Sections 194Q, 206AB and 206CCA of Income Tax Act, 1961

Second Quarter of FY 2021-22 has started today and industry is still facing lack of understanding on new sections of 194Q, 206AB and 206CCA

Finance Act 2021 has inserted 3 new sections applicable from 1^st July 2021

1. Section 194Q- Tax withholding on purchase of goods

2. Section 206AB and Section 206CCA – Special provision for TDS/TCSfor non-filers of income-tax return

Section 194Q vis-à-vis Section 206C(1H)

1: Pictorial presentation

*Eligible means the customer is not required to deduct TDS i.e., having turnover of <= Rs. 10 Cr.

2: Background of Section 194Q and Section 206C(1H)

Before introduction of these two sections i.e., till 30^th September 2020, Income tax had no provision for TDS/TCS on supply in “Goods” except section 206C for collecting TCS on special goods only.

Various industries are experiencing a dilemma as to how to apply new section 194Q in the light of TCS provisions of Section 206C(1H) earlier introduced by Finance Act 2020.

As a tax consultant and accountant, considering your ERP data, we can deduce following basic steps to determine the interplay between these to check on which transactions you are liable to deduct/collect tax.

3: Analysis of Section 194Q vis-à-vis Section 206C(1H)

Basis	194Q applies for all your purchase of goods/payments as per ERP i.e., As a Buyer you are liable:	206C(1H) applies for all your Sales of goods/receipts as per ERP i.e., As a seller you are liable:
1. Value of consideration	Only if aggregate purchase is for value greater than Rs. 50 Lakhs	Only if aggregate sale is for value greater than Rs. 50 Lakhs
2. Other sections	If Tax is liable to be deducted by you/collected by other party under other sections except Section 206C(1H), then not liable to deduct i.e., Section 194Q supersedes sub-section (1H) of Section 206C ‘only’ and 194-O supersedes Section 194Q.	If Tax is already ‘actually’ deducted by Buyer, then you are not liable to collect TCS.
3. Turnover check	Only if your own “Business” turnover in preceding year exceeds INR 10 Crores, then only deduct TDS otherwise, if seller’s turnover exceeds INR 10 Crores, be ready for your TCS to be collected.	If your own turnover in preceding year exceeds INR 10 Crores, then only collect TCS
4. Residency check	Check if seller is a resident	Check if buyer is a resident
5. Declaration and Confirmation	Intimate the seller/obtain seller’s declaration that they won’t be collecting TCS by a declaration letter given in Annexure 1 at last of this document	Confirm that buyer isn’t deducting TDS by a confirmation letter given in Annexure 2 at last of this document
6. GST component	No TDS is deducted on GST component, if identifiable separately. (Circular 23/2017 and Circular 13/2021)	TCS is advised to be collected on GST component too (Circular 17/2020)
7. Applicable date	1st July 2021	1st October 2020
8. Rate of Tax (PAN is furnished)	@0.1 % on excess amount above Rs 50 Lakhs.	@0.1 % on excess amount above Rs 50 Lakhs.
9. Rate of Tax (PAN is not furnished)	@5 % on excess amount above Rs 50 Lakhs.	@1 % on excess amount above Rs 50 Lakhs.
10. Form	Deduct TDS and file Form 26Q	Collect TCS and file Form 27EQ
11. Non – Compliance impacts	30% of value of purchases are disallowed	Late filing fees- u/s 234E, Interest u/s 206(7) Penalty u/s 271H– from Rs. 10k to 1 Lakh, prosecution u/s 276BB

4: Practical issues and their legal position

a. What all is included in “Goods”?

• • Since Income Tax Act, 1961 doesn’t define the word “Goods”, the meaning can be derived from Section 2(7) of Sale of Goods Act,1930 as “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.”
  • Thus, it includes capital goods like machinery, motor vehicle, oil, software and excludes securities, commodities, electricity, property, flats, land held as stock in trade by a real estate builder, lottery tickets.

b. How to check the threshold of Rs. 50 lakhs and on which amount should TDS be deducted under section 194Q?

c. What to do if debit notes are issued i.e., purchase returns by the buyer for purchases on which he has already deducted TDS?

