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Direct Tax Alert

CBDT issued clarificatory guidelines for TDS on Purchases

July 03, 2021

Finance Act, 2021 introduced Section 194Q of the Income Tax Act, 1961 (ITA) effective from 01 July 2021. It applies to any “Buyer” who is responsible for paying any sum to any resident “Seller” for purchase of any goods of the value or aggregate of such value exceeding INR 5 million in any previous year. 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, deduct an amount equal to 0.1 per cent of such sum exceeding INR 5 million as income-tax.

Buyer: A person whose total sales or gross receipts or turnover from the business carried on by him exceed INR 100 million during the financial year immediately preceding financial year in which the purchase of goods is carried out.

Central Board of Direct Taxes (CBDT) issued the guidelines vide Circular No.13 of 2021 dated 30 June 2021. The major clarifications are as follows:

  • Section 19Q of the ITA shall not be applicable on following:
    • Transactions in securities and commodities which are traded through recognised stock exchanges or cleared and settled by recognised clearing corporation located in International Financial Service Centre (IFSC).
    • Transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges.
  • Section 194Q of the ITA mandates buyer to deduct tax on credit of sum in the account of seller or on payment of such sum, whichever is earlier. This section shall not apply on any sum credited or paid before 1 July 2021.Therefore, any sum paid or credited by the buyer from 1 April 2021 to 30 June 2021 shall not be counted for tax deduction under Section 194Q of the ITA.
  • The threshold of INR 5 million is with respect to financial year calculation of sum for triggering Tax Deducted at Source (TDS) under Section 194Q of the ITA shall be computed from 1 April 2021.
  • It is clarified that when tax is deducted at the time of credit of amount in the account of seller and as per agreement or contract between buyer and seller, component of GST is indicated separately, tax shall be deducted as per Section 194Q of the ITA on the amount credited without including such GST. However, in case of payment is earlier than credit, tax would be deducted on the whole amount of advance paid as it is not possible to identify the payment with GST component of the amount to be invoiced in future.
  • It is clarified that tax is required to be deducted at the time of payment or credit, whichever is earlier. Thus, before purchase return happens, the tax must have already been deducted as per Section 194Q of the ITA on that purchase. In cases, where the money is refunded by seller against such purchase return, TDS may be adjusted against the next purchase or future supply against the same seller.
  • Section 194Q of the ITA shall not be applicable to Non-resident where such Non-resident does not have permanent establishment in India whose purchase of goods from resident seller in India.
  • Section 194Q of the ITA shall not apply on purchase of goods from a person, being a seller, who as a person is exempt from income tax under the ITA. Similarly, Section 206C(1H) shall not apply to sale of goods to a person, being a buyer, who as a person is exempt from income tax under the ITA. However above clarification would not apply if only part of the income of the person (Seller or buyer, as the case may be) is exempt.
  • As per Section 194Q of the ITA a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding INR 100 million 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 ITA shall not apply in the year of incorporation.
  • Section 194Q of the ITA shall apply to a buyer who has turnover or gross receipt exceeding INR 100 million but total sales or gross receipts or turnover from business is INR 100 million or less. It is clarified that for the purposes of Section I94Q of the ITA, a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding INR 100 million during the financial year immediately preceding the financial year in which the purchase of good is carried out. Hence, the sale or gross receipts or turnover from the business carried on by him must exceed INR 100 million. However, turnover or receipts from non-business activity is not to be counted for this purpose.
  • If tax has been deducted by the e-commerce operator on a transaction under Section 194O of the ITA, that transaction shall not be subjected to TDS under Section 194Q of the ITA.
  • Section 206C (1H) of the ITA, provides exemption from TCS, if the buyer has deducted tax at source on goods purchased by him. 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 the transaction is under the purview of both the Section 194O and 194Q of the ITA, it is clarified that, tax is required to be deducted under section 194O of the ITA.
  • Further, if the transaction is under the purview of both the Section 194Q and 206C(1H) of the ITA, it is clarified that tax is required to be deducted under Section 194Q of the ITA. However, if, for any reason tax has been collected under Section 206C(1H) of the ITA, before the buyer could deduct tax under Section 194Q of the ITA on the same transaction, such transaction would not be subject to tax deduction again by the buyer.

Last updated: 03/07/2021

Article contributed by:

Gaurav Paliwal

Sr. Manager – Direct Tax

MBG Corporate Services

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