Howdy TaxAddicters,
In the Finance Act, 2021, a new section 194Q has been inserted vide Circular No. 13 of 2021 dated 30-June-2021 in the Income Tax Act, 1961 (hereinafter referred to as "the Act"). Let us understand the complete concept in an epic manner of a conversation between Krishna & Arjuna(Fictional Characters).
Table of Content:
1. What is Section 194Q, and to whom it is applicable?
2. Who is responsible for tax deduction? and What is the TDS rate under section 194Q?
3. when the responsible person is required to deduct the tax under this section?
4. who is considered a buyer under this section, and are there any conditions?
5. How to calculate the threshold limit for FY 2021-22? and whether TDS under this section is applicable in case of any advance tax has been paid before 1st Jul 2021?
6. There is any effect/adjustment about the GST component as per this Section?
7. In the case of completion of the purchase transaction, deduction of TDS, how to adjust the purchase returns, if any?
Arjuna(Fictional Character):
Krishna, day by day the Income Tax Act becomes more complicated, and in every Finance Act, some new sections have been inserted in the Act. What is Section 194Q, and to whom it is applicable?
Krishna(Fictional Character):
Arjuna,
- Finance Act,2021 inserted a new section 194Q in the Income Tax Act,1961 (hereinafter referred to as "the Act") which had taken effect from 1st July 2021.
- It applies to any buyer who is responsible for paying any sum to any resident seller for the purchase of goods of the value or the aggregate of value exceeding Rs. 50 Lakhs in any previous year.
Krishna, who is considered a buyer under this section, are there any conditions?
- A buyer is defined to be the person whose total sales or gross receipts or turnover from the business carried on by him exceed Rs.10 Crores during the financial year immediately preceding the financial year in which the purchase of goods is carried out.
- That means 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 activities are not to be counted for this purpose.
- Central Government has been authorized to specify by notification in the Official Gazette, the person who would not be considered as the buyer for the purposes of this section.
Krishna, as this section had been applicable from the beginning of the second quarter of the FY 2021-22 (i.e from 1st July 2021), how to calculate the threshold limit for the FY 2021-22? and whether TDS under this section is applicable in case of any advance tax has been paid before 1st Jul 2021?
Krishna(Fictional Character):
Arjuna, Since section 194Q of the Act, would come into effect from 1 st 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,-
- Since section 194Q of the Act mandates the 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 subsection 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.
- Since the threshold of Rs.50 Lakhs is concerning 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 a 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.
Arjuna, It has been clarified in circular no 23 of20 17 dated 19th July 2017 as under,
"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 Good and Services Tax"
- Accordingly, concerning 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 future.
- Arjuna, concerning purchasing return, it is clarified that the tax is required to be deducted at the time of payment or credit, whichever is earlier.
- Thus, before the 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.
- Arjuna, it is clarified that the provisions of section 194Q of the Act 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 nonresident 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 carried on.
- Arjuna, it is clarified that the provisions of section 194Q of the Act shall not apply to the purchase of goods from a person, being a seller, who as a person is exempt from income tax under the Act (like a person exempt under section 10 or under any other Act passed by the Parliament (Like RBI Act, ADB Act, etc.).
- Similarly, concerning subsection (1 H) of section 206C of the Act, it is clarified that the provisions of this subsection shall not apply to the sale of goods to a person, being a buyer, 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 et,c.).
- The above 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.
- Arjuna, there is a condition under section 194Q that the buyer is required to deduct the tax under section 194Q when the buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding Rs.10 Crores during the financial year immediately preceding the financial year in which the purchase of goods 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.
- If tax has been deducted by the e-commerce operator on a transaction under section 194O of the Act [including transactions on which tax is not deducted on account of sub-section (2) of section 194O], that transaction shall not be subjected to tax deduction under section 194Q of the Act.
- Though sub-section (1H) 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.
- If a transaction is both within the purview of section 194O of the Act as well as section 194Q of the Act, tax is required to be deducted under section 194O of the Act and not under section 194Q of the Act.
- (iv) Similarly, if a transaction is both within the purview of section 194O of the Act as well as sub-section (1 H) of section 206C of the Act, tax is required to be deducted under section 194O of the Act.
- It is clarified that here primary responsibility is on the e-commerce operator to deduct the tax under section 194O of the Act and that responsibility cannot be condoned if the seller has collected the tax under sub-section (1 H) of section 206C of the Act.
- This is for the reason that the rate of TDS under section 194O is higher than the rate of TCS under sub-section (1 H) of section 206C of the Act.
- If a transaction is both within the purview of section 194-Q 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 194-Q of the Act.
- 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 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 (1 H) of section 206C of the Act.
- Thus, In the case of cross-application between Section 194O, Section 194Q, and Section 206(1H), Section 194O Overrides the other two sections.
Good Information
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