• • If TDS is already deducted but the bills and payments are returned & refunded, then adjust this TDS in next purchase with the same party.

d. What is the position of TDS component in case of purchase of capital goods like Machineries/ Furniture/Fixtures/Intangible assets? Will it be added in the block of assets?

• • Yes, this TDS component with be added to the WDV of Assets.

5: Bare Text of Sections

Section 194Q

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.]

Section 206C(1H)

206C(1H) – 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.

Sections 206AB and 206CCA

1: Background of Section 206AB and Section 206CCA

Earlier, Section 206AA of the Act provides for higher rate of TDS for non-furnishing of PAN. Similarly section 206CC of the Act provides for higher rate of TCS for non-furnishing of PAN. It is seen that while these provisions have served their purpose in ensuring obtaining and furnishing of PAN by various person, there is need to have similar provisions to ensure filing of return of income by those person who have suffered a reasonable amount of TDS/TCS.

2: Analysis of Section 206AB and Section 206CCA

Basis	As a Buyer, you are liable to deduct tax monthly at Higher Rates for non-filers of ITRs by deductee,	As a Seller, you are liable to collect tax monthly at Higher Rates for non-filers of ITRs by collectee
1. Sums	It is applicable on all sections of TDS except – Salary Premature withdrawal of PF Lottery/horse race winnings Income from securitisation trust Cash withdrawals	It is applicable on whole section 206C
2. Rates	Higher of 2X of Specified Rate or Rates in force or 5%	Higher of 2X of Rates specified or 5%
3. Specified Deductee / Collectee *	1. All Persons who have not filed ITRs for preceding 2 FY’s and 2. Their due dates have expired and 3. TDS + TCS from all sources exceeds Rs. 50,000 for each such preceding FY’s	1. All Persons who have not filed ITRs for preceding 2 FY’s and 2. Their due dates have expired and 3. TDS + TCS from all sources exceeds Rs. 50,000 for each such preceding FY’s
*Facilty under Circular 11/2021 is provided to identify specified deductee/collectee. Also, refer below illustration for understanding the meaning of such specified person.

3: Illustration on how to determine the default in filing ITRs

XYZ Ltd. receives contractual services billing Rs 10 Lakhs from Mr. Mittal (Individual) such that TDS is liable to be deducted u/s 194C for Q2 of FY 21-22

4: Bare Text of Sections

206AB (1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be deducted at source under the provisions of Chapter XVIIB, other than section 192, 192A, 194B, 194BB, 194LBC or 194N on any sum or income or amount paid, or payable or credited, by a person (hereafter referred to as deductee) to a specified person, the tax shall be deducted at the higher of the following rates, namely:—

(i) at twice the rate specified in the relevant provision of the Act; or

(ii) at twice the rate or rates in force; or

(iii) at the rate of five per cent.

(2) If the provisions of section 206AA is applicable to a specified person, in addition to the provision of this section, the tax shall be deducted at higher of the two rates provided in this section and in section 206AA.

(3) For the purposes of this section “specified person” means a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be deducted, for which the time limit of filing return of income under sub-section (1) of section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of these two previous years:

Provided that the specified person shall not include a non-resident who does not have a permanent establishment in India.

Explanation.—For the purposes of this sub-section, the expression “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.]

206CCA (1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be collected at source under the provisions of Chapter XVII-BB, on any sum or amount received by a person (hereafter referred to as collectee) from a specified person, the tax shall be collected at the higher of the following two rates, namely:—

(i) at twice the rate specified in the relevant provision of the Act; or

(ii) at the rate of five per cent.

(2) If the provisions of section 206CC is applicable to a specified person, in addition to the provisions of this section, the tax shall be collected at higher of the two rates provided in this section and in section 206CC.

(3) For the purposes of this section “specified person” means a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be collected, for which the time limit of filing return of income under sub-section (1) of section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of these two previous years:

Provided that the specified person shall not include a non-resident who does not have a permanent establishment in India.

Explanation.—For the purposes of this sub-section, the expression “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.]

