Section 194 Q: Buyer to deduct TDS on Purchase of Goods from Seller effective from 1st July, 2021

 


Section 194 Q: Buyer to deduct TDS on

 Purchase of Goods from Seller effective

 from 1st July, 2021

 

Whom it is applicable: Any buyer who is responsible for paying any sum to any resident seller for purchase of any goods of the value or aggregate of value exceeding 50lakh rupees in any previous year.

When the TDS to be deducted: The buyer, 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 50 lakh rupees as income tax.

Definition of Buyer: Buyer is defined to be 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 good is carried out. Central Government has been authorised to specify by notification in the Official Gazette, person who would not be considered as buyer for the purposes of this section.

This section is not applicable to:

(i)     transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation, Circular No. 13 of2021 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 whether the tax is required to be deducted in respect of advance paid before 1st July 2021 and sum credited thereafter.

Since Section 194Q of the Act is effective from 1st July, 2021, CBDT has clarified how the threshold of Rs 50 lakh 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. 

Section 194Q of the Act mandates buyer to deduct tax on credit of sum in the account of 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 Ist 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.  

Since the threshold of Rs 50 lakh is with respect to the previous year, calculation of 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 Rs 50 lakh 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 Ist July 2021, to such seller. 

Adjustment for GST in case of purchase returns?

No adjustment on account of GST is required to be made for collection of tax under sub-section (IH) of section 206C of the Act since the collection is made with reference to receipt of amount of sale consideration.

Applicability of section 194 Q with respect to TDS?

When tax is 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 under section 194Q of the Act on the amount credited without including such GST.

However, if the tax is deducted on 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 identity that payment with GST component of the amount to be invoiced in future.

Applicability of section 194 Q with respect to purchase return?

The tax is required to be deducted in case of purchase return 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.

Is section 194Q applicable to 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.

Whether section 194Q applicable when the seller is a person whose income is exempt?

The provisions of section 194Q of the Act shall not apply on purchase of goods from a person, being a seller, who as a person is exempt from income tax under the Act (like person exempt under section 10) or under any other Act passed by the Parliament (Like RBI Act, ADB Act etc.). The above clarifications would not apply if only part of the income of the person is exempt.

Whether section 194Q applicable on advance payment?

Since the provisions apply on payment or credit whichever is earlier, the provisions of section 194Q of the Act shall apply to advance payment made by the buyer to the seller.

Whether section 194Q to buyer in the year of incorporation?

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 good is carried out. Since this condition would not be satisfied in the year of incorporation, the provisions of section 194Q of the Act shall not apply in the year of incorporation.

Whether section 194Q to buyer if the turnover from business is 10 crore or less?

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 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 non-business activity is not to be counted for this purpose.

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