Unfolding Section 194Q of Income tax Act 1961 which are effective from 1.7.2021
While it is fresh in everyone's memory that section 206C(1H) was made effective from 1.10.2020 wherein a seller, whose total sales, turnover/gross receipts exceed rupees ten crores in preceding financial year and sells goods worth exceeding Rs. 50lacs to a particular customer during the previous year was mandated to collect tax. Subject to the condition that no tax was deducted or collected under any other section of the Income Tax Act. It successfully created an obligation on the seller to collect tax on prescribed transactions. But it has failed to achieve the expected results due to limited coverage and some lacunae in implementation. So, a need was felt for the introduction of a complementary section wherein the obligation would be on the buyer to deduct tax. Rationality being widening the scope of tax, plug the loophole in the implementation of section 206C(1H), and above all the target to achieve the earliest collection of tax by the authorities. Because section 206C(1H) created an obligation to collect tax only on receipt of consideration but if there was default or delay in payment by the buyer then it would affect the compliance of the rule by the seller. As a result, Section 194Q was introduced in Finance Act 2021. Now these two sections operate in a mutually exclusive way. Section 194Q has an upper hand as the primary obligation is on the buyer now to deduct tax as per CBDT circular 13/2021 dt 30.6.2021.
According to this section 194Q any buyer, whose total sales/gross receipts or turnover from business exceeds Rs.10 crores during preceding financial year, responsible for paying any sum to a resident seller for purchase of any goods of value/ aggregate of value exceeding Rs.50 lacs in any previous year shall at the time of credit or payment whichever is earlier has to deduct an amount equal to 0.1% of such sum exceeding Rs.50 lacs. But the said provisions shall not apply under two circumstances:
- If tax is deductible under any of the provisions of the Act and
- If tax is collectible under Section 206C except 206C(1H)
Also, it’s enunciated that if credit of above said sum is credited to suspense account or any other account in the books of account instead of seller account, even in such cases the deduction of tax needs to be done as the Act deems it to be credited to the account of seller. Hence once cannot take shelter under an excuse of issues in books of accounts for non-compliance w.r.t deduction of tax under this section.
Let us understand and analyse each and every minute details of the section in light of provisions of the Act and Circular issued by CBDT, with the help of below examples:
1. Mr. A is an individual assessee, whose turnover in preceding previous year is Rs.15 crores? Does this section apply to him?
Section 194Q uses the term "any person" who is a buyer. Income Tax Act,1961 defines a person to include an individual, HUF, Firm, Company, an association of persons, body of individual, local authority and every Artificial juridical person, not falling within any of the preceding categories. Hence constitution of the business is not relevant for determining the applicability of Section 194Q.
2. Besides exceptions mentioned in the section 194Q, under what other circumstances provision of this section doesn’t apply? (Refer 4.1.2 of CBDT Circular 13/2021)
Section 194Q doesn’t apply in the following cases:
a. Persons who are exempt under income tax Act u/s 10 or under any other Act passed by the parliament (RBI Act, ADB Act). This exception is applicable where entire income of assessee is exempt. But if only a part of the income is exempt then Section 194Q would continue to apply
b. When the buyer is a non-resident and his purchase of goods are not connected with permanent establishment in India (Refer 4.4 of CBDT Circular 13/2021)
c. 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#;
d. transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC
Based on various representations received from certain exchanges and clearing corporations on difficulty in complying said section due to the absence of one to one contract between buyer and seller exception (c ) and (d) has been incorporated through CDBT circular.
*[clause (i) of the Explanation to clause (23 EE) of section 10]
**[clause (i) of the Explanation to clause (23 EE) of section 10]
#clause (q) of section 2 of the Special Economic Zones Act, 2005.
3. Does this section apply always, once attracted?
The entity should check the criteria every year so as to know the applicability of section 194Q. Suppose an entity’s turnover in FY 2020-21 and FY 2021-22 was 12 crores and 8 crores respectively. In that case TDS provisions applies to it for specified transactions during the previous FY 21-22 as turnover of preceding financial year exceeds the threshold of ten crores rupees. But for the specified transactions in FY 2022-23 the section would not be applicable as the turnover of preceding financial year is less than ten crore rupees.
