Section 194Q TDS & Higher TDS Rate under Section 206AB

 Section 194Q- Deduction of TDS on Purchase of Goods

The government has introduced Section 194Q in the Income Tax Act, 1961 vide the Finance Act, 2021. The intent of the government to bring this provision is to establish the trail of high value of transaction of sale and purchase of goods. There are various other provision which provides for deduction of tax at source on different transaction however deduction of tax on sale of goods has been made applicable vide inserting Section 194Q of the Income Tax Act, 1961.

Here in this article we will discuss different aspect of this provision.

• Applicability of Section 194Q: 

Any person, being a buyer who is responsible for paying any sum to any resident seller for purchase of any goods, in case the value or aggregate of such values exceeds ₹50 lakhs in any Previous Year is liable for deduction of tax on such transaction.

• Who shall be considered as buyer for the purpose of this provision?

As per the explanation to Section 194Q (1), a buyer shall be a person whose total sales, gross receipt or turnover exceeds ₹ 10 crore in the immediate preceding financial year of the year of transaction.

• Effective date of Applicability: The provision will be effective from 1^stJuly, 2021.
• Rate of TDS: A person being a buyer is liable to deduct tax at the rate of 0.1% of the purchase value in excess of ₹50 lakhs. However, there is an exception to this, in case the seller is not holding valid PAN, the rate of tax deduction will be 5% under Section 206AA.
• When the person is liable to deduct tax: The person being buyer shall deduct tax at the time which Earlier of the following:
• At the time of credit of such sum to the account of the seller
• At the time of payment by any mode

Note: Here it is to be noted that in case such amount is credited to any other account by whatever name in the books of the buyer, the same shall be considered as credit in account of seller. This is just to curb the deferment of deduction of tax. [Section 194Q (2)]

• Applicability on Import of Goods:

It is evident from the provision that buyer is liable to deduct tax on sum payable to resident sellers only. Therefore, any goods purchased form the seller located outside India shall remain out of the ambit of this provision.

• Due dates for depositing tax liability:

Like due dates of depositing TDS in other section of the Income Tax Act, 1961, TDS under Section 194Q shall be deposited by dates as follows:

S. No.	Period	Due Date
1.	April-February	7th of the subsequent month
2.	March	30th April

•  Due dates for filing of TDS returns for the deposited tax liability? 

QUARTER	PERIOD	DUE DATE
Q1	April- June	31st July
Q2	July- September	31st October
Q3	October- December	31st January
Q4	January- March	31st May

• Exceptions to the applicability of Section 194Q?

The provisions of this section shall not apply to transactions where:

• tax is deductible under any other section of the Act
• tax is collectible under section 206C other than a transaction to which sub-section (1H) of section 206C applies

It is evident that 194Q is not overriding other provision of TDS or TCS. However, in case if provisions of TCS under Section 206C(1H) is applicable on any transaction and simultaneously provisions of Section 194Q also attracts, in that provisions under Section 194Q shall prevail.

• Summary of Section 194Q:

The provision of Section 194 shall apply only in case the following condition are fulfilled:

• The seller of goods should be resident of India.
• The buyer of goods shall fall in to the meaning of Buyer as provided in the explanation to Section 194Q(1)
• The value or aggregate of value should be exceeding ₹50 lakhs in any Previous Year
• The rate of TDS shall be 0.1 per cent of the amount in excess of ₹50 lakhs.
• The provisions of this section shall not apply in case the transaction attracts provision of TDS and TCS under any other section of Income Tax Act, 1961.
• In case provisions under Section 194Q and Section 206C (1H) attracts simultaneously, then provisions under Section 194Q shall prevail.

• Frequently Asked Questions:

Q. 1 What is the meaning of Buyer for the purpose of this Section?

Ans. For the purpose of this section, “buyer” means a person whose total sales, gross receipts or turnover from the business, exceeds ₹10 crores during the F.Y. immediately preceding the F.Y. in which goods are purchased. Further, the Central Government may, by notification in the Official Gazette, specify the list of persons who shall not be considered as buyers for this matter.

