prpri Analysis of Section 194Q of Income tax Act Analysis of Section 194Q of Income tax Act

DISCUSSION ON SECTION 194Q AT A GLANCE

Introduction

The Finance Act, 2021, has widened the scope of the TDS Chapter in the Income Tax Act, 1961 by introducing a new section namely 194Q dealing with

TDS on  Purchase of Goods w.e.f. 1st July 2021.  This new TDS provision is just a replica of  section 206C(1H) of the Income Tax Act, 1961

introduced by the Government with effect from 1st October, 2020. The only basic difference between these two sections is that the responsibility of deduction of tax will lie upon the buyer whereas the responsibility of collecting tax will lie upon the Seller.

Analysis of Section 194Q :

As per newly introduced Section 194Q, TDS needs to be deducted by buyer of goods (whose total sales, gross receipts or turnover exceeds Rs.10 Crore of goods is carried out)

during the immediately preceding financial year in which purchase  at a rate of 0.1 percent on payment made to resident seller or credit to his account, whichever is earlier exceeding Rs 50 lacs in the financial year. Moreover, if the resident seller has not provided Permanent Account Number (PAN) or Aadhar Number to the buyer,  then the TDS would be deducted at 5 percent instead of 0.1 percent.

Difference between section 194Q and section 206C(1H) :

Since Sale and Purchase are 2 sides of the same coin and relates to a single transaction, let us analyse the difference between the two sections:

Particulars Section 194Q Section 206C(1H)
Applicable If the turnover of the Buyer is more than 10 Crore in Previous FY. If the turnover of the Seller is more than 10 Crore in Previous FY.
Threshold for Section Purchases more than 50 Lakhs Receipts more   than   50 Lakhs
Time  of  Deduction / Collection At the  time of payment or credit  whichever is earlier At the time of receipt
Rate 0.1% 5% (PAN not available)  5% (2 yrs ITR not filed) 0.1% 1% (PAN not available) 5% (2 yrs ITR not filed)
Liable of Deduction/ Collection Buyer is liable Seller is liable

The key issue/ perplexity is, whether on the same transaction the buyer is liable for deduction of TDS u/s 194Q and Seller is liable for collection u/s 206C(1H)?

Section 194Q (5) states that no TDS shall be deducted on transactions which are covered u/s 206C [other than 206C(1H)].

And on identical lines, second proviso  to Section 206C(1H) states that TCS under this provision shall not be collected if the transaction is covered under any other provision of the Act.

Hence, having a careful reading of both the provisions, one can conclude that the primary liability is on the buyer to deduct TDS.

If the buyer is liable to deduct TDS, then the seller shall not collect TCS on the same, but if the buyer is not liable for TDS deduction, then seller must collect TCS u/s 206C(1H).

How to ascertain as to whether TDS u/s 194Q shall be deducted by the buyer in purchase transaction of more than INR 50 lacs, which shall exempt the seller  from TCS compliance u/s 206C (1H)??

In a said scenario, to avoid double taxation on the transaction, which is not in the spirit of law,

the seller should seek for a declaration from  the purchaser on whether TDS u/s 194Q applies on the buyer and in case the same shall be complied with.

Moreover, the said declaration should  include an indemnification clause to protect the seller from any tax/interest/penalty on account of any wrong declaration from the buyer.

Complexity in filing TDS return in compliance with Section 194Q

Recently, the CBDT has issued a Notification No. 71/2021 dated 8th June 2021 Where in the department has introduced the

Income Tax (17th Amendment) Rules, 2021. Under these rules, the Department has inserted  clause (xvi) to Rule 31A(4) of the Income Tax rules, 1962.

“(xvi) furnish particulars of amount paid or credited on which tax was not deducted in view of sub-section (5) of section 194Q with effect from 1st day of July,2021.”

As per the rule mentioned above, the department has sought to obtain the details  of amounts on which Section 194Q was applicable, but no TDS has been deducted by virtue of Sub- section (5) of Section 194Q.

Sub section (5) of Section 194Q prescribes for no TDS deduction on purchase of goods u/s 194Q in cases where TDS or TCS (other than Section 206C(1H)) has already been deducted/ collected on a transaction.

