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TDS on Purchase of Goods & its inter play with TCS provision on sale of Goods
Section 206C(1H) was added in the Income Tax Act- 1961 in the last year which requires every “Seller” with turnover exceeding Rs. 10 Cr to collect Tax at Source (TCS) @ 0.10% from the buyer on an amount exceeding Rs. 50 Lakh. TCS was required to be done at the time of “Receipt of Consideration”. Many taxpayers found it difficult to comply with it on “Receipt of Consideration” and so have implemented the system of collecting it at the “Time of Billing” by adding a suitable column in the bill itself rather than on “Receipt”. The software & computer programmer were modified so as to ensure the compliance with the new TCS provisions and are still trying to adjust with the new TCS system on sale of goods.
To complicate it further, new provision in the form of Section 194Q has been added in the Income Tax Act-1961 by the Finance Act – 2021 which now requires TDS on purchase of Goods. It provides that the “Buyer” of goods will be required to do TDS @ 0.10% if the turnover of such buyer is exceeding 10 Cr and the purchase from any “Seller” is exceeding Rs. 50 Lakh.
There are a lot of confusions & ambiguities with regard to the new TCS & TDS provision on sale & purchase of goods & its interplay. Here is an attempt to simplify the same for its better compliance.
Section 194Q provides as under:
- Any buyer with turnover in the preceding previous year exceeding Rs. 10 Cr would now be required to deduct tax at source (TDS) on its purchases @ 0.10% w.e.f. 01.07.2021.
- TDS would be applicable only if the purchase or aggregate value of purchase from the seller exceeds Rs. 50 Lakh in a financial year. If the purchase from any seller is not exceeding Rs. 50 Lakh then the buyer would not be required to do any TDS. The sales /gross receipts/ turnover of the FY 2020-21 would be relevant in determining the applicability in the FY 2021-22. TDS applicability would be required to be examined every year on the basis of turnover of preceding previous year.
- TDS is applicable only on an amount exceeding Rs. 50 Lakh. Suppose M/s Smart Ltd has purchased goods of Rs. 51 Lakh from M/s X Ltd then the TDS would be required to be done only on Rs. 1 Lakh and not entire Rs. 51 Lakh.
- Liability to do TDS would arise 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. It means that the TDS liability would arise if the buyer makes the advance payment for purchase of goods.
- TDS U/s 194Q would not be required where,
(a) Tax is Deductible under any of the provisions of this Act &
(b) Tax is Collectible under the provisions of section 206C other than a transaction to which section 206C(1H) applies.
- Overall reading with above provisions would make it aptly clear that the TDS would be applicable even if the seller is collecting TCS U/s 206C(1H).
- It may be noted that if the buyer is liable for TDS under other provisions of the Act then the TDS would not be applicable u/s 194Q but would be continued subject to the TDS under other provisions.
TDS U/s 194Q Vs. TCS U/s 206C(1H)
- A person may be required to comply with section 206C(1H) as well as section 194Q as a seller and buyer respectively.
- TCS U/s 206C(1H) is applicable only on Seller of Goods if the Turnover of seller is more than Rs. 10 Cr in previous financial year. TCS U/s 206C(1H) is applicable “Receipt of Consideration” as against TDS U/s 194Q which is applicable on purchase of goods or advance payment, whichever is earlier.
- TCS U/s 206C(1H) is not applicable if the buyer is liable to do TDS under any other provision of this Act. In short, if the buyer is doing TDS U/s 194Q then the seller will not be required to do TCS U/s 206C(1H).
- After introduction of section 194Q, whether section 206C1H) would be redundant?
a) For applicability of TCS U/s 206C(1H), Turnover of the seller would be relevant whereas for TDS U/s 194Q, the turnover of the buyer would be relevant. Introduction of section 194Q doesn’t make section 206C(1H) redundant.
b) It may happen that the turnover of the buyer is less than Rs. 10 Cr and so the buyer may not be doing TDS U/s 194Q and as a result seller would be required to do TCS U/s 206C(1H).
c)Now, sellers would be required to enquire & verify with every buyer paying more than Rs. 50 Lakh in a year as to whether such buyer would be making payment after TDS or not. TDS by the buyer would relieve the seller from TCS compliance part u/s 206C(1H). (If the seller has opted for TCS Compliance U/s 206C(1H) on a billing basis then it would be required to check & enquire with every buyer as to the applicability of section 194Q on them before the issue of invoice itself).
Let us read section 194Q & its justification as provided in the Explanatory Memorandum to the Finance Bill -2021:
Reproduction of Section 194Q:
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.
Explanatory Memorandum for Section 194Q:
Tax Deduction at Source (TDS) on purchase of goods Chapter XVIIB of the Act relates to deduction of tax at source. The provisions of this chapter provide for TDS on various payments at rates contained therein. It is proposed to provide for TDS by the person responsible for paying any sum to any resident for purchase of goods. The rate of TDS is kept very low at 0.1%.
To ensure that compliance burden is only on those who can comply with it, it is proposed that the tax is only required to be deducted by those person (i.e ―buyer‖) 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. The Central Government is proposed to be empowered by notification in the Official Gazette to exempt a person from obligation under this section on fulfillment of conditions as may be specified in that notification.
Tax is required to be deducted by such person, if the purchase of goods by him from the seller is of the value or aggregate of such value exceeding fifty lakh rupees in the previous year.
It is also proposed to provide that the provisions of this section shall not apply to,- (i) a transaction on which tax is deductible under any provision of the Act; and
(ii) a transaction, on which tax is collectible under the provisions of section 206C other than transaction to which sub-section (1H) of section 206C applies.
This means, if on a transaction a TDS or tax collection at source (TCS) is required to be carried out under any other provision, then it would not be subjected to TDS under this section.
There is one exception to this general rule. If on a transaction TCS is required under sub-section (1H) of section 206C as well as TDS under this section, then on that transaction only TDS under this section shall be carried out.
Board with the approval of the Central Government has been empowered to issue guidelines for removing difficulty in giving effect to the provisions of this section.
Every guideline issued by the Board is required to be laid before each House of Parliament, and shall be binding on the income-tax authorities and the person liable to deduct tax It is also proposed to consequentially amend sub-section (1) of section 206AA of the Act and insert second proviso to further provide that where the tax is required to be deducted under section 194Q and Permanent Account Number (PAN) is not provided, the TDS shall be at the rate of five per cent.
These amendments will take effect from 1st July, 2021.
[Clauses 48 and 50]
Section 206C(1H) has already added an unnecessary compliance burden on the taxpayers. Proposal to add section 194Q in the Income Tax Act – 1961 is going to further complicate the process and will be against the concept of “Ease of business”.
Though the seller will get immunity from TCS compliance u/s 206C(1H) if the buyer do TDS, it will be a case specific and cannot be generalized. TDS & TCS on purchase/Sale is neither going to widen the tax base or increase the revenue as the data of buyers & sellers are very well available & can be extracted from the GST returns.
Let us hope that the provisions like section 206C(1H) & 194Q are scrapped from the Income Tax Act – 1961.
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