Practical approach to new TDS section 194Q introduced in budget 2021 which will be effective from 01.07.2021 and its effect in application of existing section(amended) TCS u/s 206C (1H) of Income Tax which is required to be collected on sales of goods above 50 lakh.
With the introduction of new section 194Q in the Budget 2021, for deduction of tax at sources will be effective from 01.07.2021 which reads as follows:
Section 194Q: (1) Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding fifty 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 thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 per cent. of such sum exceeding fifty lakh rupees as income-tax.
Explanation.–For the purposes of this sub-section, “buyer” means a person whose 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, not being a person, as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.
(2) Where any sum referred to in sub-section (1) is credited to any account, whether called “suspense account” or by any other name, in the books of account of the person liable to pay such income, such credit of income shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
(3) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.
(4) Every guideline issued by the Board under sub-section (3) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income tax authorities and the person liable to deduct tax.
(5) The provisions of this section shall not apply to a transaction on which- (a) tax is deductible under any of the provisions of this Act; and
(b) tax is collectible under the provisions of section 206C other than a transaction to which sub-section (1H) of section 206C applies.
Whereas existing section for tax collected at sources (TCS) of 206C(1H) which reads as – Every person, being a seller, who receives any amount as consideration for sale of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, other than the goods being exported out of India or goods covered in sub-section (1) or sub-section (1F) or sub-section (1G) shall, at the time of receipt of such amount, collect from the buyer, a sum equal to 0.1 per cent of the sale consideration exceeding fifty lakh rupees as income-tax:
Provided that if the buyer has not provided the Permanent Account Number or the Aadhaar number to the seller, then the provisions of clause (ii) of sub-section (1) of section 206CC shall be read as if for the words “five per cent”, the words “one per cent” had been substituted:
Provided further that the provisions of this sub-section shall not apply, if the buyer is liable to deduct tax at source under any other provision of this Act on the goods purchased by him from the seller and has deducted such amount.
Explanation.—For the purposes of this sub-section,—
(a) “buyer” means a person who purchases any goods, but does not include,—
(A) the Central Government, a State Government, an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign State; or
(B) a local authority as defined in the Explanation to clause (20) of section 10; or
(C) a person importing goods into India or any other person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein;
(b) “seller” means a person whose 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 sale of goods is carried out, not being a person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.
Practical Approach to application of Section 194H or 206C(1H):
Now there will be two sections which will deals on same transaction of sales/purchase above 50 lakhs from party whose turnover in P.Y exceeds Rs 10 crore.
New section 194H mandate to all buyers who are responsible for paying for purchase of goods to deduct Tax at Source (TDS) @ 0.1% subject to threshold limits as enumerated below:
Total turnover of the Buyer in preceding financial year (i.e. FY 2020-21) exceeds Rs.10 Crs.; and
The value of Goods purchased from the Seller exceeds Rs.50 Lacs in the said financial year
Please note, if the Buyer is liable to deduct TDS on payments made to the Seller under above conditions, then the Seller need not levy Tax Collected at Source (TCS) as required u/Sec.206C(1H) of the Act.
However, higher TCS rate of 5% will be applicable-
(a) If you have not filed the income-tax returns for last 2 years preceding the relevant financial year; and if TDS / TCS is greater than Rs. 50,000 in last 2 years preceding the relevant financial year; or
(b) if PAN is not available.
The following scenarios makes clear understanding of application of section 194H or section 206C(1H):
| Scenarios | Action for Buyer | Action for Seller | |
| 1 | If buyer’s turnover > Rs.10 Crs. +
transaction amount > Rs.50 Lacs during financial year |
Buyer to deduct TDS @ 0.1% while paying to seller | No action |
| 2 | If buyer’s turnover < Rs.10 Crs. + transaction amount > Rs.50 Lacs during financial year | No action | Seller has to levy TCS @ 0.1% / 5%, whichever applicable, while raising sales invoice on buyer |
| 3 | If buyer’s turnover > Rs.10 Crs. +
transaction amount < Rs.50 Lacs during financial year |
No action | No action |
| 4 | If buyer’s turnover < Rs.10 Crs. +
transaction amount < Rs.50 Lacs during financial year |
No action | No action |
Note: Here Turnover shall be taken for the preceding financial year i.e For the FY 2021-22, turnover for the previous year 2020-21 shall be considered.
Conclusion: Often there will be a ambiguity in application of section 194H or Section 206C(1H) and identification of responsibilities between seller and buyers in case if buyer fails to deduct tax and triggering of sellers responsibility, obtaining turnover details of the buyers for identification of threshold limit for application of TDS etc.
To overcome the ambiguities and timely compliance to the provisions it will be suggested that prior understanding between buyers and sellers will reduce the complexities and litigation.
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