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published on 5 July 2021 | reading time approx. 3 minutes
Finance Act, 2021 had introduced a new section 194Q under the Income-tax Act, 1961 ('ITA') which has taken effect from 1 July 2021. As per this section, any person, being a buyer, who is responsible for paying any sum to any resident for purchase of any goods of the value or aggregate of such value exceeding INR 50 lacs (INR 5 Million) 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 INR 5 Million as income-tax.
For the purposes of this section, "Buyer" means a person whose total sales, gross receipts or turnover from the business carried on by him exceeds INR 10 Crores (INR 100 Million) during the financial year immediately preceding the financial year in which the purchase of goods is carried out. Central Government may, by notification in the Official Gazette, specify the categories of persons who may not be regarded as Buyer, subject to such conditions as may be specified in the notification.
There was a lack of clarity on some of the aspects that may be relevant while undertaking Tax Deduction at Source (TDS) compliances under the newly introduced section. In order to resolve the practical difficulties in complying with the provisions of TDS contained in section 194Q of ITA, the Central Board of Direct Taxes ('CBDT') CBDT has now issued clarifications vide Circular No. 13 of 2021 dated 30 June 2021.
Some of the clarifications forming part of the Circular are as below:
Threshold of INR 5 Million is with respect to the previous year. Therefore, for calculation of threshold for triggering TDS compliance under section 194Q shall be done from 1 April 2021.
If a person, being buyer has already credited or paid INR 5 Million lacs or more up to 30 June 2021 to a seller, TDS under section 194Q shall apply on all credits or payments , on or after 1 July 2021, to such seller.
However, TDS is not required to be deducted on any sum credited or paid before 1 July 2021.
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 section 194Q of ITA 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 identify that payment with GST component of the amount to be invoiced in future.
In case of purchase return, if the money is refunded by the seller, then tax deducted may be adjusted against the next purchase from the same seller.
However, no adjustment is required, if the purchase return is replaced by the goods.
Provisions of section 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.
The provisions shall not apply on purchase of goods from a person, being a seller, who as a person is exempt from income tax under the ITA (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 is required to be deducted on advance payment made by the buyer to the seller
The condition, that buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding INR 100 Million during the financial year immediately preceding the financial year in which the purchase of goods is carried out, would not be satisfied in the year of incorporation. Hence, the provisions of section 194Q of ITA shall not apply in the year of incorporation.
A buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding INR 100 Million during the financial year immediately preceding the financial year, in which the purchase of goods is carried out. Therefore, sales or gross receipts or turnover from business carried on by him must exceed INR 100 Million. Turnover or receipts from non-business activity are not to be counted for this purpose.
(i) If a transaction is covered by both i.e. section 194-O as well as section 194Q, tax is required to be deducted under section 194-O and not under section 194Q.
(i) If a transaction is covered by both i.e. within the purview of section 194-O as well as Section 206C(1H), tax is required to be deducted under section 194-O.
It is clarified that here primary responsibility is on e-commerce operator to deduct the tax under section 194-0 of ITA and that responsibility cannot be condoned if the seller has collected the tax under section 206C(1H) of the Act. This is for the reason that the rate of TDS under section 194-0 is higher than rate of TCS under section 206C(1H) of ITA.
(ii) If a transaction is covered by both i.e. section 194Q of ITA as well as section 206C(1H) of ITA, the tax is required to be deducted under section 194Q of ITA.
However, if for any reason, tax has been collected by the seller under section 206C(1H) of ITA, before the buyer could deduct tax under section 194Q of ITA 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 section 206C(1H) of ITA.
1 Section 194-O of ITA prescribes that with effect from 1 October 2020, an e-Commerce operator to deduct TDS for facilitating any sale of goods or providing services through an e-Commerce participant. E-Commerce operators needs to deduct TDS at the rate of 1 per cent at the time of credit of the amount of sale of goods, services, or both to the account of an e-commerce participant or at the time of making payment to an e-Commerce participant by any other mode, whichever is earlier.
2 Section 206C(1H) of ITA prescribes that with effect from 1 October 2020 a seller receiving an amount as consideration for sale of any goods of the value or aggregate of such value exceeding INR 5 Million in any previous year to collect tax from the buyer a sum equal to 0.1 per cent of the sale consideration exceeding INR 5 Million as income-tax. The collection is required to be made at the time of receipt of amount of sales consideration. However, the second proviso to section 206C(1H) of ITA provides that 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.
In addition to above, it has been clarified by CBDT that provisions of section 194Q of ITA shall not be applicable in relation to:
(i) 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;
(ii) transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the Central Electricity Regulatory Commission.
The clarificatory circular by CBDT addresses most of the concerns of the taxpayers. However, the clarifications have come just a day before section 194Q becoming applicable. As such, corporates may have already made changes in their system as per their own interpretation of the provisions of section 194Q. Hence, it may be likely that the clarifications may be different from interpretation that the corporates would have adopted while making changes in their system. This would necessitate further changes in the system and as such, may disrupt the business operations during initial period after provisions of section 194Q become applicable from 1 July 2021.
Further, the clarificatory circular may not cover all situations and as such, some of the issues may remain unaddressed (like applicability to purchase of fixed assets).
Chetan Kakariya
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Gaurav Makhijani
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