References and credits

1. Circulars

a. TDS not deductible on GST Component: CBDT

b. TDS under Section 194O- CBDT issues Guidelines

c. Compliance Check functionality for Sections 206AB & 206CCA

d. Guidelines under section 194Q of Income-tax Act, 1961

2. Other Sources

a. https://legislative.gov.in/sites/default/files/A1930-3_0.pdf

b. https://taxguru.in/income-tax/declaration-format-section-194q-206ab-206cca.html

– Annexures

Annexure : 1 Seller’s Declaration

(On the Letterhead of the Buyer)

To,

(Supplier’s/Seller Name & Address)

Sub: Regarding change in compliance due to insertion of new sections under Income Tax Act. Deduction of TDS u/s 194Q and non-applicability of TCS u/s 206C (1H) of Income Tax Act.

Dear Sir / Madam,

We, (name of buyer) , having PAN (PAN of buyer) hereby inform you that our total sales/gross receipts/turnover from Business during FY 2020-21 has been more than Rs.10 Crore. Therefore, provisions of Section 194Q inserted in the Income Tax Act vide Finance Act 2021 with effect from 01.07.2021 are applicable to our company. Hence, we shall be deducting tax at source at per provisions of above section from purchase consideration paid/ credited on or after 01.07.2021 to you against supplies made by you at the rate 0.1 percent of purchase consideration paid / credited exceeding rupees 50 lacs during the current financial year.

Since, we are liable to deduct tax at source under section 194Q of the Act, you may ensure not to take any action to collect tax at source under section 206C (1H) of the Act w.e.f. 01.07.2021, in case provisions of section are applicable to you considering your amount of turnover and our purchases being of more than rupees 50 lacs.

You are also requested to intimate your Permanent Account Number. In case you fail to provide your PAN, tax will be deducted at a higher rate in terms of Section 206AA of the Act.

Further, you are also required to confirm that in your case amount of TDS/TCS was Rs.50,000/- or more in previous years relevant to Assessment Years 2019-20 and 2020-21 and you have filed your returns of income for these assessment years according to section 139(1), otherwise tax is required to be deducted at a higher rate in terms of Section 206AB of the Act.

Further, as per Rule 114AAA, higher of TDS/TCS will be applicable in case PAN and AADHAR is not linked. This is applicable only in case of Individual.

You may send to us your declaration in the enclosed draft on or before 25.06.2021 to enable us to take note of same and modify our accounting software accordingly. In case we do not receive your declaration by the above date, we will modify our software to deduct tax at the higher rate and it would be difficult for us to take corrective action to reduce the rate during the current financial year.

Further, we confirm that (name of buyer) has filed its Income Tax Return for the previous year 2018-19 & 2019-20. You may accordingly ensure that in case of applicability of Tax deduction u/s 194Q, TDS is deducted @ 0.1% on all purchases from us. The status of return of Income filed by (name of buyer) is as under: –

Assessment year	Acknowledgement No.	Filing Date
AY 2019-20
AY 2020-21

Important to note here, that any financial loss which (name of buyer) would incur, due to said non-compliance at your end, will have to be indemnified by you. We, therefore, look forward to your full cooperation in the process.

Thanks,

For (name of buyer)

Authorized Signatory

Then, on the below format vendor will confirm its details.

Annexure : 2 Buyer’s Confirmation

(On the letter head of the seller)

To,

(Buyer Name & Address)

Sub: Declaration / information for deduction of tax at source u/s 194Q of the Act.

Dear Sir,

This is with reference to your letter dated requiring our declaration / information in regard to deduction of tax at source u/s 194Q of the Act. The information is being provided hereunder:

1. Since your company is liable to deduct tax u/s 194Q of the Act, you may deduct the tax @0.1 % of sale consideration paid /credited by your company to us on the amount exceeding Rs.50 lacs during the current financial year. We also confirm that we will not take any action to collect tax at source under section 206C(1H) of the Act w.e.f. 01.07.2021.

