Interplay analysis of Section 194Q & 206C(1H) of Income Tax Act, 1961

CA Deepak Kumar 08 Aug 2021 5,163 Views 1 comment Print Income Tax | Articles

This article provides easy analysis of section 194Q-TDS on Purchase of Goods and Section 206C(1H)-TCS on sale of goods.

The article also covers the latest CBDT clarifications on section 194Q and 206C(1H) of the Act. finance Act 2020 had amended section 206C of the Income-tax act 1961 by inserting a new subsection (1H) which says that the seller is required to collect the tax if the sale of goods to buyers exceeds Rs.50 lakhs.

Finance Act 2021 inserted a new section 194Q which says that the buyer is required to deduct the tax if the purchase of goods from the seller exceeds Rs. 50 lakhs.

The Provisions of section 194Q supersede the provisions of section 206C(1H).

1. Section 194Q of the Income Tax Act-TDS on the purchase of goods.

2. Section 206C(1H) – TCS on sale of Goods.

3. Comparative analysis of Section 194Q and 206C(1H)

4. Compliances of Section 194Q and 206C(1H)

5. Cross application of sub-section (lH) of section 206C and section 194Q of the Act

6. Some Important CBDT Clarifications

7. Analysis with examples

TDS on the Purchase of goods-Section-194Q:

Every buyer who is responsible for paying any sum to a resident seller, for purchase of any goods of the value or aggregate of value exceeding Rs 50 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, whichever is earlier, deduct an amount equal to 0.1 % of such sum exceeding Rs 50 lakh as income tax.

Analysis:

Buyer means a person whose turnover in the preceding financial year exceeds INR 10 crore (exclusive of GST).
Turnover or receipts from non-business activity is not to be counted for this purpose.
TDS shall be deducted at the time of credit in the books of account or at the time of making payment, whichever is earlier.
If PAN is not furnished, then applicable TDS rate shall be 5%
The provisions of Section-194Q will take effect from 1st July, 2021.

TCS under Section-206C(1H):

The tax shall be collected by the seller from buyer, on an amount received exceeding INR 50 Lakhs at the rate of 0.1%, if following
conditions are satisfied:

a) The seller’s total sales, gross receipts or turnover from the business carried on by him exceed INR 10 crore during the financial year immediately preceding the current financial year.

b) There is a sale of goods.

c) The seller receives any amount as consideration for the sale of any goods of the value or aggregate of such value exceeding INR 50 lakhs in any previous year from such buyer.

d) Payments received here refer only to payments received in connection with “sale” of goods. This is receipt based TCS hence even if you received payments in advance for supply of Goods, the TCS provisions are applicable.

Comparative analysis of Section 194Q and 206C(1H)

Basis	Section 194Q (applicable from 01.07.2021)	Section 206C(1H) (applicable from 01.10.2020)
Purpose	Deduction of TDS	Collection of TCS
Responsibility	Buyer of goods whose turnover in the preceding FY exceeds INR 10 crore to deduct TDS @ 0.1% on the amount exceeding INR 50 lakhs	Seller of goods whose turnover in the preceding FY exceeds INR 10 crore to collect TCS 0.1% on the amount exceeding INR 50 lakhs
Rate if PAN not furnished	5% on amount exceeding Rs. 50 Lacs	1% on amount exceeding Rs. 50 Lacs
Point of Deduction/Collection	Payment or credit, whichever is earlier i.e. The TDS shall also be deducted on Advance Payment made by buyer to the seller.	At the time of receipt of consideration
Payment	7th day of subsequent month for the month of April to February of the PY and 30th April for the month of March of the PY.	7th day of subsequent month of the PY.
Return	Form 26Q	Form 27EQ
Consequences upon failure	Disallowance to the extend of 30% under section 40a(ia). Simple interest of 1% or 1.5%.	Simple interest of 1%

Cross application of sub-section (lH) of section 206C and section 194Q of the Act:

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. The transaction shall come out of the purview of sub-section (1 H) of section 206C of the Act after tax has been deducted by the buyer on that Once the buyer has deducted the tax on a transaction, the seller is not required to collect the tax under sub-section (I H) of section 206C of the Act on the same transaction.
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. This concession is provided to remove difficulty, since tax rate of deduction and collection are same in section 194Q and sub section (IH) of section 206C of the Act.

Whether non-resident can be buyer under section 194Q of the Act ?

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.

Whether tax is to be deducted/Collected when the seller/Buyer is a person whose income is exempt ?

To remove difficulty, it is clarified by the CBDT 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 ).
Similarly, with respect to sub-section (1 H) of section 206C of the Act, it is clarified by the CBDT 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.

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

It is clarified by the CBDT 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.

Adjustment for GST, purchase returns:

Vide circular no 17 of 2020 dated 29th Sept 2020 it was clarified that no adjustment on account of GST is required to be made for collection of tax under sub-section (IH) of section 206C of the Act since the collection is made with reference to receipt of amount of sale Consideration.
However, the situation is different so far as TDS is It has been clarified by CBDT in circular no 23 of 2017 dated 19th July 2017 as under:

“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 with respect to TDS under section 194Q of the Act, it is 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.
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.

Adjustment for GST, purchase returns Contind…

Further, with respect to purchase return it is clarified by the CBDT that the tax is required to be deducted at the time of payment or credit, whichever is earlier. Thus, before purchase return happens, the tax must have already been deducted under section 194Q of the Act on that purchase. If that is the case and against this purchase return the money is refunded by the seller, then this tax deducted 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 as in that case the purchase on which tax was deducted under section 194Q of the Act has been completed with goods replaced.

Calculation of threshold for the financial year 2021-22:

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 1st July 2021. If either of the two events had happened before 1st July 2021 , that transaction would not be subjected to the provisions of section 194Q of the Act.
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 1st 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 1st July, 2021 to such seller.

Analysis with an example

S.No.	Turn-over of buyer FY 20-21	Turn-over of seller FY 20-21	Transa-ction upto 01.07.21	Transa-ction after 01.07.21	Total value of transa-ction	Section applica-bility	TDS/ TCS dedu-cted on Amount
1	7 cr	15 cr	40 Lakh	50 Lakh	90 Lakh	206C(1H)	40 Lakh
2	15 cr	7 cr	40 Lakh	50 Lakh	90 Lakh	194Q	40 Lakh
3	15 cr	7 cr	70 Lakh	20 Lakh	90 Lakh	194Q	20 Lakh
4	15 cr	12 cr	40 Lakh	50 Lakh	90 Lakh	194Q	40 Lakh
5	15 cr	12 cr	70 Lakh	20 Lakh	90 Lakh	194Q	20 Lakh
6	15 cr	7 cr (Exempted)	40 Lakh	50 Lakh	90 Lakh	194 Q NA	0
7	7 cr (Exempted)	15 cr	40 Lakh	50 Lakh	90 Lakh	206C(1H) NA	0
8	7 cr	15 cr (Exempted)	40 Lakh	50 Lakh	90 Lakh	206C(1H)	40 Lakh
9	15 cr (Exempted)	7 cr	40 Lakh	50 Lakh	90 Lakh	194Q	40 Lakh

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. I can’t accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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