GUIDELINES UNDER SECTION 194Q OF THE INCOME TAX ACT, 1961

[Mr. M. GOVINDARAJAN]

Introduction

Part B of Chapter XVII contains the provisions for deduction of tax at source.  Clause 54 of Finance Act, 2021 inserted a new section 194Q in the Income Tax Act, the provisions of which come into effect from 01.07.2021.  The newly inserted section 194Q provides for deduction of tax at source on payment of certain sum for purchase of goods. 

Deduction by the buyer

Section 194Q(1) provides that the buyer is liable to deduct tax at source if his purchase of any goods from the resident seller exceeds ₹ 50 lakhs in the previous year at the time of crediting such amount to the account of the seller or at the time of payment by any mode, whichever is earlier. 

Rate of tax

The rate of tax to be deducted by the buyer on such payment is 0.1% of such sum exceeding ₹ 50 lakhs.  If the total purchase is ₹ 1 crore, then the buyer is to deduct tax for ₹ 50 lakhs (₹ 1 crore – ₹ 50 lakhs = ₹ 50 lakhs).

Who is the buyer?

Explanation to section 194Q (1) defines the term ‘buyer’ as a person whose total sales, gross receipts or turnover from the business carried on by him exceed ₹ 10 crores 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.

Credit of income

Section 194Q (2) provides that any sum referred to in sub-section (1) is credited to any account, whether called ‘suspense account’ or by any other name, in the books of account of the person liable to pay such income, such credit of income shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

Non applicability of Section 194Q

The provisions of section 194Q shall not be applicable to-

• the transaction on which the tax is deductible under this Act; and
• the transaction on which the tax is collectible under the provisions of section 206C other than a transaction to which sub-section (1H) of section 206C applies.

Guidelines

Section 194Q(3) gives powers to the Board to issue the guidelines with the previous approval of the Central Government, if any difficulty arises in giving effect to the provisions of this section, to remove difficulty.  Every guideline issued by the Board shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and the person liable to deduct tax.

The Board, vide Circular No.  13 of 2021, dated 30.06.2021, issued guidelines under section 194Q of the Income Tax Act, 1961.  These guidelines at some places have also tried to remove difficulties in implementing the provisions of section 194-O and sub-section (1 H) of section 206C of the Act using power contained in sub-section (4) of section 194-O of the Act and sub-section (I­I) of section 206C of the Act.

Non applicable to security transactions

The Board clarified that the provisions of Section 194Q shall not be applicable in relation to-

• 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;
• transactions in electricity renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC.

Computation of threshold limit

The Board further clarified the computation of threshold limit of ₹ 50 lakhs (the provisions come into effect from 01.07.2021).  The Board clarified that-

• Since 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 is 01.07.2021. 
• If either of the two events had happened before is 01.07.2021, that transaction would not be subjected to the provisions of section 194Q of the Act.
• Since the threshold of ₹ 50 lakhs is with respect to the previous year, calculation of sum for triggering TDS under section 194Q shall be computed from 01.04.2021. Hence, if a person being buyer has already credited or paid ₹ 50 lakhs or more up to 30.06.2021 to a seller, the TDS under section 194Q shall apply on all credit or payment during the previous year, on or after is 01.07.2021, to such seller.

Adjustment of GST

Vide circular no 17 of 2020 dated 29.09.2020 it was clarified by the Board that 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.   But the situation is different so far as TDS is concerned. It has been clarified in circular no 23 of 2017 dated 19.07.2017.  It has been clarified in the said circular 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 under Chapter XVII-B of the Act on the amount paid or payable without including such ‘GST on services’ component. GST for these purposes shall include Integrated Goods and Services Tax., Central Goods and Services Tax, State Goods and Services Tax and Union Territory Goods and Services Tax.

With respect to TDS under section 194Q of the Act the Board clarified that 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 identify that payment with GST component of the amount to be invoiced in future.

Adjustment of purchase return

In case of purchase return, the buyer must have already deducted tax for such purchase return.  If the purchase return is accepted then the purchase should be given refund of the amount for purchase return and the tax paid by him on such amount.  The Board clarified that the 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.

Nonresident – Buyer?

The Board clarified that the provisions of Section 194Q shall not be applicable to non residents whose purchase of goods from seller resident in India is not effectively connected with the permanent establishment of such non­resident in India.

Exempted income

The Board clarified that 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 or under any other Act passed by the Parliament (Like RBI Act, ADB Act etc.).

It is also clarified that the provisions relating to exempted income shall not apply to sale of goods to a person, being a buyer, who as a person is exempt from income tax under the Act or under any other Act passed by the Parliament (Like RBI Act, ADB Act etc.).

The above said clarifications would not apply if only part of the income of the person (being a seller or being a buyer. as the case may be) is exempt.

Advance payment

The Board clarified that 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.

Applicability to the buyer in the year of incorporation

It is clarified that under section 194Q of the Act a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding ₹ 10 crores 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.

Turnover ₹ 1 crore or less

Another query put up before the Board is as to whether Section 194Q shall apply to a buyer who has turnover or gross receipt exceeding ₹ 10 crore but total sales or gross receipts or turnover from business is ₹ 10 crore or less.  The Board clarified that for the purposes of section 194Q of the Act, a buyer is required to have total sales or gross receipts or turnover from the business carried on by him ₹ 10 crore during the financial year immediately preceding the financial year in which the purchase of good is carried out.  His turnover or receipts from non-business activity is not to be counted for this purpose.

Cross application of sections 194-O, 206C(1H) and 194Q

On conjoint reading of the above sections the Board clarified as below-

• If tax has been deducted by the e-commerce operator on a transaction under section 194-O of the Act [including transactions on which tax is not deducted on account of sub-section (2) of section 194-O] that transaction shall not be subjected to tax deduction under section 194Q of the Act.
• Section 206C (1H) provides exemption from TCS if the buyer has deducted tax at source on goods purchased by him.  to remove difficulties it is clarified by the Board 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 seller to buyer through e-commerce operator.
• If a transaction is both within the purview of section 194-O of the Act as well as section 194Q of the Act, tax is required to be deducted under section 194-O of the Act and not under section 194Q of the Act
• 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 by the Board that here primary responsibility is on e-commerce operator to deduct the tax under section 194-O 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-O is higher than rate of TCS under sub-section (I H) of section 206C of the Act.
• If a transaction is both within the purview of section 194Q of the Act as well as sub-section (1 H) of section 206C of the Act, the tax is required to be deducted under section 194Q 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 (1 H) of section 206C of the Act, before the buyer could deduct tax under section 194Q 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 tax rate of deduction and collection are same in section 194Q and sub­-section (1H) of section 206C of the Act.