In a series of clarification regarding TDS obligation from 1st July 2021 onwards, the Central Board of Direct Taxes, Government of India, has issued another circular on 30th June 2021 answering the following questions in connection with TDS liability under section 194Q of the Income-tax Act, 1961. The provision is applicable from 1st July 2021 onwards and makes it mandatory to deduct / withhold tax at source on purchase of goods from an Indian resident seller, subject to certain conditions. Please refer our email dated 9th June 2021 for details.
1. Exemption to certain categories of transactions
Section 194Q shall not apply to:
- Transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by recognized clearing corporation (including those located in International Financial Service Centre)
- Transactions in electricity, renewable energy certificates and energy saving certificates traded through registered power exchanges
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2. Calculation of threshold limit of Rs.50 lakh for Financial Year (FY) 2021-22
- Section 194Q shall not apply on any sum credited or paid before 1st July 2021, i.e, if either of the 2 events had happened before 1st July 2021 that transaction would not be subjected to section 194Q
- If a buyer has already credited or paid Rs.50 lakh or more up to 30th June 2021 to a seller, then TDS under section 194Q shall apply on all credit or payment during FY 2021-22 on or after 1st July 2021, to such seller
3. Adjustment of GST, Purchase Returns
- When tax is deducted at the time of credit, the base amount on which TDS is calculated shall exclude GST
- However, if tax is deducted on payment basis before credit (such as advance), GST shall be included in the base amount as it is not possible to identity that payment with GST component of the amount to be invoiced in future
- With respect to purchase return, tax deducted may be adjusted against the next purchase from the same seller. No adjustment is required if the purchase return is replaced by the goods.
4. Whether non-resident can be buyer under section 194Q?
No, unless the purchase of goods from Indian resident seller is effectively connected with the permanent establishment (taxable presence) of such non-resident in India.
5. Whether tax is to be deducted when the seller is a tax-exempt person?
No, provided seller’s whole income is tax-exempt (not just a part).
6. Whether tax is to be deducted on advance payment?
Yes, as the provision applies at the time of payment or credit whichever is earlier.
7. Whether section 194Q shall apply to buyer in the year of incorporation?
No, because the pre-requite of buyer having minimum sales / gross receipts of Rs.10 crore in the preceding year would not be satisfied.
8. Whether turnover / gross receipts of preceding year from non-business activity is to be counted for calculating the threshold of Rs. 10 crore?
No. Only the turnover / gross receipts from business activity shall be counted.
9. Cross application of Sections 194O and 194Q .
Section 194O calls for TDS @ 1% on payment or credit of sales amount by an e-commerce operator to e-commerce participant.
- If tax has been deducted by an e-commerce operator on a transaction under section 194O, that transaction shall not be subjected to tax deduction under section 194Q
- If a transaction is within the purview of both section 194O as well as section 194Q, tax is required to be deducted under section 194O and not section 194Q.
Read the Circular no. 13 dated 30th June 2021 issued by the Central Board of Direct Taxes.