FAQ ON TDS & TCS ON PURCHASE/SALE OF GOODS & HIGHER TDS/TCS RATES IN CASE OF NON-FILERS OF ITR
(Section 194Q, 206C, 206AB & 206CCA of the Income Tax Act, 1961)
This FAQ covers provisions relating to (A) TDS on purchase of goods (194Q) and a comparison with TCS on sale of goods (206C(1H)) and (B) higher rate of TDS/TCS in case of non-filers of ITR (206AB & 206CCA) with the following questions/points:
1. Who is the person liable to deduct tax U/s 194Q?
2. If purchases exceed Rs.50 lakhs should TDS be made on the entire sum on only on the amount in excess of Rs.50 lakhs?
3. How to compute aggregate value of Rs.50 lakhs for FY 2021-22?
4. Should GST portion of the invoice be considered to arrive at the Rs.50 lakhs threshold?
5. How to compute the threshold of Rs.10 crores for Section 194Q?
6. Will purchases made from outside India attract Section 194Q?
7. Will purchase of capital goods attract TDS U/s 194Q?
8. In a transaction for purchase and sale of goods how to decide whether provisions of TDS or TCS would apply?
9. Would purchase of software products attract TDS U/s 194Q?
10. When is the tax deductor/collector required to deduct/collect tax at a higher rate as per Section 206AB & 206CCA?
11. What are the documentation/process involved in relation to compliance of TDS/TCS U/s 206AB & 206CCA?
12. What is the TDS/TCS rate U/s 194Q & 206C(1H) if the vendor/ customer does not have a PAN and also not filed ITR for 2 PYs?
Q1. who is the person liable to deduct tax u/s 194Q?
A1. W.e.f 1st July 2021, a Buyer is required to deduct tax U/s 194Q from a Seller @ 0.10% if the following two conditions are cumulatively satisfied:
(a) the Buyer’s total sales, gross receipts or turnover from business exceeds Rs.10 Crores during the immediately preceding FY AND;
(b) the aggregate value of the purchase exceeds Rs.50 lakhs in a year.
Q2. if purchases exceed rs.50 lakhs should TDS be made on the entire sum on only on the amount in excess of rs.50 lakhs?
A2. TDS U/s 194Q should be made only on the amount in excess of Rs.50 lakhs. For example, Mr.R purchases goods for Rs.90 lakhs from Mr.S for which the former should deduct tax @ 0.1% on Rs.40 lakhs.
Q3. how to compute aggregate value of rs.50 lakhs for FY 2021-22?
A3. In order to arrive at the threshold of Rs.50 lakhs U/s 194Q for FY 2021-22, the purchases made during 1st April 2021 to 30th June 2021 should also be considered. However, TDS should be made only on the value of purchases made from 1st July 2021. In the context of Section 206C(1H), the CBDT (Circular No.17 of 2020 dt.29th September 2020) clarified that receipts for the entire FY should be considered to arrive at the threshold of Rs.50 lakhs. Analogy can be drawn from the said Circular for Section 194Q also.
For example, during 1st April 2021 to 30th June 2021, Mr.T purchased goods for Rs.70 lakhs from Mr.U. During July’21, Mr.T made additional purchase of Rs.45 lakhs from Mr.U. Here, TDS should be made U/s 194Q on the entire Rs.45 lakhs since the purchases crossed the threshold limit in the year.
Let us continue with the above example where the entire payment of Rs.115 lakhs is made in July’21. Should TDS be made on the payment of Rs.115 lakhs or on purchase of Rs.45 lakhs during July’21? In the author’s view, since TDS U/s 194Q is at the time of credit or payment, whichever is earlier, TDS should be made only on Rs.45 lakhs.
Q4. should gst portion of the invoice be considered to arrive at the rs.50 lakhs threshold?
A4. Section 194Q(1) provides for TDS if payment for purchase value of any goods exceeds Rs.50 lakhs. Should the said ‘value’, which is not defined in the Section, include GST or not? For example, ‘D & Co.’ purchased goods from ‘E & Co.’ for Rs.45 lakhs excluding GST of Rs.8.10 lakhs. Should ‘D & Co.’ consider Rs.45 lakhs or Rs.53.10 lakhs for TDS U/s 194Q?
The CBDT vide Circular No.23/2017, dt.19-7-2017 clarified that TDS is not required to be made on the GST component if indicated separately in the invoice. However, the said clarification is only in relation to ‘GST on services’ and not ‘GST on goods’ (at the time of issuance of the Circular, there was no TDS on goods). Although the intention of the Circular is to avoid ‘tax on tax’, since there is no specific clarification with regard to goods, it is advisable to consider the GST component on purchase of goods to arrive at the TDS liability to avoid disputes. Hence, the GST portion may be considered to arrive at the Rs.50 lakhs threshold. In the context of Section 206C(1H), vide Circular No.17 of 2020 dt.29th September 2020, the CBDT clarified that GST component should be included for TCS.