Q.2 How to calculate turnover of 10 crore?

Ans.  It is evident that provision of TCS under this section shall apply in case the total sales, gross receipt or total turnover exceeds ₹10 crore. This can be understood as if a person engaged in sale of goods as well as rendering services in that case total value of sale of goods and gross receipt of services should be considered for calculating value of ₹10 crore.

In other words, to calculate value of ₹10 crore value of sale of goods as well services shall be cumulatively considered to work out total turnover.

Illustration: Mr. A is engaged in the trading of Automobile Parts and having turnover of Rs. 7 crore and at the same time he has also rendered services of technical designing and having gross receipt of Rs. 4 crore. In this case, total turnover shall be calculated comprising total sale of automobile parts as well gross receipt of services.

Q.3 What would be the consequence in case the buyer fails to deduct the TDS under this Section?

Non deduction of TDS under any provision of the Income Tax Act, 1961 shall attracts disallowance provision. As per section 40a (ia) of Income Tax Act 1961, in case of non-deduction/non- payment of TDS, amount to the extent of 30% of the value of transaction on which TDS needs to be deducted, shall be disallowed.

Q.4 What would be the applicability of Section 194Q on transactions carried through various Exchanges where there no one to one contract between the buyers and sellers?

Ans. In order to remove such difficulties, the board has exercised the power under Section 194Q (3) clarified vide Circular No. 13 of 2021-Income Tax, dated 30/06/2021, that the provisions of section 194Q of the Act shall not be applicable in relation to,-

1. 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;

2. transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC; and

Q. 5 What is the meaning of “Recognised Clearing Corporation”, “Recognised Stock Exchange” and “International Financial Services”?

Ans. For this purpose of provisions of Section 194Q, aforesaid terms are defined as:

• “Recognized Clearing Corporation” shall have the meaning assigned to it in clause (i) of the Explanation to clause (23 EE) of section 10 of the Act;
• “Recognized Stock Exchange” shall have the meaning assigned to it in clause (ii) of the Explanation I to sub-section (5) of section 43 of the Act; and
• “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005.

Q.6 How to calculate threshold limit of Rs. 50 lakhs in the Previous Year 2021-22 since the provisions are applicable from 1st July 2021?

It is quite clear that TDS will be applicable on payment or credit whichever is earlier and the provisions of Section 194Q are applicable w.e.f. 1^st July 2021. Therefore, in case if there is any transaction executed prior to 1^st July shall remain outside the ambit of Section 194Q.

However, the provision is crystal clear and talks about the previous year, therefore while calculating the turnover of Rs. 50 lakhs or aggregate of Rs. 50 lakhs shall be considered from 1^st April 2021 being a previous year. Therefore, if the total transaction executed prior to 1^st July 2021 amount to Rs. 50 lakhs in that case TDS shall be deducted on the entire amount of transaction executed post to 1^st July 2021.

Illustration 1: “A” being buyer was having turnover of 11 crore in the F.Y 2020-2021. The purchases for the period from 01.04.2021 to 30.06.2020 was 45 lakhs made from “B”. The purchase made from “B” on or after 01.07.2021 was 40 lakhs. Now, on which value TDS should be deducted by “A”.

Answer: The answer is Rs. 35 lakhs. The amount in excess of Rs. 50lakhs i.e. 45+40-50=35 lakhs.

Q.7 Whether TDS under Section 194Q shall be deducted on the amount of GST charged by the seller?

Ans. For answer to this question we need to refer to Circular No 23 of 2017 dated 19th July 2017 wherein it was duly clarified that “wherever in terms of the agreement or contract between the payer and the payee, the component of ‘GST on services’ comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid or payable without including such ‘GST on services’ component. GST for these purposes shall include Integrated Goods and Services Tax, Central Goods and Services Tax, State Goods and Services Tax and Union Territory Good~ and Services Tax. “

Accordingly, similar ratio shall be applied on transaction under Section 194Q, that if the component of GST comprised in the amount payable to the seller is indicated separately, tax shall be deducted under section 194Q of the Act on the amount credited without including such GST.

