Update: Guidelines under section 194Q of Income-tax Act, 1961

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Update: Guidelines under section 194Q of Income-tax Act, 1961

Tejasvi

@tejasvi

July 1, 2021

Public Policy

178

The Central Board of Direct Taxes (CBDT) has issued guidelines under S. 194Q of Income-tax Act, 1961 (Act) vide issue of Circular No. 13 of 2021 dated June 30, 2021.

S. 194Q which takes effect from July 1, 2021, provides for levy of tax whereby the buyer of goods shall deduct TDS @ 0.1% on payments exceeding INR 50 lakhs, made to the seller. In this regard, following clarifications have been provided by CBDT:

Applicability on transactions carried through various Exchanges: S. 194Q will not apply to

transactions in securities 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 corporation located in International Financial Service Centre;
transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC;

Calculation of threshold for financial year 2021-22:

S. 194Q will not apply on any sum credited or paid before July 1, 2021 (i.e, If payment or credit of amount happened before July 1, 2021 , the transaction would not be subjected to the provisions of S. 194Q of the Act).
Since the threshold of INR 50 lakhs is with respect to the previous year, calculation of sum for triggering TDS u/s 194Q shall be computed from April 1, 2021. Hence, if a person being buyer has already credited or paid INR 50 lakh or more up to June 30 2021 to a seller, TDS u/s 194Q shall apply on all credit or payment during the previous year, on or after July 1, 2021 , to such seller.

Adjustment for GST and purchase returns

If the GST is indicated separately in the amount payable to the seller, tax will be deducted u/s 194Q 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.
For purchase returns, the tax deducted us 194Q 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.

Status of non-resident as buyer

S. 194Q shall not apply to a non-resident whose purchase of goods from seller resident in India is not effectively connected with the permanent establishment of such non-resident in India. For this purpose, "permanent establishment" shall mean to include a fixed place of business through which the business of the enterprise is wholly or partly carries on. This clarification is a welcome move and is in line with NASSCOM’s recommendation to Ministry of Finance.

Requirement of TDS if seller is a person whose income is exempt

S. 194Q 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 S. 10) or under any other Act passed by the Parliament (Like RBI Act, ADB Act etc.).
Similarly, with respect to S. 206C(1H), it has been 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.).
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.

Tax deduction on advance payment:

Since S. 194Q apply on payment or credit whichever is earlier, TDS will apply to advance payment made by the buyer to the seller.

Applicability for buyer in the year of incorporation

Since the condition requiring the buyer to have total sales or gross receipts or turnover from the business more than INR 10 crores would not be satisfied in the year of incorporation, S. 194Q shall not apply in that year.

Applicability for buyer whose turnover from business is INR 10 crore or less

The buyer should have total sales or gross receipts or turnover from the business exceeding INR 10 crore during the financial year immediately preceding the financial year in which the purchase of good is carried out. Hence, 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.

Cross application of S. 194-0, S. 206C(1H) and S.194Q:

If tax has been deducted by E-Commerce Operator (ECO) on a transaction u/s 194-0 [including transactions on which tax is not deducted on account of sub-section (2) of section 194-0], that transaction shall not be subjected to TDS u/s 194Q of the Act.
Though S. 206C(1H) provides exemption from TCS if buyer has deducted tax at source on goods purchased by him, it has been clarified that this exemption would also cover a situation where instead of the buyer, ECO has deducted tax at source on that transaction of sale of goods by seller to buyer through e-commerce operator.
If a transaction is both within the purview of S. 194-0 as well as S. 194Q, tax will be deducted under S.194-0 and not under S. 194Q.
If a transaction is both within the purview of S.194-0 as well as S. 206C(1H), tax will be deducted under S. 194-0. Such transaction shall be out of the purview of S. 206C(1H) after tax has been deducted by ECO on that transaction. Once ECO has deducted tax on a transaction, seller is not required to collect tax under S. 206C(1H) on the same transaction. It has been clarified that primary responsibility is on ECO to deduct the tax under S. 194-0 and that responsibility cannot be condoned if seller has collected tax under S. 206C(1H), as TDS rate under S.194-0 is higher than TCS rate under S. 206C(1H).
If a transaction is both within the purview of S.194-Q as well as S. 206C(1H), tax will be deducted under S. 194-Q. Such transaction shall be out of the purview of S. 206C(1H) once tax has been deducted by the buyer on that transaction. Once buyer has deducted tax on a transaction, seller is not required to collect tax under S. 206C(1H) on the same transaction. However, if, for any reason, tax has been collected by seller under S. 206C(1H) before buyer could deduct tax under S.194-Q on the same transaction, such transaction would not be subjected to tax deduction again by the buyer. This has been provided to remove ambiguity as the TDS and TCS rate are same in S.194Q and S. 206C(1H) of the Act.

This clarification is in line with NASSCOM’s recommendation to Ministry of Finance on the issue. Our representation on this issue can be accessed from here.

Copy of the Circular is attached for your reference.

We hope you will find the update useful.

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Tejasvi