The hot topic of discuss in all tax forums is deduction of tax on purchase of goods. Why is this provision in place now when already TCS was being collected by Suppliers from their buyers from October 2020? TCS all this while was applicable all sellers whose turnover was above 10 Crores and the responsibility of collecting tax from the buyer was with the supplier.

Out of the entire population, only 1.6% of the population pays tax and rest the percentage says it all. The government wants to bring in as many taxpayers possible into the tax net and hence the provisions have been made more stringent by deducting upfront 0.1% TDS on the purchase price paid to the supplier by the buyer. Hence the new TDS provision makes the buyer responsible for deducting taxes whereas the old TCS provisions makes the supplier responsible for collecting taxes

 Laptop computer displaying logo of TCS

What is TDS under 194 Q:

  • Nature of transaction- Purchase of goods
  • Effective From: 01.07.2021
  • Person responsible: Buyer
  • Applicability- It shall be applicable to a buyer with a turnover of more than 10 crores
  • Applicable for all Suppliers? – No. It shall be applicable for transactions with a supplier of more than 50 Lakhs per annum
  • Applicable for the entire transaction amount? – No. Only in value over and above 50 Lakhs
  • Rate- 0.1% normal and in case of specified persons – 5%
  • Who are specified persons- Suppliers who have not filed 2 yrs IT returns and TDS/TCS credit more than 50K each year
  • How to find out specified persons- There is a compliance check option in the income tax portal to check the credibility of vendor/ declarations can be obtained from the vendors as well.

TDS Vs TCS:

The common question posted is whether TCS and TDS shall be applicable on the same transaction?

TDS u/s 194Q overrides 206C(1H). Hence any transaction on which TDS shall be applicable TCS shall not be collected. Hence if TDS is deducted for a supplier, the respective supplier shall not charge TCS.

Then is TCS redundant?

No. Govt has brought in this TDS provisions only for more than a medium sized buyer having turnover more than 10 Crore. Hence a buyer who doesn’t have a turnover of more than 10 crore, the supplier will still continue to collect TCS in his invoices.

Hence if a buyer doesn’t have more than 10Cr turnover the seller would be collecting TCS and if the buyer has more than 10 Cr turnover, the buyer would be charging TDS. Thereby covering all sellers and buyers under TCS and TDS itself. Now with this process, the government would be aware of the tax deductors and the tax credits of buyers and sellers thereby expanding the scope for bringing such taxpayers into tax net.

What should a buyer/seller do if the customer / vendor is a specified person:

If the buyer/seller meets the two conditions:

  • Not filed Income Tax returns for two preceeding financial years and
  • TDS/TCS credits of such person is >50K each year

Then such person is a specified person and TDS /TCS shall be deducted /collected at a higher rate of 5%

This is also a part of the initiative to make the non-compliant dealers compliant with Income Tax Laws.

Hence this TDS provision though may not be a welcoming provision in the industry as it involves a lot of change in the process and system amidst all the pandemic and shortage of manpower, in a long run it may help the government identify the transactions in a transparent way. On the revenue part of the government, it shall be a beneficial one as they receive upfront tax of every transaction at the time of transaction and does not have to wait till they file returns.

It may be a beneficial provision for the government 😉

Author Bio

Qualification: CA in Practice
Company: Paul & Aravind LLP
Location: Bengaluru, Karnataka, India
Member Since: 15 Dec 2020 | Total Posts: 5
I am a Chartered Accountant by profession. I have a total of 6+ years of work experience, which is 3 years of experience in employment with a big 4 audit firm (during GST implementation phase) and 3 + years of experience in practise. View Full Profile

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