Q.8 On which amount TDS shall be deducted under Section 194Q, if the payment is made in advance inclusive of GST?

Ans. It is explicit that TDS shall be deducted on payment or credit whichever is earlier. In case the payment against the supply of goods is made in advance, 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.

Q.9 What would be the treatment of TDS deducted and paid on purchases if such goods are returned to the seller?

Ans. It is explicit that TDS needs to be deducted on the amount of credit or payment whichever is earlier. Therefore, there arises no question of adjustment of TDS as TDS is already deducted on the transaction at the time of credit. However, if the amount of goods returned to the seller has been received by the purchaser in that scenario, TDS amount can be adjusted against subsequent purchase from the same seller.

Q.10 What would be the treatment of TDS deducted and paid on purchases if such goods are replaced by the seller?

Ans. In this case, there is no return of goods actually instead the same is replaced by the seller. Therefore, no adjustment of TDS shall be made. However, if there is any difference in the amount of goods return and replaced, the same needs to be dealt accordingly. In other words, if the amount of goods returned back to the seller is more that the replaced goods, in that scenario I am of the view the excess amount of TDS shall be adjusted in subsequent purchase from the same seller whereas in case if it is less than the replaced goods, TDS needs to be further deducted and deposited.

Q.11 What would be the applicability of Section 194Q on Non-Resident buyers?

Ans. To remove difficulties, it is clarified that the provisions of section 194Q of the Act shall not apply to a non-resident buyer of goods from the resident seller. However, if purchase of goods is connected with the permanent establishment of such non-resident buyer, TDS provisions shall apply. 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.

Q.12  Whether tax under Section 194Q needs to be deducted in case where the income of the seller is exempt under the Income Tax Act, 1961?

There are cases where the seller supplying goods to the buyer has income which is exempt under the provisions of Income Tax Act, 1961. A seller, being a person who 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.

Q.13 What would be the applicability of Section 194Q if the goods are purchased by the buyer in the year of its incorporation?

Ans. It is evident from the definition of the “buyer”, 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 good is carried out. Hence, if the goods are purchased in the year of incorporation, there will be no turnover in the immediately preceding financial year. The conditions of the provisions does not satisfy and therefore the provision of section 194Q of the Act shall not apply in the year of incorporation.

Q. 14 What would be the applicability of Section 194Q if the turnover from the business does not exceeds Rs. 10 crore but exceeds after including non-business income?

Ans. It is evident from the definition of the “Buyer” that the total sales, gross receipts or the turnover from the “business” carried on by him exceeds Rs. 10 crore. Therefore, the turnover from the receipts should be considered and if it does not exceeds Rs. 10 crore, then the provisions of this section shall not apply.

In other words, receipts or income from non-business activities should not be considered for the purpose of computing the turnover of Rs. 10 crore.

Practical Case Studies:

Illustration 1: Mr. P, a buyer, having a total turnover of INR 15 Crores. Mr. A purchases goods from Mr. Q, a seller, worth INR 60 Lakhs.

Since buyer’s “P” turnover is above INR 10 Crores, provisions of section 194Q get applicable. Further, the buyer has purchased goods having a value of more than INR 50 Lakhs. TDS under section 194Q will be deductible by the buyer in the following manner-

Particulars	Amount
Taxable amount (INR 60 Lakhs – INR 50 Lakhs)	INR 10 Lakhs
Rate at which TDS under section 194Q	0.1%
Amount of TDS deductible	INR 1,000

Illustration 2: Mr. A, a buyer, is having gross receipts of INR 30 Crores. Mr. A buys goods from Mr. B worth INR 60 Lakhs. Notably, Mr. Y, a seller, is having a turnover of INR 15 Crores.

