Demystifying Section 206C(1H) And Section 194Q

TCS ON SALE OF GOODS UNDER SECTION-206C(1H):

The Finance Act,2020 had inserted a new section 206C(1H) with effect from 1^st October 2020.It applies to any seller who receives any consideration for sale of any goods of the value exceeding rupees fifty lakhs in any previous year. The seller shall collect from the buyer, a sum equal to 0.1 per cent of the sale consideration exceeding fifty lakh rupees as income-tax.

1. Seller-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 sale of goods is carried out.

2. Buyer- means a person who purchases any goods, but does not include,

(A)  the Central Government, a State Government, an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign State; or

(B)  a local authority as defined in the Explanation to clause (20) of section 10 or

(C)  a person importing goods into India;

3. Who Shall collect Tax-Seller (Seller shall collect tax from Buyer)

4. Rate of TCS U/s206C(1H)-1% of the sales consideration.

5. Threshold limit-Receipts for sales consideration exceeding fifty lakh rupees.

6. Time of collection-at the time of receipt of such amount.

7. Not Applicable when

a) goods being exported out of India or goods covered under sub-section (1) or sub-section (1F) or sub-section (1G) of sec 206C.

b) in respect of a transaction on which TDS is applicable, and the buyer has deducted such amount. This can be understood clearly with subsequent readings.

Note: The Act is very clear about collecting TCS on the amount of receipt for sales consideration and not on sales value.

CBDT has issued circular no.17 of 2020 dated 29^th September 2020 (TDS under Section 194O- CBDT issues Guidelines), providing for guidelines under Section 206C(1H) of the Act and clarifying some important points. some of the important ones are given here under:

1) Adjustment for Sales return, Discount or GST

CBDT Clarified that no adjustment on account of sale return or discount or indirect taxes including GST is required to be made for collection of TCS under section 206C(1H) since the collection is made with reference to receipt of amount for sale consideration. Thus, TCS is to be collected on amount including GST.

2) Whether tax is required to be collected in respect of amounts received before 1^st October 2020.

Since sub-section (1H) of section 206C of the Act applies on receipt of sale consideration, the provision of this sub-section shall not apply on any sale consideration received before 1^st October 2020.Consequently it would apply on all sale consideration (including advance received for sale) received on or after 1^st October 2020 even if the sale was carried out before 1^st October 2020.

3) Applicability on sale of Motor vehicles:

The provisions of sub-section (1F) of section 206C of the Act apply to sale of motor vehicle of the value exceeding ten lakh rupees. Sub-section (1H) of section 206C of the Act exclude from its applicability goods covered under sub-section (1F). While sub-section (1F) is based on single sale of motor vehicle, sub-section (1H) is for receipt above 50 lakh rupees during the previous year against aggregate sale of good. While sub-section (1F) is for sale to consumer only and not to dealers, sub-section (1H) is for all sale above the threshold. Hence,

(i) Receipt of sale consideration from a dealer would be subjected to TCS under sub-section (1H) of the Act, if such sales are not subjected to TCS under sub-section (1F) of section 206C of the Act.

(ii) In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value of ten lakh rupees or less to a buyer would be subjected to TCS under sub-section (1H) of section 206C of the Act, if the receipt of sale consideration for such vehicles during the previous year exceeds fifty lakh rupees during the previous year.

(iii) In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value exceeding ten lakh rupees would not be subjected to TCS under sub-section (1H) of section 206C of the Act if such sales are subjected to TCS under sub-section (IF) of section 206C of the Act.

TDS ON PURCHASE OF GOODS UNDER SECTION-194Q:

The Finance Act, 2021 has inserted a new Section 194Q in the Income-Tax Act,1961 with effect from 1^st July 2021.It applies to any person who is responsible for paying any sum to any resident seller for purchase of any goods of value exceeding Rupees Fifty lakh rupees in any previous year. The buyer, is required to deduct an amount equal to 0.1 % of such sum exceeding fifty lakh rupees as income tax.

It is to be noted that TCS provisions under Sec 206C(1H) doesn’t cease to operate from 1^st July 2021,

1. Buyer-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 good is carried out.

2. Who shall deduct tax-Buyer.

3. Rate of TDS U/s194Q – 1%

4. Threshold limit-Purchase of goods exceeding 50 Lakhs in any previous year.

5. Time of deduction-At the time of payment/credit whichever is earlier.

6. Not applicable when-TDS is deductible under any other provisions of the act or tax is collectible under section 206(C) other than section 206(C)1H.

Note:

As per the MEMORANDUM EXPLIANING THE PROVISIONS IN THE FINANCE BILL 2021, If on a transaction, TCS is required under sub-section (1H) of section 206C as well as TDS under this section, then on that transaction only TDS under this section shall be carried out.

It is to be noted that TCS provisions under Sec 206C(1H) doesn’t cease to operate from 1^st July 2021, but continues to operate where the conditions provided therein are to be satisfied.

Thus, with the introduction of TDS u/s 194Q, TCS Provisions u/s 206C(1H) would largely become inapplicable and would apply majorly only on transactions where the buyer’s turnover is less than Rs.10 crores and buyer is not liable to TDS (or) where the buyer was liable to deduct tax but has not deducted it.

