Guidelines under section 194Q of the Income Tax Act, 1961
These guidelines are issued in accordance with the powers granted to the CBDT in Section 194Q(3), subject to the approval of the Central Government.
These guidelines at some places have also tried to remove difficulties in implementing the provisions of Section 194-O and Section 206C(1H) of the Act using power contained in Section 194-O(4) and Section 206C(1-I) of the Act respectively.
List of issues resolved:
1. Applicability on transactions carried through various Exchanges
2. Calculation of threshold for the Y. 2021-22
3. Adjustment for GST & Purchase Return
4. Can a Non- resident be buyer u/s 194Q?
5. Whether tax is to be deducted when the seller is a person whose income is exempt?
6. TDS on advance payment
7. Applicability in the year of incorporation
8. Applicability when turnover from business of buyer is ₹10 crore or less
9. Cross application of Section 194Q, 194-O & 206C(1H)
|Applicability on transactions carried through various Exchanges:
Difficulties are represented in the applicability of Section 194Q in case of Exchanges and Clearing Corporations. It has been stated that sometime in these transactions there is no one to one contract between the buyers and the sellers.
|In order to remove the difficulties, it is provided that the provisions of Section 194Q shall not be applicable in relation to:
– transactions in securities and commodities which are traded through Recognized Stock Exchanges (RSE) or cleared and settled by the Recognized Clearing Corporation (RCC), including RSE & RCC located in International Financial Service Centre (IFSC).
– transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC.
|Calculation of threshold for the F.Y. 2021-22:
It was requested to clarify how the threshold of ₹50 lakh specified under this Section shall be computed and whether the tax is required to be deducted in respect of advance paid before 1st July, 2021 and sum credited thereafter.
– Since Section 194Q mandates buyer to deduct tax on credit of sum in the account of seller or on payment of such sum, whichever earlier, the provision of this Section shall not apply on any sum credited or paid before 1st July, 2021.
– Since the threshold of ₹50 lakh is to be calculated in respect of the previous year, calculation of sum for triggering TDS under section 194Q shall be computed from 1st April, 2021.
|Adjustment for GST & Purchase Return:
It was requested to clarify that whether adjustment is required to be made for GST or purchase returns for the purpose of tax deduction under section 194Q of the Act or not.
Keeping in mind the Circular 17/2020 dated 29.09.2020, CBDT clarified that TCS under Section 206C(1H) is applicable on the amount of sales consideration and no adjustments on account of GST is required to be done. However, the situation is different so far as TDS is concerned. The position of TDS was clarified earlier vide Circular No. 23/2017 dated 19.07.2017 regarding inclusion of “GST on services” in total value.
The Board clarified that wherever in terms of the agreement or contract between the payer and the payee, the component of ‘GST on services’ comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source on the amount paid or payable without including such ‘GST on services’ component.
It has been clarified that Circular No. 23/2017 dated 19.07.2017 regarding inclusion of “GST on services” is extendable to GST on purchase of goods as well.
– when tax is deducted at the time of credit of amount in the account of seller and in terms of the agreement or contract between the buyer and the seller, the component of GST comprised in the amount payable to the seller is indicated separately, tax shall be deducted under section 194Q on the amount credited without including such GST.
– If the tax is deducted on payment basis because the payment is earlier than the credit, the tax would be deducted on the whole amount including GST as it is not possible to identify that payment with GST component of the amount to be invoiced in future.
Further, with respect to purchase return it is 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 must have already been deducted under section 194Q on that purchase. 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.
|Can a Non- resident be buyer u/s 194Q?||Section 194Q 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.
For this purpose, “permanent establishment” shall mean to include a fixed place of business through which the business of the enterprise is wholly or partly carried on.
|Whether tax is to be deducted when the seller is a person whose income is exempt?||– Provisions of Section 194Q 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.).
– Provisions of Section 206C(1H) shall 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.).
– 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.
|TDS on advance payment||Since the provisions apply on payment or credit whichever is earlier, the provisions of section 194Q shall apply to advance payment made by the buyer to the seller.|
|Applicability in the year of incorporation||Since the condition of buyer having turnover of more than ₹10 crore in the immediately preceding F.Y. would not be satisfied in the year of incorporation, the provisions of section 194Q shall not apply in the year of incorporation.|
|Applicability when turnover from business of buyer is ₹10 crore or less:
It is requested to clarify if the provisions of section 194Q shall apply to a buyer who has turnover or gross receipt exceeding ₹10 crore but total sales or gross receipts or turnover from business is ₹10 crore or less.
|For the purposes of section 194Q, a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding ₹10 crore.
Hence, turnover or receipts from non-business activity is not to be counted for this purpose.
|Cross application of Section 194Q, 194-O & 206C(1H):
– Under Section 194-O(3), a transaction in respect of which tax has been deducted by the e-commerce operator under sub-section (1), or which is not liable to deduction under sub-section (2), shall not be liable to tax deduction at source under any other provision of chapter XVII of the Act.
– Under second proviso to section 206C(1H), provisions of this sub-section shall not apply, if the buyer is liable to deduct tax at source under any other provisions of this Act on the goods purchased by him from the seller and has deducted such tax.
– Under Section 194Q(5), the provision of this section shall not apply to a transaction on which:
i. Tax is deductible under any other provisions of the Act.
ii. tax is collectible under the provisions of section 206C, other than a transaction on which sub-section (1H) applies.
– If tax has been deducted by the e-commerce operator on a transaction under section 194-O, including transactions on which tax is not deducted on account of sub-section (2) of section 194-O, that transaction shall not be subject to tax deduction under section 194Q.
– Though section 206C(1H) provides exemption from TCS if the buyer has deducted tax at source on goods purchased by him, to remove difficulties it is clarified that this exemption would also cover a situation where instead of the buyer the e-commerce operator has deducted tax at source on that transaction of sale of goods by seller to buyer through e-commerce operator.
– Transaction is within purview of both, Section 194Q & 194-O: 194-O shall prevail over 194Q.
– Transaction is within purview of both, Section 206C(1H) & 194-O: 194-O shall prevail over 206C(1H). The transaction shall come out of the purview of Section 206C(1H) after tax has been deducted by the e-commerce operator on that transaction. Once the e-commerce operator has deducted the tax on a transaction, the seller is not required to collect the tax under Section 206C(1H) on the same transaction. It is clarified that here primary responsibility is on e-commerce operator to deduct the tax under section 194-O and that responsibility cannot be condoned if the seller has collected the tax under Section 206C(1H).
This is for the reason that the rate of TDS under Section 194-O is higher than rate of TCS under Section 206C(1H).
– Transaction is within purview of both, Section 206C(1H) & 194-Q: 194-Q shall prevail over 206C(1H). The transaction shall come out of the purview of Section 206C(1H) after tax has been deducted by the buyer on that transaction. 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, for any reason, tax has been collected by the seller under Section 206C(1H), before the buyer could deduct tax under Section 194-Q on the same transaction, such transaction would not be subject to tax deduction again by the buyer. This concession is provided to remove difficulty, since tax rate of deduction and collection are same in Section 194Q and Section 206C(1H).
Disclaimer: The author is based in Jabalpur and is a Practicing Company Secretary dealing in Corporate, Legal & Taxation services. The information contained in this write up, as provided by the author, is to provide a general guidance to the intended user. The information should not be used as a substitute for specific consultations. Author recommends that professional advice is sought before taking any action on specific issues.
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