Circular No. 13 of 2021
F. No. 370142/26/2021-TPL
Section 194Q has been inserted on the Income Tax Act, 1962 by the Finance Act of 2021 that will come into effect from the 1st of July 2021. Accordingly, any buyer who is responsible for paying any sum to any resident seller for the purchase of any goods of the value or aggregate of value exceeding fifty lakh rupees in any previous year, at the time of credit of such sum to the account of the seller or at the time of payment, whichever is earlier, is required to deduct an amount equal to 0.1 % of such sum exceeding fifty lakh rupees as income tax.
Who is a buyer?
The buyer is defined to be a person whose total sales or 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.
Guidelines issued by the Board:
Section 194Q(3) of the Income Tax Act, 1961 empowers Board with the approval of the Central Government to issue several guidelines to remove difficulties. Correspondingly, the following guidelines issued by the Board at some places have tried to remove difficulties in implementing the provisions of section 194-0 and sub-section (I H) of section 206C of the Act using power contained in sub-section (4) of section 194-0 of the Act and sub-section (II) of section 206C of the Act.
Applicability on transactions carries through various exchanges:
Difficulties involved here is, there are practical difficulties in implementing the provisions of Tax Deduction at Source CTDS) contained in section 194-Q of the Act in case of certain exchanges and clearing corporations.
In order to remove such difficulties, it is provided that the provisions of section 194Q of the Act shall not be applicable in relation to,-
i) transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation, including recognized stock exchanges or recognized clearing corporation located in International Financial Service Centre;
(ii) transactions in electricity, renewable energy certificates, and energy-saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC; and
For this purpose,-
(i) "recognized clearing corporation" shall have the meaning assigned to it in clause (i) of the Explanation to clause (23 EE) of section 10 of the Act;
(ii) "recognized stock exchange" shall have the meaning assigned to it in clause (ii) of the Explanation I to sub-section (5) of section 43 of the Act; and
(iii) "International Financial Services Centre" shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005.
Clarification on the calculation of threshold for FY 2021-22:
Since section 194Q of the Act would come into effect from 1st July 2021, it was requested to clarify how the threshold of fifty lakh rupees specified under this section shall be computed and whether the tax is required to be deducted in respect of advance paid before 1st July 2021 and sum credited thereafter.
It hereby clarified that,-
(i) Since section 194Q of the Act mandates buyer to deduct tax on the credit of sum in the account of the seller or on payment of such sum, whichever earlier, the provision of this sub-section shall not apply on any sum credited or paid before 1st July 2021. If either of the two events had happened before 1st July 2021, that transaction would not be subjected to the provisions of section 194Q of the Act.
(ii) Since the threshold of fifty lakh rupees is with respect to the previous year, the calculation of the sum for triggering TDS under section 194Q shall be computed from 1st April 2021. Hence, if a person being buyer has already credited or paid fifty lakh rupees or more up to 30th June 2021 to a seller, the TDS under section 194Q shall apply on all credit or payment during the previous year, on or after 1st July 2021, to such seller.
Clarification on TDS u/s 194Q:
With respect to TDS under section 194Q of the Act, it is clarified that when tax is deducted at the time of credit of amount in the account of the 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 under section 194Q of the Act on the amount credited without including such GST. However, if the tax is deducted on a payment basis because the payment is earlier than the credit, the tax would be deducted on the whole amount as it is not possible to identify that payment with the GST component of the amount to be invoiced in the future.
Clarification on Purchase Return u/s 194Q:
With respect to Purchase returns, it is clarified that the tax is required to be deducted at the time of payment or credit, whichever is earlier. Thus, before purchase return happens, the tax must have already been deducted under section 194Q of the Act on that purchase. If that is the case and against this purchase return the money is refunded by the seller, then this tax deducted may be adjusted against the next purchase against the same seller. No adjustment is required if the purchase return is replaced by the goods by the seller as in that case the purchase on which tax was deducted under section 194Q of the Act has been completed with goods replaced.