In the example above-referred, the value of purchase exceeded Rs.50 lakhs after including the GST component and hence ‘D & Co.’ is liable for TDS U/s 194Q on Rs.3.10 lakhs (Rs.45L + Rs.8.1L – Rs.50L).
Q5. how to compute the threshold of rs.10 crores for section 194Q?
A5. TDS U/s 194Q should be made by a buyer whose ‘total sales, gross receipts or turnover’ in the PY exceeds Rs.10 crores. The term ‘total sales, gross receipts or turnover’ is not defined in the Section and hence the same approach to arrive at ‘total sales, turnover or gross receipts’ for the purpose of Section 44AB may be applied even for Section 194Q.
Q6. will purchases made from outside India attract section 194Q?
A6. NO, TDS U/s 194Q is applicable for purchases made only from residents. Purchase of goods even from an Indian branch of a foreign company would not attract TDS in view of this.
Q7. will purchase of capital goods attract tds u/s 194Q?
A7. Yes, purchase of any goods would attract TDS U/s 194Q, subject to fulfilment of other stipulated conditions.
Q8. in a transaction for purchase and sale of goods how to decide whether provisions of tds or tcs would apply?
A8. In a transaction for purchase and sale of goods, it is the buyer’s responsibility to comply with TDS, subject to fulfilment of threshold limits, for the following reasons.
As per the provisions of Section 194Q(5)(b), TDS is not required to be made IF tax is collectible U/s 206C (other than TCS on sale of goods U/s 206C(1H)).
As per the second proviso to Section 206C(1H), TCS is not required to be made IF the buyer is liable to TDS and has also deducted the same.
Apparently, both the above provisions appear to contradict each other but they do not. They are mutually exclusive. Section 194Q(5)(b) provides that TDS shall not apply if the provisions of TCS are applicable (other than a transaction on which tax is collectable under Section 206C(1H) i.e. TCS on sales). On the other hand, the second proviso to Section 206C(1H), simply provides that TCS shall not apply if TDS is made by the buyer. Hence, Section 194Q overrides Section 206C(1H) in case of purchase/sale of goods. Let us understand this with the following examples:
|Buyer||PY Turnover – Buyer||Seller||PY Turnover – Seller||Purchase/ Sale value||TDS (or) TCS||Remarks – Refer Note No.|
|B & Co.||Rs.22 Cr.||A & Co.||Rs.14 Cr.||Rs.75 Lakhs||TDS||I|
|B & Co.||Rs.30 Cr.||A & Co.||Rs.6 Cr.||Rs.75 Lakhs||TDS||II|
|B & Co.||Rs.3 Cr.||A & Co.||Rs.14 Cr.||Rs.75 Lakhs||TCS||III|
|B & Co.||Rs.3 Cr.||A & Co.||Rs.6 Cr.||Rs.75 Lakhs||–||IV|
I. If TDS is not made by ‘B & Co.’ for any reason, ‘A & Co.’ will be liable to collect TCS.
II. Even if TDS is not made by ‘B & Co.’ ‘A & Co.’ will NOT be liable to collect TCS (since turnover of PY is less than specified threshold).
III. The seller ‘A & Co.’ should find out from ‘B & Co.’ with regard to whether he would deduct tax or not – what a simple law!!!).
IV. Neither ‘A & Co.’ is required to collect tax U/s 206C(1H) nor ‘B & Co.’ is required to deduct tax U/s 194Q since the PY turnover of both is less than Rs.10 Crores.
In effect, a Seller would be required to Collect tax at source U/s 206C(1H) ONLY in a situation where the Buyer has not deducted tax on the purchases made (either because his turnover of the PY below the prescribed limit or for any other reason). In all other cases, only the Buyer of goods is required to deduct tax at source U/s 194Q.
Q9. would purchase of software products attract tds u/s 194Q?
A9. The Courts have, in different contexts, held Computer Software to be goods. Hence, would the provisions of Section 194Q apply to purchase of software products from residents? There are two possible views.
Computer Software can be purchased within India: (a) directly from a developer or (b) from resellers (persons covered by Notification No.21/2012 dt.13-06-2012). In case of purchase of software from a resident software developer directly, the buyer of software will be required to comply with TDS U/s 194J and therefore Section 194Q does not apply. In case of purchase of software from resellers, covered under Notification No.21/2012 dt.13-06-2012), TDS shall not be made U/s 194J, subject to prescribed conditions.
For example, Z Co. Ltd. develops and sells software through its reseller Y Co. Ltd., which in-turn sells it to X Co. Ltd. Here, Y Co. Ltd. would deduct tax U/s 194J however X Co. Ltd. would NOT (following Notification No.21/2012).
