Preamble
India's fiscal deficit was 9.5% for the year 2020-2021. The fiscal deficit for 2021- 2022 is targeted at 6.8%. Both the percentages are highest at least since economic liberalization in 1991 except in 1993-1994 when the fiscal deficit was 6.8%. India's external debt is also increasing. At this juncture of a complex and grim situation, the Government of India is desperately searching for untapped areas wherefrom revenue can flow into the Government exchequer. I personally think the implication of section 194Q in the Income Tax Act, 1961 is one of several desperate attempts of the Government to increase the flow of revenue into the exchequer. Because, already there are several sub sections especially (1H) under section 206C in the Income Tax Act, 1961 prescribing for TCS on sale of goods. One person's sale means another person's purchase. Therefore, the credibility of section 194Q to swell the Government exchequer is very much questionable to me.
1. Date of Applicability of Section 194Q
With effect from 1st day of July 2021
2. Rate of TDS
- 0.1% on gross purchase value*.
- 5% where a seller can't provide PAN to the purchaser.
*Including GST
3. Persons responsible for deducting TDS on purchase of Goods
A buyer whose total sales, gross receipts and turnover from business exceeded rupees ten crores during the financial year immediately preceding the financial year in which purchase of goods is carried out.
Note: The Central Government may exempt certain category of persons from the purview of Section 194Q
4. Threshold limit of purchase to deduct TDS
An eligible buyer (see point no. 3) shall deduct TDS @0.1% on such portion of purchase value that is exceeding rupees fifty lakh.
Threshold limit of rupees fifty lakh shall be calculated separately for each individual seller from the perspective of the buyer.
Threshold limit of rupees fifty lakh is to be calculated for each year separately.
Value of a single transaction may be more than rupees fifty lakh or cumulative value of more than one transaction may cross the threshold value.
Value of purchase from each individual seller shall be calculated from the first day of a financial year. The moment it exceeds rupees fifty lakh the buyer will start deducting TDS @0.1%.
Note: The section will be effective from 01.07.2021. Therefore, from which date threshold limit of rupees 50 lakh should be calculated. In my personal opinion it should be calculated from 01.04.2021.
5. Residential status of seller
The seller shall be an Indian Resident. Payment for purchase to non-resident does not come under the purview of section 194Q.
6. When TDS shall be deducted by the buyer
TDS shall be deducted at the time of credit of purchase value to the account of the seller maintained in the books of the purchaser or at the time of actual payment thereof, whichever is earlier.
Note: Even if such sum is credited to any account, whether called “suspense account or by any other name in the books of account of the purchaser, credit of such sum shall be deemed to be the credit to the account of the seller and the provisions of this section shall apply accordingly.
7. Cases where section 194Q is not applicable
- The provisions of section 194Q are not applicable in the following situations:
- Tax is deductible under any other provisions of the Income Tax Act, 1961.
- Tax is collectible under the provisions of section 206C other than a transaction to which section206C (1H) applies.
8. Where both section 206C(1H) and section 194Q are applicable
Section 206C(1H) prescribed for TCS @0.1% on sales. On the other hand section 194Q is prescribing to deduct TDS @0.1% on purchase. One person's purchase means other person's sale. Therefore, both sections may be applicable in a single transaction.
Let us an in-depth look to both the sections.
Second proviso to section 206C(1H) prescribed that the section shall not be applicable if in case the buyer is liable to deduct tax at source under any provision of this Act on the goods purchased by him from the seller and has deducted such amount.
Therefore, where TDS is deductible on purchase under section 194Q and purchaser has actually deducted such TDS amount, the seller cannot collect TCS under section 206C(1H)
As per the sub-section 5 of section 194 Q (i.e. point no. 7 above), the provisions of the section shall not apply where tax is collectible under the provisions of section 206C other than a transaction to which sub section (1H) of section 206C applies.
Therefore, we can conclude that as per the section 194Q, on a particular transaction both the section 194Q and section 206C (1H) can be applicable.
But if we analyze both the sections together, where purchaser actually deducted TDS under section 194Q on a certain purchase transaction, section 206C (1H) would not be applicable on the same on the part of the seller. Hence, where both the sections are applicable on a certain transaction, it is the purchaser who will have main responsibility to deduct TDS under section 194Q and thus avoiding the implication of section 206C (1H) on the same.
9. PRACTICAL ISSUES
Section 206C (1H) is prescribing the seller to collect TCS @0.1% at the time of receiving money from the purchaser.
Seller charge TCS on its sale invoice. Therefore, the moment seller raises an invoice TCS is credited in books of account as liability on the other hand value of invoice is debited in the customer's account maintained in the books of seller.
The purchaser may get delivery of goods on the same day or next day or even after seven days or more. After getting delivery of goods and invoice, the purchaser will make
entry of the invoice in its books of account. Only then the buyer will be in a position to deduct TDS and make entry of such in its book.
Section 206C(1H) shall not be applicable if in case the buyer is liable to deduct tax at source on the goods purchased by him from the seller and has deducted such amount.
Therefore, when seller is generating sales invoice, the buyer generally is not in a position to deduct TDS on such transaction. Now what to do! Whether the purchaser should ask to seller that I will deduct TDS on the purchase value and you may issue a credit note for the TCS amount already charged on the invoice and in turn I will issue a debit note or both the sections shall be applicable on a particular transaction. Because, if we analyze sub section 5 of section 194Q, it may be concluded that both sections 206C(1H) and 194Q may be imposed on a single transaction.
In reality and practically it is not viable and justified to handle the situation in the manner described in the above paragraph.
My opinion in this confusing situation
The Government should prescribe a particular form under section 194Q. Wherein a purchaser should issue an annual declaration (or at the time of placing purchase order) to seller that he is liable to deduct TDS under section 194Q of the Income Tax Act, 1961. Hence, seller shall not charge TCS under section 206C(1H) on the invoice issued to that particular purchaser.
However, sub-section3 of section 194Q clearly says
If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.
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