Key Feature of the Guidelines issued by the CBDT on Section 194Q for TDS on purchase of Goods

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Key Feature of the Guidelines issued by the CBDT on Section 194Q for TDS on purchase of Goods

Vide Circular No. 13 of 2021, CBDT has clarified on various issues that might arise after introduction of new Section 194Q that takes effect from 1st day of July, 2021. 

Finance Act, 2021 inserted a new section 194Q in the Income-tax Act 1961 which takes effect from 1st day of July, 2021. It applies to any buyer who is responsible for paying any sum to any resident seller for purchase of any goods of the value or aggregate of value exceeding fifty lakh rupees in any previous year. The buyer, at the time of credit of such sum to the account of the seller or at the time of payment, whichever is earlier, is required to deduct an amount equal to 0.1% of such sum exceeding fifty lakh rupees as income tax.

Buyer is defined to be a person whose total sales or 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 has been authorised to specify by notification in the Official Gazette. person who would not be considered as buyer for the purposes of this section.

 

There are various issues which have been clarified with regard to applicability of section 194Q by the CBDT. The same is compiled as under:

 

  1. Section 194Q shall not be applicable on the transactions carried through various Exchanges forsecurities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation, including recognized stock exchanges or recognized clearing corporations located in the International Financial Service Centre.
  2. Section 194Q shall not be applicable on the transactions in electricity. renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC; and
  3. Section 194Q shall not apply on any sum credited or paid before 1stJuly 2021. Since section 194Q of the Act mandates buyers to deduct tax on credit of sum in the account of seller or on payment of such sum, whichever earlier. If either of the two events had happened before is‘ July 2021, that transaction would not be subjected to the provisions of section I94Q of the Act.
  4. Since the threshold of fifty lakh rupees is with respect to the previous year, calculation of sum for triggering TDS under section 194Q shall be computed from Is‘ 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 is‘ July 2021, to such seller.
  5. It has been clarified that TDS under section 194Q of the Act shall not be applicable on the component of GST comprising the amount payable to the seller is indicated separately. In short, tax shall be deducted under section 194Q of the Act on the amount credited without including such GST if it separately reflected in the Invoice.
  6. In case of advance payment, 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 identify that payment with the GST component of the amount to be invoiced in future.
  7. With respect to purchase return it is clarified that the tax is required to be deducted at the time of payment or credit, whichever is earlier. Thus, before purchase return happens, the tax must have already been deducted under section 194Q of the Act on that purchase. If that is the case and against this purchase return the money is refunded by the seller, then this tax deducted may be adjusted against the next purchase against the same seller. No adjustment is required if the purchase return is replaced by the goods by the seller as in that case the purchase on which tax was deducted under section 194Q of the Act has been completed with goods replaced.
  8. It is clarified that the provisions of section 194Q of the Act shall not apply to a non-resident whose purchase of goods from a seller resident in India is not effectively connected with the permanent establishment of such non­-resident in India.
  9. TDS under section 194Q of the Act shall not be applicable in case of a seller whose income is exempt.  In short, 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.).
  10. With regard to applicability of sub-section (1H) of section 206C of the Act, it is clarified in this circular 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.).
  11. 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. In short, TDS u/s 194Q is applicable on advance payment made by the buyer.
  12. Section 194Q of the Act is applicable to buyers whose total sales or gross receipts or turnover from the business carried on by him exceeding ten crore rupees during the financial year immediately preceding the financial year in which the purchase of goods is carried out. Since this condition would not be satisfied in the year of incorporation, the provisions of section 194Q of the Act shall not apply in the year of incorporation.
  13. Section 194Q of the Act is applicable if total sales or gross receipts or turnover from the business carried on by him exceeds ten crore rupees during the financial year immediately preceding the financial year in which the purchase of goods is carried out. Hence, the sales or gross receipts or turnover from business carried on by him must exceed Rs 10 crore. His turnover or receipts from non-business activity is not to be counted for this purpose. In short, non – business receipt will not be reckoned for section 194Q.
  14. Under sub-section (3) of section 194-0 of the Act, a transaction in respect of which tax has been deducted by the e-commerce operator under sub-section (1), or which is not liable to deduction under sub-section (2), shall not be liable to tax deduction at source under any other provision of chapter XVII of the Act. In short, if tax has been deducted by the e-commerce operator on a transaction under section 194-0 of the Act [including transactions on which tax is not deducted on account of sub-section (2) of section 194-0] then that transaction shall not be subjected to tax deduction under section 194Q of the Act. If a transaction is both within the purview of section 194-0 of the Act as well as section 194Q of the Act, tax is required to be deducted under section 194-0 of the Act and not under section 194Q of the Act.
    Similarly, if a transaction is both within the purview of section 194-0 of the Act as well as sub-section (1H) of section 206C of the Act, tax is required to be deducted under section 194-0 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 e-commerce operator on that transaction. Once the e-commerce operator has deducted the tax, the seller is not required to collect the tax under sub-section (1H) of section 206C of the Act on the same transaction. It is clarified that here primary responsibility is on e-commerce operators to deduct the tax under section 194-0 of the Act and that responsibility cannot be condoned if the seller has collected the tax under sub-section (1H) of section 206C of the Act. This is for the reason that the rate of TDS under section 194-0 is higher than rate of TCS under sub-section (I H) of section 206C of the Act.
  15. An important clarification has been provided with respect to Cross application of section 206C(1H) and section 194Q of the Act. Under second proviso to sub-section (1H) of section 206C of the Act, provisions of this sub-section shall not apply, if the buyer is liable to deduct tax at source under any other provisions of this Act on the goods purchased by him from the seller and has deducted such tax. Further, under sub-section (5) of section 194Q of the Act, the provision of this section shall not apply to a transaction on which‑
    (i) tax is deductible under any of the provisions of this Act; and
    (ii) tax is collectible under the provisions of section 206C, other than a transactions on which sub-section (1 H) of section 206C applies

CBDT has clarified that sub-section (1H) of section 206C of the Act provides exemption from TCS if the buyer has deducted tax at source on goods purchased by him.

No TDS if the buyer has done TCS:
If a transaction is both within the purview of section 194-Q of the Act as well as sub-section (1 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 (1H) 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 (1H) 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 (1 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 sub ­section (1H) of section 206C of the Act.

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