This is the case where provisions of TDS under 194Q and TCS under Section 206C (1H) are applicable.

Since both the provisions i.e., section 194Q and section 206C (1H) gets applicable. TDS would be deductible only under section 194Q as per the table below-

Particulars	Amount
Taxable amount (INR 60 Lakhs – INR 50 Lakhs)	INR 10 Lakhs
Rate at which TDS under section 194Q	0.1%
Amount of TDS deductible	INR 1000

Illustration 3: Mr. A buyer starter its business w.e.f 24^th June 2021. Mr. A purchased goods from Mr. B amounting to Rs. 75 lakhs on 3^rd July 2021. Whether Mr. A is liable to deduct TDS on payment made to Mr. B amounting to Rs. 75 lakhs.

Since, Mr. A started its business in Financial Year 2021-22, therefore there is no turnover in the immediately preceding financial year. Since, there is no turnover in the immediate preceding financial year, the transaction will remain outside the ambit of provisions of Section 194Q.

Section 206AB of Income Tax Act, 1961- Imposing Higher Rate of TDS

In order to ensure strict compliance of the provisions of the Income Tax relating to filing of income tax return, the government introduced the provision of Section 206AB. By virtue of this provision, government implemented the provision of higher rate of TDS in case the buyer fails to comply with the provision of filing of Income Tax return under Section 139(1) of the Income Tax Act, 1961.

It is quite evident from the plain reading of Section 206AB that this section is a kind of special provision for deduction of tax at source at a higher rate for certain non-filers (hereinafter called as specified person) of Income Tax Return.

In order to understand the provision under this section, we will discuss and analyse as follows:

• What is the effective date of both the provisions?

The provisions of Section 206AB will be effective from 1^st July 2021.

• Which section will prevail in case where TDS is applicable under any other provisions of the Income Tax Act, 1961?

Section 206AB is non-obstante section having an overriding effect to any other provision/section contrary to this under the Income Tax Act.

Sub-section (1) of Section 206AB states that, where tax is required to be deducted/collected at source on any sum or income or amount paid/received or payable or credited by any person to/from the specified person, then tax shall be deducted/collected at higher of the following rates:

• At twice the rates specified in the relevant provisions of the act
• At twice the rate or rates in force
• At the rate of 5%

Further, Sub-section (2) of Section 206AB provides that on Non-furnishing of PAN by the specified person, Section 206AA shall be applicable in addition to this section respectively and the tax shall be deducted/collected at higher of two rates provided in Section 206AB and in Section 206AA.

• What is the meaning of Specified Person under Section 206AB?

The Section 206AB (3) specifies who shall be considered as “Specified Person”. ‘Specified person’ means a person which satisfies all the below mentioned conditions but shall not include a non-resident who does not have a permanent establishment in India:

• Person who has not filed their Income Tax Return for two previous years immediately preceding the previous year in which tax is required to be deducted/collected
• The time limit for filing of such return of income U/s 139(1) has expired.
• Aggregate of Tax deducted/collected at source in each of these two financial year is INR 50,000/- or more

For FY 2021-22 effective 1^st July 2021, “Specified person” shall mean those persons who has not filed their Income Tax Return for both the FY 2018-19 & FY 2019-20 and whose total tax deducted/collected during each of FY 2018-19 & FY 2019-20 were INR 50,000/- or more.

• How a deductor under Section 206AB will identify whether a specified has filed its return or not?

It is evident that deductor is responsible to identify the income tax return compliance of the specified person. The way to identify this is to take declaration from the specified person about the Income Tax Return compliance.

Additionally, deductee can give self-declaration to their respective tax deductor about the non-applicability of Section 206AB upon them.

SAMPLE FORMAT OF SELF-DECLARATION IS MENTIONED BELOW:

(On the letter-head of entity)

Dear XXXX (Deductor’s Name)

Sub: Declaration regarding filing of Income Tax Returns for past years 

This letter is to inform you that Finance Act 2021 has introduced new provision w.e.f. 1st July 2021 vide section 206AB under Income Tax Act 1961 for deducting/collecting TDS at higher rate for non-filing income tax return (ITR) which is otherwise required to be furnished under section 139 (1) of the Income Tax Act,1961.