2. Permanent Account Number of our company is (PAN of seller). Further, we have duly filed our returns of income for Assessment Years 2019-20 and 2020-21 as per the information given hereunder:

Assessment year	Acknowledgement No.	Filing Date
AY 2019-20
AY 2020-21

3. Our PAN and AADHAR is linked. This is applicable only in case of Individual.

Please take note of the above information and confirmation and deduct tax at the appropriate rate-taking cognizance of the above information.

Thanks,

For (Seller Name)

Authorized Signatory

4. How to check the limit of Rs. 50 lakhs under section 194Q?

Credits+/Payment-

Scenario	Purchases bills			Payments (Incl. Advance)			Exhausted Limits till 1st July 2021@	Whether 194Q triggered? **	TDS to be deducted on*
	Till 31st Mar, 21	From 1st Apr,21 to 30th Jun,21	1st Jul, 21 till 31st Mar, 22		From 1st Apr, 21 to 30th Jun, 21	1st Jul, 21 till 31st Mar, 22
1	60 Lakhs	–	–		(30) Lakhs	(30) Lakhs	30 Lakhs	Yes	–
2	–	60 Lakhs	–		–	–	50 Lakhs	Yes	–
3	–	–	–		–	(60) Lakhs	0	Yes	10 Lakhs
4	–	60 Lakhs	–		(30) Lakhs	(30) Lakhs	50 Lakhs	Yes	–
5	–	60 Lakhs	–		(30) Lakhs	(40) Lakhs	50 Lakhs	Yes	10 Lakhs
6	–	9 Lakhs	–		(30) Lakhs	(40) Lakhs	30 Lakhs	Yes	20 Lakhs
7	–	9 Lakhs	60 Lakhs		(30) Lakhs	(40) Lakhs	30 Lakhs	Yes	20 Lakhs#
8	–	30 Lakhs	40 Lakhs		(9) Lakhs	(60) Lakhs	30 Lakhs	Yes	20 Lakhs
9	20 Lakhs	30 Lakhs	10 Lakhs		(20) Lakhs	(20) Lakhs	–	No	–
10	20 Lakhs	30 Lakhs	25 Lakhs		(10) Lakhs	(60) Lakhs	30 Lakhs	Yes	5 Lakhs
11	20 Lakhs	30 Lakhs	25 Lakhs		(70) Lakhs	(60) Lakhs	50 Lakhs	Yes	60 Lakhs
@ The exhausted limits is higher of purchases/payment till 1 Jul, 21 up to Rs 50 Lakhs. * As per 194Q, TDS to be deducted on value of – Higher of 1. Purchase bills post 1st July,21 excluding already received in advance before 1st July,21______or 2. Payments after 1st July, 21 excluding billed already before 1st July,21______ Less: Rs 50 Lakhs Less exhausted limits **194Q is triggered when Purchase or Payments in FY 21-22 exceed Rs 50 Lakhs. # This is just an explanation of how formula above works – TDS is to be deducted on advance payments of Rs 1 Lakhs (70-69) and purchase bills of Rs 69 Lakhs less exemption of Rs 50 Lakhs i.e., Rs 20 Lakhs, and not just Rs 19 Lakhs (Rs69 Lakhs- Rs 50 Lakhs)

_____

Status of ITR of Mr. Mittal			TDS / TCS from Mr. Mittal to be deducted / collected by any person			Rates applicable	Remarks
FY 18-19	FY 19-20	FY 20-21	FY 18-19	FY 19-20	FY 20-21
Not Filed	Not Filed	Not expired date for ITR for individuals	40,000	80,000	Not expired date for ITR for individuals	1% (194C)	Since, Mr. Mittal has any TDS + TCS < 50,000 in single relevant year, thus, 206AB doesn’t apply
Not Filed	Not Filed		80,000	80,000		5% (206AB)	Since, defaulted in filing ITRs and any TDS + TCS >=50,000, thus 206AB applies for deductor (XYZ Ltd.) to deduct TDS and 206CCA applies for collector (Any person) to collect TCS of Mr. Mittal at higher rates
Not-Filed	Filed		Irrelevant	Irrelevant		1%(194C)	Since, filed for single year, thus not a continuous default.
Filed	Filed					1%(194C)	206AB not applies

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