Applicability of Section 194Q on Non-resident buyer:
The provisions of section 194Q of the Act shall not apply to a non-resident whose purchase of goods from seller resident in India is not effectively connected with the permanent establishment of such non-resident in India. For this purpose, "permanent establishment" shall mean to include a fixed place of business through which the business of the enterprise is wholly or partly carries on.
Application of section 194Q on a buyer if the turnover from business is 10 crore or less:
For the purposes of section I94Q of the Act, a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding ten crore rupees during the financial year immediately preceding the financial year in which the purchase of a good is carried out. Hence, the sales or gross receipts or turnover from business carried on by him must exceed Rs.10 crore. His turnover or receipts from the non-business activity is not to be counted for this purpose.
Section 194Q, Section 194O and Section 206 of the Income Tax Act
Section 194Q | Section 194O | Section 206 |
Section 194Q(5) of the Act shall not apply to a transaction on which:- (i) tax is deductible under any of the provisions of this Act; and (ii) tax is collectible under the provisions of section 206C, other than a transactions on which sub-section (1H) of section 206C applies | Under Section 194O(3) of the Act, a transaction in respect of which tax has been deducted by the e-commerce operator under sub-section (I), or which is not liable to deduction under sub-section (2), shall not be liable to tax deduction at source under any other provision of chapter XVII of the Act. | Section 206(1H) of the Act shall not apply, if the buyer is liable to deduct tax at source under any other provisions of this Act on the goods purchased by him from the seller and has deducted such tax. |
Clarification on how section 194-0, sub-section (IH) of section 206C, and section 194Q of the Act, apply on the same transaction:
(i) If tax has been deducted by the e-commerce operator on a transaction under section 194-0 of the Act [including transactions on which tax is not deducted on account of sub-section (2) of section 194-0], that transaction shall not be subjected to tax deduction under section 194Q of the Act.
(ii) Though sub-section (IH) of section 206C of the Act provides an exemption from TCS if the buyer has deducted tax at source on goods purchased by him, to remove difficulties it is clarified that this exemption would also cover a situation where instead of the buyer the e-commerce operator has deducted tax at source on that transaction of sale of goods by the seller to the buyer through e-commerce operator.
(iii) If a transaction is both within the purview of section 194-0 of the Act as well as section 194Q of the Act, tax is required to be deducted under section 194-0 of the Act and not under section 194Q of the Act.
(iv) Similarly, if a transaction is both within the purview of section 194-0 of the Act as well as sub-section (1H) of section 206C of the Act, tax is required to be deducted under section 194-0 of the Act. The transaction shall come out of the purview of subsection (1H) of section 206C of the Act after tax has been deducted by the e-commerce operator on that transaction. Once the e-commerce operator has deducted the tax on a transaction, the seller is not required to collect the tax under sub-section (1H) of section 206C of the Act on the same transaction. It is clarified that here primary responsibility is on e-commerce operator to deduct the tax under section 194-0 of the Act and that responsibility cannot be condoned if the seller has collected the tax under sub-section (1H) of section 206C of the Act. This is for the reason that the rate of TDS under section 194-0 is higher than the rate of TCS under sub-section (1H) of section 206C of the Act.
(v) If a transaction is both within the purview of section 194-Q of the Act as well as sub-section (1H) of section 206C of the Act, the tax is required to be deducted under section 194-Q of the Act. The transaction shall come out of the purview of sub-section (1H) of section 206C of the Act after tax has been deducted by the buyer on that transaction. Once the buyer has deducted the tax on a transaction, the seller is not required to collect the tax under sub-section (1H) of section 206C of the Act on the same transaction. However, if, for any reason, tax has been collected by the seller under sub-section (1H) of section 206C of the Act, before the buyer could deduct tax under section 194-Q of the Act on the same transaction, such transaction would not be subjected to tax deduction again by the buyer. This concession is provided to remove difficulty since the tax rate of deduction and collection are the same in section 194Q and subsection (1H) of section 206C of the Act.