Understanding of Provisions of Section 194Q of Income Tax Act, 1961- by CA Bhavesh Jindal and Binny Grover

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Finance Act 2021 appeared to be a walk in the park but turned out to be an uphill battle when it was read between the lines.

The Finance Act introduced various new provisions for the taxpayers. Number of total sections for tax deducted at source was increased from 36 to 38 with the insertion of 2 new sections- Section 194P (deduction of tax in case of specified senior citizens) and Section 194Q (deduction of tax on payment of certain sum for purchase of goods).

Recently, in order to encompass almost all types of transactions under the purview of taxman, changes are brought in various TDS/TCS provisions.

Section 194Q, a convoluted principium is explained in detail in this article

INTRODUCTION

The newly incorporated provisions of section 194Q shall be applicable from 01^st July, 2021. Last year, government introduced TCS provision under section 206C (1H), wherein a seller was required to collect TCS on receipt of more than Rs. 50 Lakhs in a year, in respect of sale of goods. (To learn more about provisions of section 206C(1H), click here)

However, it provided a threshold to exclude the sellers whose total sales, gross receipts or turnover, did not exceed rupees ten crores in the immediately preceding financial year. More or less, the move of the government here was again to cover maximum percentage of registered taxpayers. But, eventually the provisions yet gave an escape to the sellers having sales below a particular threshold. In order to overcome this to some extent, a new section is inserted “Section 194Q: TDS on purchase of goods exceeding Rs 50 Lakhs”. 

APPLICABILITY OF THE SECTION:

The provisions contained in section 194Q are in sync with those contained in section 206C (1H). As per this section, 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 percent of such sum exceeding fifty lakh rupees as income-tax.

DEFINITION OF BUYER:

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.

Therefore, in simple words section has three limbs which needs to simultaneously be satisfied in order to attract the provisions of section 194Q, as under:

1. Goods have been purchased from a resident, and
2. Amount to be paid exceeds Rs. 50 Lakhs in a financial year, and
3. Total sales/gross receipts or turnover in the preceding financial year exceeds Rs. 10 Crores.

NON-APPLICABILITY:

This provision shall section shall not apply to a transaction on which––

(a) tax is deductible (TDS) under any of the provisions of this Act; or

(b) tax is collectible under the provisions of section 206C, except 206C(1H) 

 

FREQUENTLY ASKED QUESTIONS (FAQs)                

Q1: Where a transaction is covered by both the provisions i.e. (TCS under sec 206C(IH) and TDS under sec 194Q), who shall be liable for deduction/collection of tax?

 

A1: The answer to the above question can be inferred from the provisions of the Section which are stated below:

SEC 206C (1H):

 Second proviso to Sec 206C(1H) provides that if the buyer is liable to deduct tax under any other provision on the goods purchased by him from the seller and has deducted such amount, no tax shall be collected on the same transaction.

SEC 194Q

As per Section 194Q(5)(b), no tax is required to be deducted by a person under this provision if tax is deductible under any other provision or tax is collectable under section 206C [other than a transaction on which tax is collectable under Section 206C(1H)].

Thus, it can be concluded from the above-mentioned provisions that though section 206C(1H) excludes a transaction on which tax is actually deducted under any other provision, but section 194Q does not create a similar exception for a transaction on which tax is collectible under Section 206C(1H).

Therefore, the buyer shall have the primary and foremost obligation to deduct the tax and no tax shall be collected on such transaction under section 206C(1H). However, if the buyer makes a default, the liability to collect the tax gets shifted to the seller.

 

 

 

 

However, vide Circular No. 13/2021 dated 30-06-2021 (click here to view the circular), CBDT has further clarified that if, for any reason, TCS has been collected by seller u/s 206C(1H), before the buyer could deduct TDS u/s 194Q, then buyer will not be required to deduct TDS on that transaction. Implying, no disallowance u/s 40(a)(ia) can be made by the department in such cases.

Q2: Whether TDS is to be deducted on the total invoice value including the GST?

A2: The same issue was raised while dealing with provisions of Sec 206C (1H), in which the CBDT vide Circular No. 17, dated 29-09-2020 (click here to view the circular), clarified that since the collection is made with reference to receipt of the amount of sale consideration, no adjustment on account of indirect taxes including GST is required to be made for the collection of tax under this provision. Thus, TCS was required to be collected on GST portion as well.

Further, vide CBDT Circular No. 23/2017, dated 19-7-2017 (click here to view the circular), it was 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.

