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A Detailed Analysis of Section 194Q of the Income Tax Act, 1961
CA Vibhor Kalamkar
The Government, vide Finance Act, 2021, has introduced Section 194Q in the Income Tax Act, 1961 (“the Act”). This section provides for deduction of tax at source (“TDS”) on payment of sum for purchase of goods with effect from 1st July, 2021. The section reads as follows:
“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.”
Let us try to analyse the section in detail.
Who is required to deduct Tax u/s 194Q?
Sub-section (1) of Section 194Q (“the Section”) states that ‘any person, being a buyer’ is required to deduct tax under this section. Section 2(31) of the Act defines ‘person’ to include individuals, HUFs, Companies, Partnership Firms, LLPs, AOP, BOI, Local Authorities and Artificial Judicial Person (AJP). Therefore, every aforesaid person is required to deduct tax under this Section.
Explanation to sub-section (1) has defined buyer. As per the explanation, a person whose Sales/Turnover/Gross Receipts from Business exceeds ` 10 Crore in the previous Financial Year is a ‘buyer’ for the purpose of this section.
Thus, any individual, HUF, company, Firm, LLP, AOP/BOI, Local Authority or AJP whose Sales/Turnover/Gross Receipts from Business exceeded ` 10 Crore in the previous Financial Year is required to deduct tax under this section.
Whose tax is to be deducted?
Tax is to be deducted of the person who is resident in India and receives the payment for the goods sold, referred to as the seller in the section. Tax under this section is not to be deducted where the seller is non-resident and also in case of Import of Goods.
When is the tax to be deducted?
Tax is required to be deducted only when purchases of goods made by a buyer from a particular seller exceed 50 Lakh during a financial year. Tax has to be deducted at the time of crediting the sum to the account of the seller or at the time of making the payment by any mode, whichever is earlier. Thus, tax shall be deductible even at the time of making an advance payment for the purchase of goods.
On what amount tax is to be deducted?
The section provides a threshold limit of ` 50 Lakh for a particular Financial Year. This means tax is required to be deducted when purchase of goods by a buyer from a seller exceed ` 50 Lakh during any financial year on the amount exceeding ` 50 Lakh.
CBDT has issued Circular No. 17 dated 29/09/2020 wherein it was clarified that no adjustment for indirect taxes including GST is to be made while collecting tax at source under Section 206C(1H). Applying the same rationale for Section 194Q, tax has to be deducted under Section 194Q on the value including GST charged on the goods since the reference in the Section is to ‘any sum paid for purchase of goods’ and not to the ‘value of goods’.
What is the rate of deduction of tax?
Tax has to be deducted at the rate of 0.1% on the sum payable to the seller for purchase of any goods. However, as per Section 206AB of the Act (Newly Inserted), if the seller has not filed his/her Income Tax Return for both of the two financial years preceding the current financial year and total of tax deducted at source and tax collected at source in his/her case is more than ` 50,000/-, tax should be deducted a the higher of the following:
a) At twice the rate specified in the relevant provision
b) At twice the rate(s) in force; or
c) At the rate of 5%
When tax will not be deducted under this section?
Sub-section (5) provides exceptions as to when tax shall not be deductible under this Section. Tax shall not be deductible under this Section in the following two cases:
a) Where tax is required to be deducted under any other provisions of the Act.
b) Where tax is required to be collected under Section 206C except under sub-section (1H) of Section 206C.
Interplay of Section 194Q with Section 206C(1H)
Finance Act, 2020 had introduced a new sub-section (1H) in Section 206C which is very similar to Section 194Q. Section 206C(1H) casts a duty on every person, whose turnover from business in the previous financial year exceeded ` 10 Crore, to collect tax at rate of 0.1% of the Sale Consideration received from the buyer of goods in excess of ` 50 Lakh during the year.
Second proviso to sub-section (1H) says that where the buyer is liable to deduct tax on goods purchased by him/her and he/she has deducted such tax, then provisions of this sub-section shall not apply. Thus, in cases where Section 194Q is applicable, Section 206C(1H) will not apply and therefore any single transaction of Sale/Purchase of Goods will not be subject to both TDS and TCS.
Let us now try to understand the application of Section 194Q and Section 206C(1H) with the help of some illustrations.
