An Overview of TDS Provision Under Section 194Q

1. Finance Act, 2021 inserted a new section 194Q in the Income-tax Act 1961 for deduction of tax at source in case of purchase of goods.

The Central Board of Direct Taxes (CBDT) vide circular No. 13 dated 30 June 2021 has issued the guidelines in respect of TDS under Section 194Q of the Income Tax Act, 1961.

2. Statutory Provision: 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 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 percent of such sum exceeding fifty lakh rupees as income-tax.

“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.

3. An overview of the TDS provision under section 194Q in line with the guidelines have been brought out in succeeding Paragraphs

The person required to deduct Tax    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 persons (AJP). Therefore, every aforesaid person is required to deduct tax under this Section.

Non-Resident Buyer: The provision of section 194Q shall not apply to a non-resident buyer unless he has permanent established in India and purchases are made from such permanent establishments.

Multiple Units under the same PAN:   A buyer may have multiple TAN (Tax Account Number) for its Units in different locations. Total Sales, Gross Receipts, or turnover from the Units in different locations under the same PAN shall be aggregated to compute the threshold of 10 crore Rupees.

Similarly, purchases made from different units of sellers need to be aggregated to compute the limit of Rs. 50 Lakhs. For Example, M/S MDL purchased goods from different units of M/S BEL, the liability to deduct tax under section 194 Q will arise when the aggregate amount paid or payable against BEL PAN number crosses the limit of Rs. 50 Lakhs.

Inter Branch Purchases Section 194Q is not applicable on inter-branch transfers as the threshold limit is on PAN Basis and not on a TAN (Tax Account Number) basis.

Turnover from Non-Business Activity   Turnover from Non-business activity is not to be counted for the threshold limit of Rs. 10 crores. For section I94Q, a buyer is required to have 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.

Hence, the sales or gross receipts or turnover from business carried on by him must exceed Rs 10 crore. His turnover or receipts from the non-business activity is not to be counted for this purpose–  Para 4.8 of circular No. 13/2021 dated 30.06.2021

Gross Receipt from Profession/ Services The gross receipts/turnover from Profession is not to be counted for the threshold limit of Rs. 10 crores. A Chartered Accountant having professional income for more than Rs 10 crores is not required to deduct tax under this section on his purchases.

Purchase of Goods from Seller who is exempted from Income Tax The provisions of 194Q of the Act shall not apply to 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 i.e. RBI Act, ADB Act, etc.-  Para 4.f of the circular No. 13/2021 dated 30.06.2021

The said above clarifications would not apply if only part of the income of the seller is exempt.

TDS on Imported Goods The buyer will not have any obligation to deduct tax under sec 194Q on imported Goods. This is because, in the case of import, the seller is a non-resident and the obligation to deduct tax arises only when the payment is made to a resident seller.

TDS on Goods Exported abroad     In the transaction of export of goods, the buyer is a non-resident and the provision of section 194Q shall not apply to a non-resident buyer. Hence the provision does not apply to the export of goods.

Rate of Tax The tax shall be deducted by the buyer of goods at the rate of 0.1% of the purchase value exceeding Rs. 50 lakhs.  If the seller is a specified person (non-filer of ITR for the previous two years) and has not furnished his PAN or Aadhaar, the tax shall be deducted at the rate of 5%.

Certificate for lower deduction of TDS The buyer does not have the option to approach the assessing officer to issue a certificate for a lower tax deduction or to file a declaration for nil deduction in respect of transactions covered under section 194Q. The Finance Bill, 2021, has not extended the benefit to apply for a certificate for deduction of tax at lower rates or to file a declaration for nil deduction in respect of transactions covered under Section 194Q.

Threshold of Rs 50 Lakhs for FY 2020-21   Section 194Q of the Act mandates buyers to deduct tax on purchase value exceeding Rs 50 lakhs. This section is applicable w.e.f 01 July 2021.

The threshold of fifty lakh rupees is for the previous year. The calculation of the sum of Rs 50 lakhs for triggering TDS shall be computed from 1st April 2021. Hence, if a 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 01.07 2021, to such seller

TDS in respect of Advance paid before 01 July 2021 The tax is required to be deducted on earlier of the two events (a) Credit of sum in the account of the seller or (b) on payment of such sum.

It is clarified vide Para 4.2 of the circular No. 13/2021 dated 30.06.2021 that the transaction would not be subjected to the provisions of section 194Q of the Act, if either of the two events had happened before 1st July 2021. Thus, the tax is not required to be deducted in respect of advance paid before 1st July 2021 and the sum credited thereafter.

TDS in respect of Advance paid after  01 July 2021 The provisions of section 194Q of the Act shall apply to advance payment made by the buyer after 01 July 2021, as the provisions apply on payment or credit whichever is earlier.

Adjustment for GST The GST amount shall not be considered for TDS under section 194Q. When the component of GST comprised in the amount payable to the seller is indicated separately, tax shall be deducted on the amount credited without including such GST. –Para 4.3 of circular No. 13/2021 dated 30.06.2021.

However, if the tax is deducted on a 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 the future.

Out-of-pocket expenses – The additional, allied, and out-of-pocket expenses shall form part of the purchase value of goods where these expenses have been reflected in the purchase invoice itself.  If they are charged through a separate invoice, it should not form part of the purchase value.

Purchase Returns   In the case of purchase returns, the money is refunded by the seller on which the tax must have already been deducted under section 194Q. In such a case, the tax deducted may be adjusted against the next purchase from the same seller.

No adjustment is required if the seller replaced the goods against the purchase return. In that case, the purchase on which tax was deducted under section 194Q of the Act has been completed with goods replaced.

TDS in the year of Incorporation   The Provision of Section 194Q shall not apply in the year of incorporation as turnover from the business carried immediately preceding the financial year will be NIL for the entity incorporated in the current year.

Transactions on which TDS deducted by E-Commerce Operator: The transactions on which tax has been deducted by E-Commerce operator has deducted tax under sec 194O shall not be subject to TDS under this section.

Section 206(IH) Vs. Section 194Q If a transaction is both within the purview of section 194-Q of the Act as well as sub-section (I H) of section 206C of the Act, the tax is required to be deducted under section 194-Q of the Act.

However, if, for any reason, tax has been collected by the seller under sub-section (I 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.

Transactions carried through various Exchanges: The provisions of section 194Q shall not apply to transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation.

Transactions in Electricity The provisions of section 194Q shall not apply to transactions in electricity, renewable energy certificates, and energy-saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC.

Purchase of Immovable property The TDS shall not be deducted from the purchase of immovable property as section 194 Q is applicable on purchase of goods and ‘goods’ means every kind of movable property Thus; the immovable property shall not be treated as ‘goods.

The consequence of Non-Compliance: – If the Buyer fails to deduct the applicable TDS u/s 194Q then in addition to penal interest a disallowance of 30% of his purchases on which TDS was required to be deducted will get attracted.

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