“Tax Deduction at Source” under the Income Tax Act, 1961, commonly addressed as TDS, has always remained ‘Tedious’ in compliance. In Chapter XVII titled as “Collection and Recovery of Tax” initially introduced to the tax payers had only 15 family members (Sections). The family started expanding in the year 1967 and the complicity has increased over the years with further additions of family members (Sections). Latest is Section 194Q which came on the Statute Book w.e.f. 01.04.2021 and has become operative w.e.f. 01.07.2021. It also has its sibling- Sec. 206C(1H), which incidentally came into existence on 01.04.2020 and became operative w.e.f. 01.10.2020. While Section 194Q provides for deduction of tax at source, Section 206C(1H) calls for collection of tax at source.
Section 194Q brings further complications to the compliance of various provisions of law already existing and it will certainly be felt by the business circle as being contrary to the ‘Ease of Doing Business’. Interestingly, the Law Drafting team had the feeling that the assessee having 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, can easily comply with the new obligations as per the observation recorded in the Memorandum to the Finance Bill, 2021, although inside their hearts they were also not sure of the ease of compliance and the right to issue clarifications/guidelines has been reserved as is the Of-late trend to give even the Delegated Legislation the colour of regular legislation.
Some Important features of Section 194Q
1. Who is liable to deduct tax under Section 194Q?
The provision applies only on purchase of goods and the tax shall be deducted under Section 194Q by the buyer-assessee carrying on a business whose total sales, gross receipts or turnover from the business exceeds Rs. 10 crores during the financial year immediately preceding the financial year in which such goods are purchased.
As this provision is applicable from 01-07-2021, thus, the liability to deduct tax under this provision in the financial year 2021-22 shall arise if the turnover of the purchaser was more than Rs. 10 crores in the financial year 2020-21.
2. What will be taken as ‘goods’ and what shall be construed as a purchase of goods?
The term ‘goods’ has not been defined in the Income-tax Act. Let us understand what other statutes have to say. The Sale of Goods Act, 1930 is a specific statute which deals with the ‘sale of goods’ and therein ‘Goods’ means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale”. Taking the import from that law, the buyer of the following: (a) Anything which comes to the market being Movable property; (b) Any commodity; (c) Shares or Securities; (d) Electricity; (e) Agriculture produce; (f) Fuel; (g) Motor vehicle; (h) Liquor; (i) Jewellery or bullion; (j) Art or Drawings; (k) Sculptures; (l) Scraps; (m) Forest produce, etc. and similar specie, has been put under legal obligation to deduct tax under this provision. Goods can be tangible or intangible.
The immovable property shall not be treated as ‘goods’ and consequently, the TDS shall not be deducted from the purchase of immovable property.
3. Whether TDS is required to be deducted on the transaction in electricity?
In the case of State of Andhra Pradesh v. NTPC (2002) 5 SCC 203, the Hon’ble Supreme Court of India has held that electricity, though not tangible, is movable property and, therefore, it is also ‘Goods’. The Central Excise and Custom Tariff Acts as also H.S.N. have covered ‘Electrical Energy’ under heading ‘2716 00 00’, further strengthening the classification thereof as ‘Goods’. Electricity is generally purchased by the buyers/consumers from the DISCOMS/Companies engaged in generation thereof. At present, in my considered view, the buyers/consumers of electricity are liable to deduct tax from the payment to be made in respect of the transaction in electricity as per the applicable timeline.
It is unfortunate that the CBDT has not considered it reasonable to exempt the expense transactions in the hands of buyers/consumers of electricity, complicating it for them. Can anybody think that buyers/consumers of electricity are better equipped than DISCOMS/ Companies engaged in generation of electricity and find themselves at ease for compliance of law?
Number of DISCOMS/Companies engaged in generation thereof, mostly State owned, is definitely much less in comparison to the number of buyers/consumers of electricity and lesser the number easier and better the compliance.
4. When tax shall be deducted under this provision?
The buyer-assessee is liable to deduct tax at source, where following conditions prevail:
(a) The goods are being purchased from a resident person;
(b) Goods are purchased for a value exceeding Rs. 50 lakhs in one instance or
the aggregate of purchase transactions starting from 1st April, 2021 exceeds Rs. 50 lakhs in the current financial year 2021-22 (similar will be the case for subsequent financial years) ; and
(c) The buyer should not be in the list of persons excluded from the provision for deduction of tax.
However, the buyer has been saved from the above rigours where the tax is being deducted or collected under some other provisions contained in Chapter XVII, except the sibling Section 206C(1H) as the buyer shall have the first obligation to deduct the tax under Section 194Q and will stop the seller collecting the tax under Section 206C(1H).
5. Who wins in the case of fight between 194Q and 206C(1H)?
It has been specified under sub section 5(b) that if TDS u/s 194Q is applicable then TCS u/s 206C(1H) will not be applicable. So TDS u/s 194Q will win the fight.
6. At what point of time tax is to be deducted and at what rate the tax is to be deducted ?
As per the general scheme relating to TDS, in this provision also the buyer is under obligation to deduct tax at source at the rate of 0.1%, at the time of making advance payment or at the time of recording the purchases in his books account (whichever is earlier). The Govt. has clarified vide Guidelines/Circular dated 30/06/2021 that in a case of deduction of tax at the point of purchase, the GST amount if charged and mentioned separately in the Invoice, can be excluded from total invoice value.