4. Does the term total sales, turnover, gross receipts include GST for the purpose of section 194Q?
There is no clarity given in this regard by CBDT. But based on available reasonable interpretations for same terms in Income Tax Act 1961 for various other sections and guidance note of ICAI, one can infer as follows.
Meaning of the terms mentioned are mostly dependent on the method of accounting adopted by the buyer. If the buyer is following inclusive approach of accounting, then turnover/gross receipts would be inclusive of GST. But if the buyer is following exclusive approach of accounting, then it would be exclusive of GST.
5. Does the transaction value limit of Rs.50 lacs prescribed for the applicability of the section includes GST? (Refer 4.3.2 of CBDT Circular 13/2021)
As per the CBDT circular, if the TDS is done at the time of credit, then it should be exclusive of GST. However, if the tax is deducted on payment basis, reason being the date earlier than that of credit then in such cases deduction should be on entire sum paid as the GST component is uncertain at that point of time and depends on the invoicing done in future.
6. Mr.R had a turnover exceeding Rs.10 crores in preceding previous year. He bought goods worth 50 lacs from Mr.Y from 1.4.2021 to 30.6.2021. On 3rd of July,2021 he purchased further goods worth Rs.33 lacs. Does TDS apply in this case as threshold since 1.7.2021 has not exceeded Rs.50lacs. (Refer 4.2.2 of CBDT Circular 13/2021)
The threshold of Rs.50 lacs needs to checked for the previous year. So, the threshold needs to be checked from 1.4.2021 (i.e., being the date of commencement of previous year) itself in spite of the fact that the provision has become effective from 1.7.2021. It would be wrong if threshold is checked considering only the transactions which occurred post 1.7.2021. In the given case Mr.R is liable to deduct tax on transaction on 03.07.2021 as threshold of 50 lacs is already crossed with the said transaction.
7. Does section 194Q apply to advance payment of consideration? What is the treatment of advance payments made before 01.07.2021? (Refer 4.2.2(i) of CBDT Circular 13/2021)
Yes. The section clearly says that the applicability is on the date earlier between the two dates (i.e., date of credit to the account of such sum or date of payment of such sum). With respect to advance payments, date of payment of sum precedes date of crediting the sum to the account. Hence liability to deduct tax arises on date of advance payment.
It’s been further clarified by CBDT that cases where advance payments are done prior to 1.7.2021, TDS u/s 194Q is not applicable at the time credit to the account of such sum. To further elaborate it said that if either of event triggering liability under section 194Q has happened before 01.07.2021 then TDS u/s 194Q is not applicable on subsequent event of same transaction.
8. Mr.B deducted tax on purchase of goods u/s 194Q and remitted it to the authorities. Subsequently some goods were returned due to some deficiency. How will the same be treated? (Refer 4.3.3 of CBDT Circular 13/2021)
In case of purchase returns, there are two scenarios explained by CBDT,
Case -1: If the amount is refunded by Seller pertaining to the returned goods
The value of returned goods needs to be adjusted on the next purchase transaction as TDS is already remitted on the principal transaction.
So, it can be understood that if subsequent purchase also happens in the same month of purchase return, then tax needs to deducted and remitted considering net off value of both the transactions
Case-2: If the fresh goods are replaced with the returned goods
No adjustments are to be made
9. In the preceding financial year, M/s ABC limited turnover was Rs.8 crores, gross receipts were Rs.3 crores from business activity and turnover from non-business activity Rs.2.5 crores. Does Section 194Q apply to it? Will your answer change if turnover from business was Rs.11 crores?
The way this provision has been framed w.r.t criteria of turnover, sales gross receipts is similar to what is prescribed under Section 44AB. Hence similar interpretation would hold good.
The section doesn’t apply for the first instance as neither turnover nor gross receipts from business activity has exceeded Rs.10 crores individually in preceding financial year. One has to bear in mind that turnover of Rs.8 crores from business activity and Rs.2.5 crores from non-business activity cannot be clubbed to check the criteria. As it’s clarified by CBDT that non-business turnover/ gross receipts shall not be considered for the purpose of this section. Yes. In the second instance, the turnover from business has exceeded the prescribed threshold of 10 crores. Hence 194Q is applicable.
10. M/s.XYZ co has started business in FY 2021-22. It has purchased goods worth Rs.57,00,000/-from Mr.C. Does Section 194Q applicable to it? (Refer 4.7 of CBDT Circular 13/2021)
The section does not apply to M/s.XYZ co. Because there was no turnover for the entity in preceding financial year i.e., FY 2020-21. Hence it doesn’t satisfy the condition of having turnover exceeding Rs.10 crores in the immediately preceding financial year.
