The introduction of Section 194Q in the Income Tax Act has brought a shift in tax compliance, particularly impacting high-value purchases of goods. While the provision primarily aims to cover physical goods, the question of whether it also extends to unlisted securities — such as privately held shares — has been a matter of interpretation. This article breaks down the provisions, legal interpretations, and CBDT clarifications to determine the applicability of TDS on sale of unlisted shares under Section 194Q.
1. Who is Liable Under Section 194Q?
Section 194Q applies to a buyer if:
- Their turnover or gross receipts exceed Rs. 10 crores in the preceding financial year, and
- They are responsible for paying a resident seller for the purchase of goods exceeding
Rs. 50 lakhs in a financial year.
If these conditions are met, the buyer is liable to deduct TDS at the rate of 0.1% on the value exceeding Rs. 50 lakhs. The deduction should happen at the time of credit or payment, whichever is earlier.
2. What Qualifies as “Goods”?
The term “goods” is not defined under the Income Tax Act. Therefore, reference is made to:
- The Sale of Goods Act, 1930, which includes stocks and shares under “goods”.
- The Central Goods and Services Tax (CGST) Act, which excludes securities from the definition of goods.
This leads to a grey area regarding unlisted shares, as they are not traded like typical commodities and fall outside the GST definition.
3. CBDT Circular No. 13/2021 — The Key Clarification
The CBDT Circular No. 13/2021, dated June 30, 2021, clarified that Section 194Q shall not apply to:
- Transactions in securities and commodities that are traded through recognised stock exchanges and settled by recognised clearing corporations (including those in IFSCs).
- Transactions involving electricity and energy certificates traded on registered power exchanges.
Implication: The exclusion is only for exchange-traded transactions. Therefore, off-market sales of unlisted shares are not exempt and are covered under Section 194Q.
4. TDS on Sale of Unlisted Shares
If a buyer acquires unlisted shares or securities in an off-market transaction and satisfies the turnover threshold, then TDS under Section 194Q must be deducted.
This applies to:
- Buybacks of shares by private companies,
- Acquisitions from angel investors or VCs,
- Inter-se transfer between shareholders.
Important: The obligation arises even if the transaction is a one-time deal, as long as the value crosses Rs. 50 lakhs in a year.
5. Additional Practical Clarifications from CBDT
Some other key points clarified by CBDT:
- Non-resident buyers are not liable unless they have a permanent establishment (PE) in India.
- No TDS under Section 194Q is required if TCS has already been collected by the seller under Section 206C(1H).
- Advance payments are also subject to TDS under Section 194Q.
- If the seller is fully exempt from income tax, e.g., under Section 10 or by special legislation (like the RBI Act), TDS does not apply.
6. Example to Illustrate
Let’s take the example of ABC Enterprises Pvt. Ltd., a company with Rs. 35 crores turnover in FY 2023–24. Suppose they purchase unlisted equity shares worth Rs. 1 crore from a resident individual in the current year.
Since the company meets the turnover threshold, and the transaction value exceeds Rs. 50 lakhs, TDS must be deducted at 0.1% on Rs. 50 lakhs, i.e., Rs. 5,000.
7. Summary: Is TDS Applicable on Unlisted Shares?
√ Yes, Section 194Q applies to off-market sale of unlisted securities if the buyer meets the turnover criteria and the transaction exceeds Rs. 50 lakhs in a financial year.
X No TDS is required if the transaction occurs through a recognised stock exchange.
If you’re involved in private equity, M&A, or off-market share transactions, Section 194Q can no longer be ignored.
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