hence, Section 194Q specifically and clearly excludes 206C(1H) from the exceptions. It means that 194Q shall apply even when 206C(1H) is applicable for that transaction.

Going through the section 206C(1H), it is stated that in a transaction where the buyer is liable to deduct TDS under any provisions of the act, then TCS shall not apply. Reproducing the section below:

206C(1H) Every person, being a seller, who receives any amount as consideration for sale of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, other than the goods being exported out of India or goods covered in sub-section (1) or sub-section (1F) or sub-section (1G) shall, at the time of receipt of such amount, collect from the buyer, a sum equal to 0.1 per cent of the sale consideration exceeding fifty lakh rupees as income-tax:

………….

Provided further that the provisions of this sub-section shall not apply, if the buyer is liable to deduct tax at source under any other provision of this Act on the goods purchased by him from the seller and has deducted such amount .'

Hence, it is clear that in 206C(1H), there is a specific exclusion of transactions to which any of the TDS provision applies, which includes Section 194Q too. Hence, TCS shall not be applicable when TDS is applicable. Hence, section 194Q prevails as the primary responsibility. It is also clarified by the CBDT as below:

'(v) If a transaction is both within the purview of section 194-Q of the Act as well as sub-section (I H) of section 206C of the Act, the tax is required to be deducted under section 194-Q of the Act. The transaction shall come out of the purview of sub-section (1 H) of section 206C of the Act after tax has been deducted by the buyer on that transaction. Once the buyer has deducted the tax on a transaction, the seller is not required to collect the tax under sub-section (I H) of section 206C of the Act on the same transaction. However, if, for any reason, tax has been collected by the seller under sub-section (I H) of section 206C of the Act, before the buyer could deduct tax under section 194-Q of the Act on the same transaction, such transaction would not be subjected to tax deduction again by the buyer. This concession is provided to remove difficulty, since tax rate of deduction and collection are same in section 194Q and subsection (IH) of section 206C of the Act.'

Q8. Applicable for advances paid for goods?

Yes, advance payment is also under the cover of Sec 194Q, the buyer shall deduct TDS on such payment making note that relevant conditions of section is satisfied.

Reference: As per para 4.6 of Circular No: 13 of 2021 dated 30th June of 2021, the Income Tax Department had given clarification for the above query as under:

' 4.6.1 It is requested to clarify if the provisions of section 194Q of the Act shall apply to advance payment made by the buyer. It is clarified that since the provisions apply on payment or credit whichever is earlier, the provisions of section 194Q of the Act shall apply to advance payment made by the buyer to the seller. '

Q9. Whether tax is to be deducted when the seller is a person whose income is Exempt?

TDS u/s 194Q shall not be deducted in the purchase of goods from the seller who is exempt from Income tax or under any other act. The point to be noted is that this applies only when the whole of income of the seller is exempt.

Reference: As per para 4.5.1 of Circular No: 13 of 2021 dated 30th June of 2021, the Income Tax Department had given clarification for the above query as under:

' 4.5.1 It is requested to clarify if the provisions of section 194Q of the Act shall apply to a seller whose income is exempt. To remove difficulty, it is clarified that the provisions of section 194Q of the Act shall not apply on purchase of goods from a person, being a seller, who as a person is exempt from income tax under the Act (like person exempt under section 10) or under any other Act passed by the Parliament (Like RBI Act, ADB Act etc.).

4.5.2 Similarly, with respect to sub-section (1 H) of section 206C of the Act, it is clarified that the provisions of this sub-section shall not apply to sale of goods to a person, being a buyer, who as a person is exempt from income tax under the Act (like person exempt under section 10) or under any other Act passed by the Parliament (Like RBI Act, ADB Act etc.).

4.5.3 The above clarifications would not apply if only part of the income of the person (being a seller or being a buyer, as the case may be) is exempt.'

Q10. When to remit the TDS and when to file TDS returns? Impact of Non-compliance?

As is the case for all other TDS provisions, the TDS deducted during a month shall be remitted before 7th of the succeeding month, ie for deductions made u/s 194Q during the period 01st July to 31st July 2021, remittance shall be made before 07th August 2021.

TDS returns for Q2, ie from 01-07-2021 to 30-09-2021 shall be filed before 31th October 2021(any extended due date).

Impact of Non compliance is quite huge and heavy - 30% disallowance of the purchase value on which TDS has not been deducted as per 194Q. We can imagine the consequences if 30% of the purchase value of the business has been treated as Profits and as taxable income. The taxpayer may end up paying a huge sum as tax as Self assessment tax as compared against 0.1% TDS that shall be deducted at the time of making the payment.

Conclusion

The aim of the government behind the introduction is to bring the trading transactions into audit trail and to ensure tax collection at the very source of business operations. The default of this section shall pose a huge threat and tax burden to the taxpayer with 30% disallowance of the purchase value. This may be a beginning of a new era of tax collection mechanism for the country and a huge step towards effectively controlling tax evasion. Though there will be numerous practical difficulties, but to abide with the new regulations/changes is the responsibility of a good taxpayer and a citizen.

Study made by: SCC Team
Saraswathy, Megha & Nithin S Chettoor

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