11. M/s.ABC LLP had a turnover of Rs.11 crores in preceding previous year and has bought goods from a non-resident worth Rs.61,00,000/- on 05-07-2021. Should they deduct TDS under section 194Q?
The section applies when payments are to be made to a resident seller on account of purchases. But in the said case the seller is a non-resident. Hence Section 194Q doesn’t apply.
12. M/s.XYZ Ltd had a turnover exceeding Rs.10 crores in preceding previous year. They have bought goods worth Rs.58 lacs and accounted the same on 01.07.2021 in the books of accounts and the payment for the said transaction was made on 31.8.2021. When does the entity become liable to deduct TDS?
The liability to deduct TDS arises on date of crediting the sum to account in books of accounts or date of payment of such sum, whichever is earlier. Hence M/s.XYZ Ltd is liable to deduct on 1.7.2021 as it’s the earliest date between date of crediting in books of account [1.7.2021] and date of payment [31.8.2021].
13. Ms.C had a turnover exceeding Rs.10 crores in preceding previous year. She purchased goods worth Rs.71 lacs and made the payment by account payee cheque. Does section 194Q apply in this case? Will your answer change if the payment mode was cash?
Yes. For the applicability of Section 194Q, mode of payment is irrelevant because the section refers to as any mode of payment. Hence the section would apply.
The answer would not change even if the mode of payment is cash.
14. Mr.H, purchased goods worth Rs.51lacs from Mr.S and accounted the same in books of account by crediting suspense account instead of Mr.S account on 1.7.2021. He made payment by account payee cheque to Mr. S on 30.9.2021. On 1.11.2021 he rectified the entry by crediting Mr.S account and debiting the suspense account. Does section 194Q apply in this case? If yes, when does the liability arise?
The section would apply even if the credit for the sum is passed to the suspense account instead of the actual seller account. The liability to deduct TDS arises on 1.7.2021 as that would be the earliest date between 01.07.2021 and 30.09.2021(i.e., date of crediting the account and date of payment). The incorrect crediting of suspense account will not have any impact on the time point at which the liability triggers as the section has already addressed that issue saying that irrespective of whatever account you credit with the sum for purchase value of such goods the liability to deduct TDS would arise.
15. What is the amount of TDS that needs to be deducted under this section?
Case-1-Generally amount equal to 0.1% of the sum paid in excess of Rs.50 lacs needs to be deducted
Case-2-If the cases are covered under section 206AB then it will be 5% of the sum paid
Case-3- If it’s covered under both 206AA and 206AB then it’s 20% of the sum paid
So along with complying section 194Q, the buyer should also check whether the seller is a specified person and accordingly decide upon the applicability of section 206AB. In addition to that buyer should also check Section 206AA for non-furnishing of PAN. As a consequence, the TDS compliances are going to be costly and cumbersome for buyers in terms additional time, resource consumed.
16. M/s.Happy Limited had a turnover exceeding Rs.10 crores in preceding previous year. It’s first purchase from Joy Limited during the previous year 2021-22, was worth sum Rs.32 lacs and second purchase was for Rs. 46 lacs. When and how much TDS needs to be deducted in the said case?
Aggregate purchase of M/s Happy Limited from M/s Joy Limited is Rs.78lacs (Rs.32lacs +46lacs). So, TDS needs to be done on 28 lacs i.e., value which is in excess of Rs.50 lacs @ 0.1% which comes to Rs.2,800/-(Rs.28,00,000*0.1%). TDS liability triggers with the second purchase as threshold of Rs.50 lacs was crossed with the second purchase.
17. A transaction satisfies all criterions mentioned in section 194Q. But tax has already been deducted by buyer u/s 194O. Does TDS need to be done under section 194Q also?
As per the exception to the section 194Q, tax should not to be deducted under this section if already deducted under any other provision of the Act. Besides as per CBDT clarification, section 194O will override section 194Q merely for the reason in substance that TDS rate u/s 194O is 1% which is more in comparison with 0.1% u/s 194Q. So, section 194Q is not applicable on any transaction where section 194O applies.
Hence TDS u/s 194Q need not be done in the given case.