CBDT has issued circular no.13 of 2021 (Guidelines under section 194Q of Income-tax Act, 1961) dated 30^th June 2021, providing for guidelines under Section 194(Q) of the Act and clarifying some important points. some of the important ones are given here under:

1) Whether TDS is applicable in respect of Advance paid before 1^st July 2021.

CBDT clarified that Since section 194Q of the Act mandates buyer to deduct tax on credit of sum in the account of seller or on payment of such sum, whichever earlier, the provision of this sub-section shall not apply on any sum credited or paid before 1^st July 2021. If either of the two events had happened before 1^st July 2021, that transaction would not be subjected to the provisions of section 194Q of the Act.

This seems to be the very purpose of issuing this circular in the late hours, on the last day before this section becomes applicable, as businesses might make payment on or before 30^th June 2021 to avoid applicability of this section.

2) Calculation of threshold for the financial year 2021-22.

CBDT Clarified that 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 1^st 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 1^st July 2021, to such seller.

3) Adjustment for GST

CBDT clarified that 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 the Act on the amount credited without including such GST. This is in line with the circular No.23 of 2017 dated 19^th July 2017.

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.

If TDS is Deducted at the time of Credit	TDS to be deducted on the amount excluding GST Component
If TDS is Deducted at the time of Payment	TDS to be deducted on the amount including GST Component.

The differential treatment for GST based on the deduction at the time of credit/payment may create a little more complexity and may have been kept as standard one regardless of the event in which TDS is deducted.

4) Whether TDS is to be deducted when the seller is a person whose income is exempt?

CBDT clarified that 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.).

Similarly, CBDT also clarified that the provisions of this 206C(1H) 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 a part of the income of the person is exempt.

5) Whether provisions of section 194Q of the Act shall apply to buyer in the year of incorporation?

CBDT Clarified that under section 194Q of the Act 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. 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.

6) Whether the provisions of section 194Q of the Act shall apply to a buyer who has turnover or gross receipt exceeding Rs 10 crore but total sales or gross receipts or turnover from business is Rs 10 crore or less?

CBDT clarified that for the purposes of section I94Q of the Act, 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, 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.

7) Whether the provisions of section 194Q of the Act shall apply to a buyer being a non-resident?

CBDT has clarified that the provisions of section 194Q of the Act 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.

INTER PLAY BETWEEN SEC 206C(1H) AND SECTION 194Q

If a transaction is both within the purview of section 194Q of the Act as well as sub-section (1H) 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. The same has already been mentioned in the MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL 2021.

However, if, for any reason, tax has been collected by the seller under sub-section (1H) 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 subsection (1H) of section 206C of the Act.

If a transaction is in purview of both Sec 194Q and 206C(1H), it is advised to apply sec 194Q on the transaction.

Suppose an entity’s turnover is above 10 crores, It is advised to categorize the suppliers and customers into two categories given below:

Nature of Transaction	Name of the Specified Party	Specified Party’s Turnover below Rs.10 crores	Specified Party’s Turnover Above Rs.10 crores
Sales	Customers	Customer will not deduct TDS because his turnover is less than 10 crores. Advised to Collect TCS from the customer if transactions exceeds Rs.50 lakhs.	Do not collect TCS as the customer’s turnover exceeds 10 crores and he will Deduct TDS if the transactions exceeds Rs.50 Lakhs. However, if the customer fails to Deduct TDS we shall be liable to collect TCS.
Purchases	Supplier	The supplier will not collect TCS as his turnover is less than 10 crores and we shall be liable to deduct TDS if transactions exceed Rs.50 Lakhs.	Both TDS and TCS Apply on this transaction. Advised to deduct TDS and inform the supplier of the same so that he does not collect TCS on the said transaction again. However, if the supplier has collected TCS before TDS could be deducted by the buyer, Such transaction need not be again subject to Tax deduction by the buyer.

The inter-play between the provisions of 206C(1H) and 194Q can be understand with the help of the table given below:

Buyer	Seller	Purchase by Buyer	Receipt by Seller	Whether TDS Applicable	Whether TCS Applicable
Turnover <10 Crores	Turnover > 10 crores	Above Rs 50 lakhs	Above Rs 50 lakhs	NA	TCS By Seller
		Below Rs 50 Lakhs	Above Rs 50 lakhs	NA	TCS By Seller
		Above Rs 50 lakhs	Below Rs 50 Lakhs	NA	NA
		Below Rs 50 Lakhs	Below Rs 50 Lakhs	NA	NA
Turnover > 10Cr	Turnover < 10Cr	Above Rs 50 lakhs	Above Rs 50 lakhs	TDS by Buyer	NA
		Below Rs 50 Lakhs	Above Rs 50 lakhs	NA	NA
		Above Rs 50 lakhs	Below Rs 50 Lakhs	TDS by Buyer	NA
		Below Rs 50 Lakhs	Below Rs 50 Lakhs	NA	NA
Turnover > 10Cr	Turnover > 10Cr	Above Rs 50 lakhs	Above Rs 50 lakhs	TDS by Buyer	NA
		Below Rs 50 Lakhs	Above Rs 50 lakhs	NA	TCS BY SELLER
		Above Rs 50 lakhs	Below Rs 50 Lakhs	TDS by Buyer	NA
		Below Rs 50 Lakhs	Below Rs 50 Lakhs	NA	NA