Guidelines for Tax Deduction | Section 194Q | Income Tax Act, 1961

Finance Act 2021 had inserted a new section 194Q of the Income tax Act, 1961 (hereafter referred to as the Act), effective from 1st July 2021, which provides for deduction of tax @ 0.1% by a person (being a buyer) whose total sales, gross receipts or turnover from the business carried on by him exceeds Rs.10 crores during the financial year immediately preceding the financial year in which the purchase of goods is carried out and who is responsible for paying any sum to a resident seller for purchase of goods of a value or aggregate value exceeding Rs.50 Lakhs in the previous year.

However, provisions of this section are not applicable to:

• a transaction on which tax is deductible under any other provision of the Act; and
• a transaction, on which tax is collectible under the provisions of section 206C of the Act, other than transaction to which section 206C(1H) of the Act applies.

With a view to remove difficulties which may arise in the applicability of the said sections, the Central Board of Direct Taxes (CBDT), vide Circular No. 13 dated 30.6.2021 has issued various guidelines which are summarized as under:

A. Guidelines related to applicability of provisions of section 194Q of the Act:

Calculation of threshold for FY 2021-22

It has been clarified that since the provisions of section 194Q would apply on the buyer to deduct tax at the time of crediting the sum to the account of seller or on payment of such sum, whichever is earlier, hence, the provisions of section 194Q of the Act will not be applicable if any of the two events i.e. amount credited or paid by the buyer to the seller happens before 1st July 2021. Further, the threshold of purchase of goods of Rs.50 Lakhs shall be computed from 1.4.2021. Hence, if a person (being a buyer) has already credited or paid Rs.50 Lakhs or more up to 30.6.2021 to a seller, TDS shall apply on the entire amount credited or paid on or after 1st July 2021.

Adjustment for GST

TDS shall be deducted as under:

• If the amount is credited to the seller’s account, and in terms of the agreement / contract between the buyer and seller, the GST component is indicated separately, then tax under section 194Q of the Act has to be deducted on the purchase amount credited without including GST component.
• If tax is deducted under section 194Q of the Act at the time of payment to the seller, because payment was earlier than credit of such sum, then tax has to be deducted on the whole amount (including GST) as it is not possible to identity that payment with GST component of the amount to be invoiced in future.

Adjustment for purchase return

Tax under section 194Q of the Act is deducted at the time of payment or credit whichever is earlier, and accordingly, tax would have already been deducted on the purchase amount. In such a case, if the money is refunded by the seller at the time of purchase return to the buyer, then the amount of tax already deducted, may be adjusted against the next purchase from the same seller. If, however, the purchase return is replaced by goods by the seller, then no adjustment will be required since in that case the purchase (on which tax was deducted under section 194Q of the Act) has been completed with the goods so replaced.

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

It has been 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.

Whether tax is to be deducted on advance payment?

It has been clarified that tax is to be deducted on advance payments also because the provisions of section 194Q of the Act applies on payment or credit whichever is earlier

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

Section 194Q of the Act shall not apply to a buyer in the year of incorporation as such a buyer’s gross receipts or turnover would not exceed Rs.10 crores in the financial year immediately preceding the financial year in which the purchase of goods is carried out.

Whether provisions of section 194Q of the Act shall apply to buyer if the turnover from business is 10 crore or less?

The provisions shall apply only if the gross receipts or turnover from the business carried out by the buyer is in excess of Rs.10 crores in the financial year immediately preceding the financial year in which the transaction takes place. This will not include the turnover from nonbusiness activities.

B. Applicability on transactions carried through various exchanges

With regard to applicability on transactions carried through various exchanges, considering that there is no one-to-one contact between the buyers & sellers in case of certain exchanges & clearing corporations, it has been clarified that, the provisions of section 194Q of the Act shall not be applicable in relation to:

• Transactions in securities & commodities traded through recognized stock exchange or cleared & settled by recognized clearing corporation, including those located in IFSC
• Transactions in electricity, renewable energy certificates & energy saving certificates traded through power exchanges registered as per Regulation 21 of CERC.

Whether tax is to be deducted/ collected when the seller/ buyer (as the case may be) is a person whose income is exempt:

With regard to applicability of the provisions of section 194Q of the Act, it is clarified that the provisions shall not apply on purchase of goods from a person (being a seller):

• whose income is exempt from income tax under the Act (like person whose income is exempt under section 10 of the Act) or
• whose income is exempt under any other Act passed by the Parliament (Like RBI Act, ADB Act etc.) Similarly, with respect to section 206C(1H) of the Act, it is clarified that the provisions of this sub-section would 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.).

However, the above clarifications would not apply if seller’s income is only partly exempt.

C. Cross application of section 194-O, section 206C(1H) and section 194Q of the Act.

With regard to applicability of section 194-O¹, section 206C(1H)² and section 194Q of the Act on the same transaction, it has been clarified that:

• If a transaction is both within the purview of section 194-O of the Act as well as section 194Q of the Act, the provisions of tax deduction of section 194-O of the Act will apply. This will apply even in a case where, as per section 194-O (2) of the Act, no deduction is actually required due to the reason that the amount is being paid/ credited to an individual/ HUF (who has furnished PAN/ Aadhaar No.) and such amount does not exceed Rs.5 lakhs.
• If a transaction is both within the purview of section 194-O of the Act as well as section 206C(1H) of the Act, tax is required to be deducted under section 194-O of the Act.
• If a transaction is both within the purview of section 194Q of the Act as well as section 206C(1H) of the Act, the tax is required to be deducted under section 194Q of the Act. Accordingly, once the buyer has deducted the tax on a transaction, the seller is not required to collect the tax under section 206C(1H) on the same transaction. However, if tax had been collected by the seller under section 206C(1H) of the Act, before the buyer could deduct tax under section 194Q of the Act on the same transaction, such transaction shall not be subjected to tax deduction again by the buyer under section 194Q of the Act.

¹ Section 194-O – Tax deduction by e-commerce operators @ 1% of gross amount of sale of goods/ provision of services/ both, facilitated through digital/ electronic facility/ platform.

² Section 206C(1H) – Tax collection by a seller @ 0.1% of the consideration from a buyer at the time of collection of sale consideration exceeding Rs.50 Lakhs in any previous year.