7. What about the tax already deposited at the time of purchase but subsequently there are Purchase Returns ?
As per the Guidelines dated 30/06/2021, at Point No. 4.3.3, the CBDT has clarified 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 most likely stands already deducted under section 194Q of the Act on that purchase and also deposited with the Central Govt. Exchequer.
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.
However, the buyer has no option to reclaim the tax deducted at source and already deposited with the Govt. where there is a case of total purchase return and there is no further purchase transaction subsequent thereto. The buyer has been put to financial hassle in such a case and will have to claim the amount of TDS back from the seller. Imagine the case scenario where dispute has risen between buyer and seller on any account like defective goods, goods not upto the mark etc. and the seller is in no mood to accommodate the buyer in any manner.
8. Where the seller does not provide PAN, what will be tax rate?
The matter gets complicated if the seller fails to furnish his PAN or Aadhaar. Section 206AA mandates compulsory furnishing of PAN and failure on the part of seller will result in enhancement of applicable tax rate from normal rate of 0.1% to the extraordinary rate of 5%.
It is of importance to note here that in the modern GST set-up, I find that the seller and buyer both, having such high sale/purchase transaction will definitely be registered under the GST Law and incidentally, the GSTINo. is based on PANo. and the information relating to PAN can be easily derived therefrom.
9. Whether a buyer of goods, having total sales, gross receipts or turnover from the business exceeding Rs. 10 crores in the immediately preceding financial year, has the option to not deduct tax at source on the pretext that the tax is being collected at source by the seller under Section 206C(1H)?
Though Section 206C(1H) excludes a transaction on which tax is actually deducted under any other provision (which shall also cover Section 194Q as well), Section 194Q(5) does not create a similar exception for a transaction on which tax is collectible under Section 206C(1H).
The buyer has no option and shall have the primary and foremost obligation to deduct the tax at source at the time of purchase of goods or at the time of advance payment, being earlier. ON the other hand, no tax shall be collected on such transaction under Section 206C(1H).
10. What shall be consequences for failure to deduct or pay TDS?
If the buyer, being responsible for deduction of tax at source under Section 194Q, fails to deduct the whole or any part of the tax or after deduction fails to deposit the same to the credit of the Central government, then he shall be deemed to be an assessee-in-default.
Section 40(a)(ia) will put the buyer assessee into trouble as 30% of the relevant purchase value, will be liable to be disallowed out of the total purchases as the purchases are treated as expenses and consequently, the buyer-assessee will have to pay income-tax on higher income.
The buyer shall also be liable to pay interest at the rate of 1% for every month or part thereof on the amount of tax he failed to deduct. However, if he fails to deposit the tax deducted at source, he shall be liable to pay interest at the rate of 1.5% for every month or part thereof on the amount of tax he failed to deposit to the credit of the Central Govt.
Ironically, the liability to collect the tax gets shifted to the seller if the buyer makes a default in deducting tax at source and the seller has not taken the protective measure of seeking declaration from the buyer that the responsibility rests exclusively with the buyer for compliance of Sec. 194Q.
11. Is a buyer importing goods from outside India required to deduct tax at source under this section?
Section 194Q provides that any person, being a buyer who is responsible for paying any sum to any resident, being a seller, is required to deduct tax at source under this provision. Thus, the obligation to deduct tax under this provision arises only when the payment is made to a resident seller. As in the case of import, the seller is a non-resident, the buyer will not have any obligation to deduct tax under this provision.
12. Where the seller is supplying goods from his multiple units, whether purchases made from different units need to be aggregated?
The threshold limit of Rs. 50 lakhs, in respect of purchases, has to be computed in respect of each PAN and where different units of a seller are established/conducting business under one PAN, the amount paid or payable to all such units shall be aggregated to compute the limit of Rs. 50 Lakhs.
13. Whether tax to be deducted on the receipt of goods by one branch from another?
The TDS under this section is required to be deducted by any person, being a buyer, responsible for making payment to the seller for the purchase of goods. Thus, the existence of two distinct parties as ‘seller’ and ‘buyer’ is a pre-requisite to construe a transaction as a purchase. The condition of purchase is not fulfilled in the context of branch transfer. Therefore, the provisions of this section shall not apply in the case of branch transfers.
14. Whether tax is to be deducted when the seller is a person whose income is exempt?
In Point No. 4.5.1 of the Guidelines dated 30/06/2021, it has been 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.), but the exemption has been reserved in Point No. 4.5.3 that 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.
15. What are the exceptions wherein Section 194Q will not be applicable even if turnover in the previous financial year has crossed Rs. 10 Cr.?
Following are the exceptions wherein Section 194Q will not be applicable even if turnover of the buyer in the immediately preceding financial year has crossed Rs. 10 Cr.
a) With respect to the individual buyer with whom the purchase of goods doesn’t exceed Rs. 50 Lacs in the current financial year.
b) TDS is deductible under any other provisions of the Act. it means TDS will be deducted under that respective provision and not under this provision.
c) Tax is collectible under Section 206C except Section 206C(1H).
The formation of opinion by the law framers, in my humble view, that compliance burden is only on those who can comply with it and the assessee having total sales, 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 goods is carried out can easily comply with the above, has only added further burden for doing good business as the provisions starting with ‘T’ for TDS, have to be literally interpreted not only as ‘Tedious’ but ‘Tearful’ as well.