TDS and TCS Understanding Tax Deduction and Collection at Source

Applicability and rate of TDS

Section 194Q requires any person, being a buyer who is responsible for paying any sum to any resident-seller for purchase of goods of the value or aggregate of such value exceeding ₹ 50 lakhs in a previous year, to deduct tax at source @ 1% of such sum exceeding ₹ 50 lakhs.

Time of deduction

The deduction is to be made at the time of credit of such sum to the account of the resident- seller or at the time of payment thereof by any mode, whichever is earlier.

Where such sum is credited to any account in the books of account of the person liable to pay such income, such credit of income is deemed to be credit of such income to the account of the payee and tax has to be deducted at source. The account to which such sum is credited may be called a “Suspense account” or by any other name.

Power of the CBDT to issue guidelines

In case of any difficulty arises in giving effect to the provisions of this section, the CBDT is empowered to issue guidelines, with the approval of the Central Government, for the purpose of removing the difficulty.

Every guideline issued by the CBDT 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 on the person liable to deduct tax.

In exercise of the power to issue guidelines, the CBDT has, with the approval of Central Government, vide Circular no. 13/2021 dated 30.6.2021, issued the following guidelines for removing certain difficulties-

1. Applicability on transactions carried through various Exchanges

There are practical difficulties in implementing the provisions of TDS contained in section 194-Q in case of certain exchanges and clearing corporations. In these transactions, sometimes, there is no one to one contract between the buyers and the sellers.

In order to remove such difficulties, it is provided 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 (IFSC).
  
  
• transactions in electricity, renewable energy certificates and energy saving certificates traded through registered power.

2. Calculation of threeshold for the Year 2021-22

Section 194Q has come into effect from 1st July, 2021. Accordingly, as regards the manner of computation of threshold of ₹ 50 lakh specified under this section, it is clarified that since the threshold of ₹ 50 lakhs is with respect to the previous year, calculation of sum for triggering TDS u/s 194Q shall be computed from 1st April, 2021. Hence, if a person being buyer has already credited or paid ₹ 50 lakhs or more up to 30th June 2021 to a seller, TDS u/s 194Q shall apply on all credit or payment during the previous year, on or after 1st July 2021, to such seller.

As regards whether tax is required to be deducted in respect of advance paid before 1st July 2021 and sum credited thereafter, it is clarified that since section 194Q mandates buyer to deduct tax on credit of sum in the account of seller or on payment of such sum, whichever is earlier, the provisions of this section 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.

3. Adjustment for GST, purchase returns

As regards whether adjustment is required to be made for GST or purchase returns for the purpose of tax deduction u/s 194Q vide Circular No.17/2020 dated 29.9.2020, it was clarified that no adjustment on account of GST is required to be made for collection of tax under section 206C(1H), since the collection is made with reference to receipt of amount of sale consideration.

However, the situation is different so far as TDS is concerned. It has been clarified in Circular No. 23/2017 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 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. 

Accordingly, with respect to TDS u/s 194Q, it is 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 u/s 194Q 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.

Further, with respect to purchase return it is clarified that the 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 u/s 194Q 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 has been completed with goods replaced.

4. Whether non-resident can be buyer under section 194Q?

As regards whether the provisions of section 194Q would apply to a buyer being a non-resident, it is clarified that the provisions of section 194Q shall not apply to a non-resident whose purchase of goods from seller resident in India is not effectively connected with the permanent establishment of such non-resident 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 carries on.

5. Whether tax is to be deducted when the seller is a person whose income is exempt?

6. Whether tax is to be deducted on advance payment?

As regards whether the provisions of section 194Q would apply to advance payment made by the buyer, it is clarified that since the provisions apply on payment or credit whichever is earlier, the provisions of section 194Q shall apply to advance payment made by the buyer to the seller.

7. Whether provisions of section 194Q shall apply to buyer in the year of incorporation?

As regards whether the provisions of section 194Q shall apply to a buyer in the year of its incorporation, it is clarified that u/s 194Q, a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding ₹ 10 crore 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 shall not apply in the year of incorporation.

8. Whether provisions of section 194Q shall apply to buyer if the turnover from business is ₹ 10 crore or less?

As regards whether the provisions of section 194Q would apply to a buyer who has turnover or gross receipts exceeding ₹ 10 crore but total sales or gross receipts or turnover from business is ₹ 10 crore or less, it is clarified that, for the purposes of section 194Q, a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding ₹ 10 crore during the financial year immediately preceding the financial year in which the purchase of goods is carried out.

Hence, the sales or gross receipts or turnover from business carried on by him must exceed ₹ 10 crore. His turnover or receipts from non-business activity is not to be counted for this purpose.

9. Cross application of section 194-O, section 206C(1H) and section 194Q

• If tax has been deducted by the e-commerce operator on a transaction u/s 194-O [including transactions on which tax is not deducted on account of section 194-O(2)], that transaction shall not be subjected to tax deduction u/s 194Q.
  
  
• Though 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 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.
  
  
• If a transaction is both within the purview of section 194-O as well as section 194Q, tax is required to be deducted u/s 194-O and not u/s 194Q.
  
  
• Similarly, if a transaction is both within the purview of section 194-O as well as section 206C(1H), tax is required to be deducted u/s 194-O. The transaction shall come out of the purview of section 206C(1H) after tax has been deducted by the e-commerce operator on that transaction. Once the e- commerce operator has deducted the tax on a transaction, the seller is not required to collect the tax u/s 206C(1H) on the same transaction.
  
  It is clarified that here primary responsibility is on e-commerce operator to deduct the tax u/s 194-O and that responsibility cannot be condoned if the seller has collected the tax u/s 206C(1H). This is for the reason that the rate of TDS u/s 194-O is higher than rate of TCS u/s 206C(1H).
  
  
• If a transaction is both within the purview of section 194Q as well as section 206C(1H), then, tax is required to be deducted u/s 194Q. The transaction shall come out of the purview of section 206C(1H) 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 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 u/s 194Q 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 section 206C(1H).

10. Non applicability of TDS under section 194Q

Tax is not required to be deducted under this section in respect of a transaction on which -

• tax is deductible under any of the provisions of this Act; and
• tax is collectible under the provisions of section 206C, other than section 206C(1H).

In case of a transaction to which both section 206C(1H) and section 194Q applies, tax is required to be deducted under section 194Q.

Meaning of buyer

Buyer means a person whose total sales, gross receipts or turnover from the business exceed ₹ 10 crores carried on by him during the financial year immediately preceding the financial year in which the purchase of goods is carried out. However, buyer does not include a person as notified by the Central Government for this purpose, subject to fulfillment of the stipulated conditions.