TDS under 194Q – Clarifications on FAQ

Clarifications on TDS under Section 194Q of Income Tax Act, 1961

As per Section 194Q of Income Tax Act, 1961, buyer

a) purchasing any goods in value exceeding Rs. 50,00,000/– in a financial year  &

b) having his turnover from business or profession in excess of Rs. 10 crores, in immediately preceding financial  year,

c) from a resident seller,

d) is liable to deduct TDS u/s 194Q @ 0.1%

e) of such purchase consideration in excess of Rs 50 lakhs,

f) on or after 1.7.2021.

TDS liability u/s 194Q will arise on all purchases booked or paid on or after 1.7 2021.

However this was filled with lot of doubts by industry. Today CBDT through Circular 13/2021 has removed the doubt on many aspects :

1.  Threshold limit of Rs. 50 lakhs is to be computed from 01-04-2021 – Hence it is not to be computed for the previous FY as there were doubts on this.

2. TDS will be only on the value of goods and not on GST : Where tax is required to be 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 on the amount credited without including such GST. – This is a welcome clarification in line with the stand of the department on similar issue in the past, where also no TDS was payable on the GST amount.

3. For TDS on payment basis TDS is deductible on Gross amount paid – Where tax is deducted on payment basis because the payment is earlier than the credit, the tax would be deducted on the whole amount; – There were some confusions that tds on be deductible after adjustments of GST. However all these doubts have been cast aside with this clarification. This may lead to blockage of Working Capital in some industries.

4. TDS on credit note amounts can be adjusted only if the amount is refunded – In case of purchase return, if money is refunded by the seller then the tax deducted may be adjusted against the next purchase against the same seller. However, if seller replaced the goods, no adjustment is required – Though this is a welcome clarification, this may also lead to complicated reconciliations in industries where returns are quite common.

5. No TDS for NR buyers without PE in India – A non-resident, whose purchase of goods is not effectively connected with the permanent establishment in India, is not required to deduct tax at source. Therefore if it can be established that the place of effective management ( PoeM) is India and hence if the NR is treated to have a PE in India, it will be liable to deduct TDS under section 194Q. Similarly if the NR fulfills any  of the other PE tests. However if it has no effective connection with PE in India, it is relieved of any such liability to withhold tax.

6. No TDS from a Seller having exempt Income – No tax is required to be deducted where seller is a person who is exempt from income tax under the Income-tax Act or any other Act passed by the parliament. Similarly, no tax is required to be collected under Section 206C(1H), where buyer is a person who is exempt from income tax under the Income-tax Act or any other Act passed by the parliament

7. TDS to be deducted on Advances made – Tax is required to be deducted on advance payment made by the buyer to the seller – Hence all advances made on or after 1.7.2021 will be liable to TDS. In case the advances are refunded later on due to non delivery of goods, the same cannot be adjusted in our opinion unless they have any other invoice from the same seller.

8. TDS under section 194O to have precedence over 194Q – If a transaction is covered both within the purview of Section 194-O as well as Section 194Q, tax is required to be deducted under section 194-O and not under section 194Q.

9. TDS under section 194O to have precedence over 206(1H)-If a transaction is covered both within the purview of section 194-O as well as Section 206C(1H), tax is required to be deducted under section 194-O.

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The above is on the basis of the understanding of the author for knowledge sharing. It has no legal value. Please do validate the same for a legal professional. The author can be reached at [email protected]