In this regard, I/We                                             , having PAN:                , hereby declare that I/We have duly filled our Income Tax Return for two previous years immediately preceding the previous year in which tax is required to be deducted/collected for which time limit for filing u/s 139(1) has expired and hence TDS should not be deducted/collected at a higher rate.

Details of ITR filling has been mentioned below

Assessment Year	Acknowledgement Number	Date of Filing

Further, we do hereby declare that what is stated above is true and correct to the best of my/our knowledge and belief. In case there is any tax liability, interest or penal impositions upon you or your organisation on account of this representation/declaration, I/we undertake to fully indemnify you/organisation for the same.

Thanks,

For                          

Name of Authorized Signatory with Designation & Signature                                    ”

• Is there any other way out to identify the compliance status of the specified person?

As discussed earlier, a deductor can take declaration from the specified person in the prescribed format. Since, it is a cumbersome activity to take declaration where there are large number of specified persons. Therefore in order to bring ease to this compliance, CBDT has issued a Circular regarding use of functionality under Section 206AB and 206CCA of the Income-tax Act, 1961 vide Circular No.11 of 2021 F. No. 3701331712021-TPL dated 21st June,2021. Wherein a new functionality “Compliance Check for Section 206AB and 206CCA” is made available through reporting portal of Income Tax department.

The tax deductor/collector can feed the single PAN (PAN search) or multiple PANs (bulk search) of the Deductee/CoIIectee and can get a response from the functionality if such Deductee is a specified person. For PAN Search, response will be visible on the screen which can be downloaded in the PDF format. For Bulk Search, response would be in the form of downloadable file which can be kept for record. The logic of how the functionality works has also been explained in detail in the said circular.

• Is there any exception to applicability of Section 206AB?

The provisions of Section 206AB is not applicable to a non-resident who does not have a permanent establishment in India.

Further, provisions of section 206AB does not apply to any sum or income or amount paid or payable or credited on which tax is otherwise deducted at source under below mentioned provision of Chapter XVIIB:

• Section 192 – Salary
• Section 192A – Payment of accumulated balance due to an employee
• Section 194B – Winnings from lottery or crossword puzzle
• Section 194BB – Winning from a horse race
• Section 194LBC – Income in respect of investment in securitisation trust
• Section 194N – Payments of certain amount/amounts in cash.

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Excerpt of Section 194Q

An excerpt of Section 194Q has been reproduced as follows for better analyses and understanding:

‘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.’

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Excerpt of Section 206AB

The relevant excerpt of Section 206AB has been reproduced as follows:

206AB. Special provision for deduction of tax at source for non-filers of income-tax return.—(1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be deducted at source under the provisions of Chapter XVIIB, other than section 192, 192A, 194B, 194BB, 194LBC or 194N on any sum or income or amount paid, or payable or credited, by a person (hereafter referred to as deductee) to a specified person, the tax shall be deducted at the higher of the following rates, namely:—

(i)		at twice the rate specified in the relevant provision of the Act; or
(ii)		at twice the rate or rates in force; or
(iii)		at the rate of five per cent.

(2) If the provisions of section 206AA is applicable to a specified person, in addition to the provision of this section, the tax shall be deducted at higher of the two rates provided in this section and in section 206AA.

(3) For the purposes of this section “specified person” means a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be deducted, for which the time limit of filing return of income under sub-section (1) of section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of these two previous years:

Provided that the specified person shall not include a non-resident who does not have a permanent establishment in India.

Explanation.—For the purposes of this sub-section, the expression “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on’.

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Disclaimer:  The information contained in this article, as provided by the author, is to provide a basic understanding of the provision in simple form. The information should not be construed as legal opinion for use. It is duly recommended to the intended users that professional advice should be taken before decision making.