Accordingly, vide Circular No. 13/2021 dated 30-06-2021, CBDT has clarified that where TDS is deducted at the time of credit (booking of purchases), then TDS shall be deducted only on the basic amount excluding GST. However, if the TDS is deducted at the time of payment and not at the time of credit, TDS shall be deducted on whole amount including GST.

Q3: Whether any adjustments in respect of discount given or purchase return will have to be made for the purpose of deduction of tax?

A3: Vide Circular No. 13/2021 dated 30-06-2021, CBDT has clarified that in case in respect of purchase return, money is refunded, then tax deducted may be adjusted against future purchases from same seller. However, if in respect of purchase return, goods are replaced, no adjustment is required to be made.

Q4: What shall be considered as goods for this section?

A4: The section does not provide the definition of goods to be expounded for this. The term has also not been defined in the Income Tax Act. Thus, the definition provided under Sales of Goods Act, 1930 and Central Goods and Service Tax shall be thought-through for this section.

Also, CBDT clarified vide Circular 13/2021 dated 30-06-2021, that provisions of Section 194Q shall not be applicable to transactions in securities and commodities traded through recognised stock exchange, transaction in electricity, renewable energy and energy saving certificates traded through power exchanges.

Q5: Whether this section is applicable on transactions with non-residents as well?

A5: The section undoubtedly specifies that the buyer is responsible for paying any sum to any resident for purchase of any goods. The obligation rises only in the case of any payments made/ to be made, to a resident for purchase of goods. Thus, it keeps the non-residents out of its preview. However, the TDS under Section 195 may be required in respect of such transaction.

In case, the buyer is a non-resident, the provisions of section 194Q shall not apply to a non-resident whose purchase of goods from seller resident in India is not effectively connected with Permanent Establishment of such non-resident in India.

Q6: Will it increase the liability on buyers after the introduction of this section?

A6: No, it won’t increase the liability on the buyers after the introduction of this section, as the comparable amount may be reduced from the advance tax payable by the taxpayer.

Q7: What happens in case of provision of section 194Q are not compiled with?

A7: If the buyer fails to deduct TDS as applicable, provisions of section 40a(ia) are going to be attracted, which will entail a disallowance of 30% of the purchases made, means thereby that even purchase supported by bills or GR’s can be disallowed to the extent of 30% of the transaction value if TDS is not deducted. Also, assessee shall be treated to be an assessee in default and consequential provisions shall follow.

Q8: How to ensure compliance of section 194Q?

A8: Unlike the complexity involved in collection of TCS on receipt against sales consideration, levy and deduction of tax under section 194Q is still manageable. Whereas, TCS was required to be collected only when receipts in respect of sale of goods exceeded Rs. 50 lakhs in a financial year. TDS on purchases of goods is liable to be deducted that the time of credit or payment, whichever is earlier. Thus, the instance when a purchase voucher is entered in the books of accounts, liability to deduct TDS shall arise.

Moreover, as exemption has been provided on collection of TCS in case TDS is deducted on such transaction. It makes sense, that buyer deducts TDS and makes necessary compliances.

 

Q9: How will threshold of section 194Q be determined?

A9: For the purpose of calculation of threshold and applicability of section 194Q, it is important that either payment or purchases made from a seller exceeds Rs. 50 Lakhs in a financial year.

However, since the section is applicable w.e.f. 01-07-2021, thus, even if payment or purchases have exceeded Rs. 50 Lakhs prior to 01-07-2021, no TDS will be deducted on such purchases/payments. TDS shall be deducted on entire amount of purchases or payments made after 01-07-2021 is such a scenario as threshold of Rs. 50 Lakhs has to be checked for entire year.

Please refer the following illustration to understand the proposition:

Particulars	Amount (Rs.)	Amount (Rs.)	Amount (Rs.)
Purchases made b/w 1st April till 30th June	70,00,000/-	45,00,000/-	45,00,000/-
Payment made b/w 1st April till 30th June	70,00,000/-	55,00,000/-	45,00,000/-
Purchases on or after 1st July	10,00,000/-	5,00,000/-	20,00,000/-
Payment on or after 1st July	10,00,000/-	5,00,000/-	20,00,000/-
TDS to be deducted	1,000/- (10,00,000 X 0.1%)	500/- (5,00,000 X 0.1%	1,500/- ( Rs. 45,00,000 + Rs. 20,00,000 – Rs. 50,00,000) X 0.1%

For more details please feel free to contact us.

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