In the above example, is X Co. Ltd. liable to deduct tax U/s 194Q? It is to be noted that Section 194Q(5)(a) provides that TDS shall not be made if tax is deductible under any of the provisions of the IT Act. In the above example, X Co. Ltd. would not deduct tax U/s 194J by virtue of Notification No.21/2012 dt.13-06-2012). Hence, it is possible to view that X Co. Ltd. will be required to deduct tax U/s 194Q since tax is not deductible ‘under any of the provisions’ of the Act.
However, another stronger view is possible. TDS on ‘computer software’ is covered U/s 194J as ‘Royalty’ (Explanation 2 to Section 9(1)(vi)). When the software is treated as ‘Royalty’ for the purpose of TDS U/s 194J at the first point of purchase, the very same software cannot be treated as ‘goods’ for the purpose of Section 194Q at a subsequent point of purchase.
It is to be noted that software services would be aptly covered under Section 194J as professional/technical services and not U/s 194Q. It is also to be noted that software is treated as ‘service’ under the GST Law however would not impact its treatment under the Income Tax Act, 1961.
Q10. when is the tax deductor/collector required to deduct/collect tax at a higher rate?
A10. With effect from 1st July 2021, tax is required to be deducted/collected at a higher rate if the (a) vendor/customer has not filed ITR for 2 FYs prior to the year in which TDS/TCS is made for which time limit of filing ITR U/s 139(1) has expired AND (b) aggregate of TDS/TCS of the vendor for each of the two FYs is Rs.50,000 or more (referred to as ‘specified person’). Both the above conditions should be cumulatively satisfied for tax to be deducted/ collected at a higher rate for Section 206AB & 206CCA. This requirement can be better understood from the following examples (on the assumption that the transaction happens in July’21):
|Vendor/Service provider||ITR filed for FY 2018-19 & 2019-20||TDS/TCS for FY 2018-19 & 2019-20 is Rs.50,000 or more||TDS Rate|
|A & Co.||Y||Y||Regular|
|B & Co.||N||N||Regular|
|C & Co.||N||Y||Higher|
|D & Co.||Y||N||Regular|
In the above example, it would be challenging/time consuming to ascertain if the seller has filed ITR for the past 2 years if the transaction happens during October’21 instead of July’21. The due date of filing the ITR of the vendor/ service provider for FY 2020-21 should be ascertained after considering if he is liable for tax audit, he is a partner in a firm which is subject to tax audit etc.
The person liable to Deduct tax at source is required to verify if the vendor has filed his ITR for the past two FYs. If not, the tax should be deducted at higher of the following rates* instead of the regular rates:
(i) at twice the rate specified in the relevant provision of the Act; or
(ii) at twice the rate or rates in force (reduced through notifications); or
(iii) at the rate of 5%.
* NOT applicable to TDS required to be made U/s 192 (Salary), 192A (PF withdrawal), 194B (winning from games), 194BB (winning from horse race), 194LBC (income from securitisation trust) or 194N (cash payments).
The person liable to Collect tax at source is required to verify if the customer has filed his ITR for the past two FYs. If not, the tax should be collected at higher of the following rates instead of the regular rates:
(i) at twice the rate specified in the relevant provision of the Act; or
(ii) at the rate of 5%.
Q11. what are the documentation/process involved in relation to compliance of tds/tcs u/s 206AB & 206CCA?
A11. The tax deductor/collector can check whether or not a vendor/ customer is a ‘specified person’ for Section 206AB & 206CCA from the portal https://report.insight.gov.in/reporting-webapp/portal/homePage. If the verification is done through this portal, no further documentation/ declaration may be required from the vendor/customer.
The ITR verification process should be done for all the vendors/customers in cases where the provisions of TDS/TCS are applicable and for every year, for all practical purposes. In case of regular vendors, where the tax deduction happens throughout the year, the above check should be done twice; first at the beginning of the year and second after the vendor’s due date for filing of the ITR has crossed (could be July or October or November!).
Q12. what is the tds/tcs rate u/s 194Q & 206C(1H) if the vendor/ customer does not have a pan and also not filed itr for 2 PYs?
A12. For the purpose of Section 194Q, if a seller does not have a PAN and also not filed ITR for 2 PYs, TDS should be made by the buyer at the rates prescribed U/s 206AA or 206AB, whichever is higher i.e. @ 5%.
For the purpose of Section 206C(1H), if a buyer does not have a PAN and also not filed ITR for 2 PYs, TCS should be made at the rates prescribed U/s 206CC or 206CCA, whichever is higher i.e. @ 5%.
Section 194Q, 206C, 206AB and 206CCA are harsh and burdensome provisions which would cause a huge inconvenience to the taxpayers in the administration of tax deduction/collection. The issue is not about deducting/collecting and paying the taxes. It is about the documentation and the voluminous verification/enquiries to be made in the process of such tax deduction/collection. Would the legislators ever understand the pain of the entrepreneurs?
Note: This FAQ has prepared by the author for the sake of easy understanding and not by statutory authorities.