Now, as per the insertion under the Notification, the Deductor needs to additionally declare the amounts  on which TDS has not been deducted by virtue of Section 194Q(5).

Concluding this notification in reference to 194Q, one needs to report in TDS return all the transactions related to purchases of goods exceeding the specified threshold of 50 Lakhs in a Financial Year,

even in case TDS u/s 194Q has not been deducted on such transactions due to any existing TDS/ TCS other than Section 206C(1H)) provisions. 

Compiling such information may become an uphill task for Deductor to comply with such opaque provisions.

HIGHER  TDS/TCS  IN  CASE  OF  NON  ITR  FILERS (SEC 206AB & 206CCA)

Introduction

The Finance Act 2021 has introduced new section 206AB & 206CCA of the Income Tax Act 1961, which shall substitute  applicable TDS/TCS rates with a higher rate for

those who have not filed income tax returns for previous two years and the aggregate of tax

deducted and collected is beyond INR 50,000 in each of those two previous years.

Thus, Section 206AB & 206CCA mandates the person to deduct/collect the tax at a higher rate to penalize the specified persons.

Hence at the time of deducting TDS /collecting TCS on day-to-day transactions post July 1, 2021, a consideration to the provisions of these sections is a must by the deductor/collector.

EXAMPLE TIME :

Analysis of the Section

Applicable In general, Section 206AB (for TDS) and Section 206CCA (for TCS) provides for deduction/collection of tax at higher rates if all the conditions below are fulfilled: –

1. The deductee/collectee has not filed the return of income for both of the two assessment years relevant to the previous year in which the tax is required to be deducted/collected.

2. The due date to file such ITRs u/s 139(1) has expired.

3. The aggregate amount of tax deducted and collected

at source is Rs. 50,000 or more in each of these two previous years.

Rates The rate shall be the higher of the following: –

1. Twice the tax rate specified in section or rates in force, or

2. Five percent (5%)

Please note that if the PAN is not provided then rates shall be higher of above rates or as mentioned in Section 206AA (for TDS) or in Section 206CC (for TCS).

Non Applicability This provision is not applicable where tax is

deductible under the following provisions:

  • Section 192: TDS on Salary;
  • Section 192A: TDS on withdrawal from EPF;
  • Section 194B: TDS on winning from lotteries, crossword puzzles, etc.
  • Section 194BB: TDS on winning from racehorses;
  • Section 194LBC: TDS on income in respect of investment in Securitization Trust;
  • Section 194N: TDS on cash withdrawal.

Also, this provision is not applicable in case of a non-resident who does not have a permanent  establishment in India.

♦ Howto ascertain as to whether TDS/TCS needs to be deducted/collected from the vendors/ customers at a higher rate u/s 206AB/206CCA??

In a said scenario, to avoid any tax liability in future, one should seek for a declaration from the vendor/customer on

whether they have filed income tax returns for previous two years and whether the aggregate of tax deducted and collected is beyond INR 50,000 in each of those two previous years.

Moreover, the said declaration should include an indemnification clause to protect the deductor/collector from any tax/interest/penalty on account of any wrong declaration from the vendor/customer.

Section Original rate As per Section  206AB Rate as per Section  206AA Rate as per Section 206CC Rate as per Section  206CCA
194C 1%/ 2% 5% 20% NA NA
194A 10% 20% 20% NA NA
194C 1%/ 2% 5% 20% NA NA
194H 5% 10% 20% NA NA
194-I(a) 2% 5% 20% NA NA
194-I(b) 10% 20% 20% NA NA
194-IA 1% 5% 20% NA NA
194-IB 5% 10% 20% NA NA
194J(a) 2% 5% 20% NA NA
194J(b) 10% 20% 20% NA NA
194Q 0.1% 5% 5% NA NA
206C  (Liquor) 1% NA NA 5% 5%
206C  (Tendu Leaves) 5% NA NA 10% 10%
206C (Timber) 2.5% NA NA 5% 5%
206C (Scrap) 1% NA NA 5% 5%
206C(1F) 1% NA NA 5% 5%
206C(1H) 0.1% NA NA 1% 5%

If you have any suggestions regarding this knowledge series then please share with us.  For Any Query Related to taxation matters , you may contact us… Thanks for Reading. 

CA SACHIN JAIN | Contact : 9829760308

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