Mr. A is engaged in trading of goods and his turnover in the previous FY exceeded ` 10 Crore. During the current FY, he purchased goods worth ` 75 Lakh from B Ltd. whose turnover also exceeded ` 10 Crore in the previous FY.
In this case, Mr. A is liable to deduct tax @ 0.1% on ` 25 Lakh (75-50) u/s 194Q and B Ltd. is liable to collect tax @ 0.1% on ` 25 Lakh (75-50) u/s 206C(1H). Since, Section 194Q overrides Section 206C(1H), B Ltd. will not be required to collect tax from Mr. A and Mr. A will be required to deduct tax on the amount paid to B Ltd. in this transaction.
M/s. ABC, a partnership firm, engaged in manufacturing of Hand Sanitizers had a turnover of ` 25 Crore in the previous FY. It purchased Raw Materials from XYZ Ltd. worth ` 84 Lakh during the year. XYZ Ltd. had a turnover of ` 7.5 Crore in the previous FY.
Here, M/s. ABC will have to deduct tax on ` 34 Lakh (84–50) at 0.1%.
JKL Ltd. purchased goods worth ` 52 Lakh from DEF Ltd. JKL Ltd. had turnover of ` 6.25 Crore in the previous FY and DEF Ltd. had a turnover of ` 100 Crore in the previous FY.
Since JKL Ltd. had a turnover of less than ` 10 Crore in the previous FY, it is not liable to deduct tax u/s 194Q. However, since DEF Ltd.’s turnover in the previous FY exceeded ` 10 Crore, it is required to collect tax @ 0.1% on ` 2 Lakh (52-50) from JKL Ltd. u/s 206C(1H).
Mr. B purchased goods worth ` 66 Lakh from Mr. C. Both Mr. B & Mr. C had turnover of less than ` 10 Crore in the previous.
In this case, both the parties had a turnover less than ` 10 Crore in the previous FY and hence neither Section 194Q nor Section 206C(1H) will be applicable in this case.
M/s. ABC, a partnership firm of Doctors is operating a Hospital. It has receipts of ` 15 Crore in the previous FY. It purchased medical consumables from JFK Pvt. Ltd. of ` 1 Crore during current FY.
In this case, M/s. ABC will not be required to deduct tax u/s 194Q even though its turnover exceeded ` 10 Crore in the previous FY. Section 194Q requires every person whose turnover from ‘business’ exceeds ` 10 Crore in the previous year. Since M/s. ABC is a firm of doctors deriving income from ‘Profession’, it will not be required to deduct tax.
M/s. DEF is engaged in trading of goods and its turnover in the previous FY exceeded ` 10 Crore. During the current FY, he purchased goods worth ` 45 Lakh from B Ltd till 30/06/2021. M/s. DEF purchased goods worth 30 Lakh on 10/07/2021.
Here, M/s. DEF will be required to deduct tax @ 0.1% on ` 25 Lakh (45+30-50) as its purchases from B Ltd. during the year exceeded ` 50 Lakh.
If in the above illustration, M/s. DEF had already purchased goods worth, say ` 60 Lakh till 30/06/2021 from B Ltd., then it would be required to deduct tax only on the amount paid after 01/07/2021 i.e. on ` 30 Lakh.
Mr. A purchased goods for 45 Lakh plus 18% GST totaling to ` 53.10 Lakh. He had a turnover of more than ` 10 Crore in the previous year.
Here, Mr. A will be required to deduct tax on ` 3.10 Lakh (53.10-50). Since, section 194Q has made a reference to ‘any sum for purchase of goods’ and not to the ‘value of goods’, any sum would include GST payable on such goods as well. Refer Circular No. 17 of 2020 in respect of TCS u/s 206C(1H).
Mr. B purchased alcoholic liquor worth ` 70 Lakh to be served in his restaurant during the year from XYZ Wines Ltd. Mr. B has a turnover of more than ` 10 Crore in the previous FY.
In this case, Mr. B will not be required to deduct tax since Section 194Q is not applicable on transactions where tax is collectible u/s 206C except for sub-section (1H). The seller i.e. XYZ Wines Ltd. will collect tax @1% from Mr. B as per the provisions of 206C (1).