The Finance Act, 2021, inserted section 194Q in the Income-tax Act, 1961 (the Act) with effect from 1 July 2021. This provision stipulates an obligation on a buyer, purchasing goods from a resident seller to deduct tax at source equal to 0.1% on a sum exceeding INR 50 Lakhs in any financial year (FY). However, many representations were filed with the Central Board of Direct Taxes (CBDT) to issue clarifications on the applicability of section 194Q of the Act and also remove difficulties in implementing other overlapping provisions such as section 206C(1H) of the Act (tax collected at source (TCS) on sale of goods) and/ or section 194-O of the Act (tax deducted at source (TDS) by e-commerce operator). Therefore, the CBDT has now issued the following clarifications vide Circular No. 13 of 2021 for removing the difficulties in the implementation of Section 194Q:
- i) Transactions of securities or commodities traded on a recognized stock exchange or cleared and settled by a recognized clearing corporation including those located in IFSC and transactions in electricity, renewable energy certificates and energy certificates traded through regulated power exchanges, shall be outside the purview of section 194Q.
- ii) It is clarified that purchases from 1 April 2021 to 30 June 2021 to be included for the purpose of determination ofthreshold of Rs. 50 lacs for the previous year.
iii) Section 194Q will not be applicable to cases where the buyer has either credited or paid the amount to the seller before 1 July 2021.
- iv) Wherein amount is credited to the seller’s account, and in terms of the agreement / contract between the buyer and seller, the GST component is indicated separately, then TDS u/s 194Q to be made on the amount credited without including GST.
- v) Section 194Q applies on payment or credit whichever is earlier and would thus, apply on advance payments too. Wherein TDS u/s 194Q is made on payment to the seller, because payment is earlier than credit, TDS has to be made on the whole amount.
- vi) Since TDS u/s 194Q is made at the time of payment or credit whichever is earlier, tax would have been already deducted on purchase return, in which case if the money is refunded by the seller, then the amount of TDS made may be adjusted against next purchase from the same seller. Further, no adjustment will be required if the purchase return is replaced in the form of goods by the seller.
vii) The provisions of section 194Q shall not apply to a non-resident whose purchase of goods from a seller resident in India is not effectively connected with the permanent establishment of such non-resident in India.
viii) Section 194Q is not applicable in the cases where the seller’s income is entirely tax exempt and would apply where the seller’s income is only partly exempt. Similarly, 206C(1H) would not apply to buyers who are exempt from income-tax such as entities exempt u/s 10 or passed under special laws like RBI Act, ADB Act etc.
- ix) Section 194Q not to apply in the year of incorporation of the buyer as the buyer is required to have gross receipts or turnover in excess of Rs.10 Crores in the financial year immediately preceding the financial year in which the transaction takes place.
- x) Section 194Q to apply only in the cases where the gross receipts or turnover from the business carried out by the buyer exceeds Rs.10 Crores in the financial year immediately preceding the financial year in which the transaction takes place and not to include the turnover from non-business activities for determination of the applicability.
- xi) If a transaction is covered both within the purview of section 194-O as well as section 194Q, tax is required to be deducted under section 194-O and not under section 194Q. Similarly, if a transaction is both within the purview of section 194-O as well as u/s 206C(1H) of TCS, tax is required to be deducted under section 194-O. In such a case, the primary responsibility is on the e-commerce operator due to higher TDS rate.
xii) Once the buyer has deducted the tax on a transaction, the seller is not required to collect the tax u/s 206C(1H) on the same transaction. However, if for any reason, tax has been collected by the seller u/s 206C(1H), before the buyer could deduct tax under section 194Q on the same transaction, such transaction would not be subjected to tax deduction again by the buyer. This is a concession to avoid difficulty as rates are same in both the sections.