Article on Section 194Q and other recent developments

This circular is for the purpose of Information and further action required by all the Stakeholder on
Section 194Q, 206CCA & 206AB of the Income Tax Act 1961.

Under Finance Act 2021, section 194Q was introduced which is effective from July 1, 2021. As per
Section 194Q(1), “Any person, being a buyer who is responsible for paying any sum to any resident
(hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate
of such value exceeding fifty lakh rupees in any previous year, shall, at the time of credit of such
sum to the account of the seller or at the time of payment thereof by any mode, whichever is
earlier, deduct an amount equal to 0.1 per cent of such sum exceeding fifty lakh rupees as income-
tax.”
Which means that if:

 Goods are purchased from a resident (Here seller is A) and are purchased for a value or aggregate of
value exceeding Rs. 50 lakhs in any previous year AND
 The turnover of the purchaser (Here purchaser is B) is more than INR 10 crores in the preceding
financial year AND
 TDS has not been deducted under any other provisions of the Income Tax Act 1961 THEN

TDS under section 194Q shall be deducted at the time of credit to the account of the seller (A) or at
the time of payment whichever is earlier.

At present, TCS under section 206C (1H) is already applicable and it is being with the introduction of
new section on TDS, you may doubt on how both the sections will work together hence both the
sections are explained as under;

Particulars Section 194Q (TDS) Section 206C (1H) (TCS)

Applicable on Purchase of goods or payment Applicable on receipt on Sale
whichever is earlier of goods
Effective date July 1, 2021 October 1, 2020
Onus of compliance Buyer Seller
Rate of tax 0.10% if seller has filed 0.10% if buyer has filed
income tax return of previous income tax return of
two years within timelines and previous two years within
have valid PAN timelines and have valid PAN
5% if seller has not filled 5% if buyer has not filled
income tax return of any of income tax return of any of
last two years or does not last two years or does not
have valid PAN have valid PAN
Consequences of non- 30% disallowance under sectionSeller have to pay interest
compliance 40(a)(ia). In addition to
30% disallowance, buyer will
also have to pay interest and
penalty
Threshold Total business of INR 10 Cr. Total business of INR 10 Cr.
and purchase of more than and sales of more than INR
INR 50 lakhs in any previous 50 lakhs in a financial year
year
What if purchase of TDS provision will be If TDS is applicable on a
more than INR 50 applicable, and buyer will be particular transaction, no
lakhs in a financial required to deduct TDS TCS applicable on the said
year? transaction
 After section 206AA of the Income-tax Act, the following section shall be inserted with effect from the 1st
day of July,2021, namely:
“After section 206AB of the Income-tax Act, the following section shall be inserted with effect from the
1st day of July, 2021, namely:

This provision shall apply and the tax shall be deductible at the higher rates prescribed under
this provision if the following conditions are satisfied:

a) Deductee has not filed the return of income for 2 assessment years relevant to
the previous years immediately prior to the previous year in which tax is required to
be deducted;

b) The due date to file such return of income, as prescribed under Section 139(1),
has expired; and
c) The aggregate amount of tax deducted and collected at source is Rs. 50,000 or
more in each of these 2 previous years.

The tax shall be deducted at the higher of the following rates:

a) Twice the rate specified in the relevant provision of the Act;

b) Twice the rate or rates in force; or

c) 5%.

Note 1: The provisions of section 206AB doesn’t apply to a non-resident who does not have a PE
in India.

Note 2: If both the provisions of section 206AA and section 206AB are applicable, that is,
deductee has neither furnished his PAN to the deductor nor has he furnished his return of
income for the specified periods, the tax shall be deducted at the rates provided in section
206AA or section 206AB, whichever is higher.

Note 3: Tax is required to be deducted at higher rates under section 206AB in respect of every
sum or income or amount from which tax is deductible under any provision of Chapter XVII-B
except the sum or income or amount on which tax is deductible under any of the following
provisions:

(a) Section 192: TDS on Salary;

(b) Section 192A: TDS on withdrawal from EPF;

(c) Section 194B: TDS on winning from lotteries, crossword puzzles, etc.

(d) Section 194BB: TDS on winning from racehorses;

(e) Section 194LBC: TDS on income in respect of investment in Securitization Trust;

(f) Section 194N: TDS on cash withdrawal

206CCA. Special provision for collection of tax at source for non-filers of income-tax
return.

(1) Notwithstanding anything contained in any other provisions of this Act, where tax is required
to be collected at source under the provisions of Chapter XVII-BB, on any sum or amount received by
a person from a specified person, the tax shall be collected at the higher of the following two
rates, namely:
(i) at twice the rate specified in the relevant provision of the Act; or (ii) at the rate of five per cent.

(2) If the provisions of section 206CC is applicable to a specified person, in addition to the provisions
of this section, the tax shall be collected at higher of the two rates provided in this section and in
section 206CC.
(3) For the purposes of this section "specified person" means a person who has not filed the
returns of income for both of the two assessment years relevant to the two previous years
immediately prior to the previous year in which tax is required to be collected, for which the time limit
of filing return of income under sub-section (1) of section 139 has expired; and the aggregate of tax
deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of
these two previous years

Which means that if:

Every person, being a seller (Here refer seller as A), who receives any amount as consideration
from the buyer
(Here refer buyer B) shall collect the TCS under Section 206CCA at the rate of 5% if:

i. Income tax returns for both previous years immediately prior to the current year is not filed in
time AND
ii. the total of tax deducted at source and tax collected at source is Rs. fifty thousand or more
in each of these two previous years.

As per the requirement of above-mentioned section, we are required to collect TCS at 5% if you
have not filed your income tax return for last two year within timelines.

Further, the declaration to be obtained from all those parties whose TDS /TCS deducted in
last Financial Year is more than Rs. 50,000 in the below suggested format.

To Whom So Ever It May Concern (Entity’s Letterhead)

Declaration form for not imposing TDS/TCS Rate as per Sec. 206AB/206CCA of the Income
Tax Act

I/We, , having Permanent Account Number , am/are

resident in India and hereby declare as follows:

1. I/We have filed my/our Return of Income for the preceding Financial Year 2018-19
relevant to the Assessment Year 2019-20. The date of filing is and the
Acknowledgement Number issued by the Income Tax Department evidencing the filing of
the tax return is . The copy of the screenshot of
the ITR Acknowledgement evidencing the filing of the above tax return is enclosed.
2. I/We have filed my/our Return of Income for the preceding Financial Year 2019-20
relevant to the Assessment Year 2020-21. The date of filing is and the
Acknowledgement Number issued by the Income Tax Department evidencing the filing of
the tax return is . The copy of the screenshot of
the ITR Acknowledgement evidencing the filing of the above tax return is enclosed.

3. This point is applicable only if a tax return has not been filed as stated above:

Where I/We have not filed my Return of Income for both the preceding two Financial
Years 2019-20 and 2020- 21, I/We hereby confirm that the aggregate tax deducted and
tax collected at source is /is not Rs. 50,000/- or more in each of the two preceding
Financial Years 2019-20 and 2020-21.

4. I/We hereby declare that I/we am/are duly authorized to give this declaration and the
information stated above is true to the best of my/our knowledge and belief. If there is
any misdeclaration, I/we undertake to indemnify you/your organisation; for any interest
or any penal consequences.

(Signature) Name:

Designation:

Date:

Place:

Common Queries requiring Clarifications

1. How the threshold of 50 lakhs shall be computed?

Since the threshold of fifty lakh rupees is with respect to the previous year, calculation of
sum for triggering TDS under section 194Q shall be computed from 1st April, 2021. Hence, if
a person being buyer has already credited or paid fifty lakh rupees or more up to 30th June
2021 to a seller, the TDS under section l94Q shall apply on all credit or payment during the
previous year, on or after 1st July 2021, to such seller.

2. Whether the tax is required to be deducted in respect of advance paid before 1

st
July 2021 and sum credited thereafter.

Since section l94Q of the Act mandates buyer to deduct tax on credit of sum in the account
of seller or on payment of such sum, whichever earlier, the provision of this sub-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 of the Act.
 3. Whether adjustment is required to be made for GST for the purpose of tax
deduction under section 194Q of the Act?

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
under section 194Q of the Act 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.

4. Whether adjustment is required to be made for Purchase Returns for the purpose
of tax deduction under section 194Q of the Act?

If against any 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 it 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.

5. Whether non-resident can be buyer under section 194Q of the Act?

The provisions of section 194Q of the Act 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.

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

The provisions of section 194Q of the Act shall apply to advance payment made by the
buyer. Since the provisions apply on payment or credit whichever is earlier, the provisions of
section 194Q of the Act shall apply to advance payment made by the buyer to the seller.

From the above explanations, we have tried to explain the provisions and mechanism from
the business perspective in a simplified manner. You are requested to kindly take
appropriate legal advice from your tax consultant for the mechanism from your business
perspective.