An Overview of TDS Provision under Section 194Q

1. Finance Act, 2021 inserted a new section 194Q in the Income-tax Act 1961 for deduction
of tax at source in case of purchase of goods.

The Central Board of Direct Taxes (CBDT) vide circular No. 13 dated 30 June 2021 has
issued the guidelines in respect of TDS under Section 194Q of the Income Tax Act, 1961.

2. Statutory Provision: Any person, being a buyer who is responsible for paying any sum to
any resident 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 percent of such sum exceeding fifty lakh rupees as income-tax.

“Buyer” means a person whose total sales, gross receipts, or turnover from the business
carried on by him exceed ten crore rupees during the financial year immediately preceding
the financial year in which the purchase of goods is carried out.

3. An overview of the TDS provision under section 194Q in line with the guidelines have
been brought out in succeeding Paragraphs

The person required to deduct Tax Any person, being a buyer is required to deduct tax
under this section. Section 2(31) of the Act defines ‘person’ to include individuals, HUFs,
Companies, Partnership Firms, LLPs, AOP, BOI, Local Authorities, and Artificial Judicial
persons (AJP). Therefore, every aforesaid person is required to deduct tax under this Section.

Non-Resident Buyer: The provision of section 194Q shall not apply to a non-resident buyer
unless he has permanent established in India and purchases are made from such permanent
establishments.

Multiple Units under the same PAN: A buyer may have multiple TAN (Tax Account
Number) for its Units in different locations. Total Sales, Gross Receipts, or turnover from the
Units in different locations under the same PAN shall be aggregated to compute the
threshold of 10 crore Rupees.

Similarly, purchases made from different units of sellers need to be aggregated to compute
the limit of Rs. 50 Lakhs. For Example, M/S MDL purchased goods from different units of
M/S BEL, the liability to deduct tax under section 194 Q will arise when the aggregate
amount paid or payable against BEL PAN number crosses the limit of Rs. 50 Lakhs.

Inter Branch Purchases Section 194Q is not applicable on inter-branch transfers as the
threshold limit is on PAN Basis and not on a TAN (Tax Account Number) basis.
Turnover from Non-Business Activity Turnover from Non-business activity is not to be
counted for the threshold limit of Rs. 10 crores. For section I94Q, a buyer is required to have
total sales or gross receipts or turnover from the business carried on by him exceeding ten
crore rupees 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 Rs 10 crore. His turnover or receipts from the non-business activity is not to be
counted for this purpose – Para 4.8 of circular No. 13/2021 dated 30.06.2021

Gross Receipt from Profession/ Services The gross receipts/turnover from Profession is
not to be counted for the threshold limit of Rs. 10 crores. A Chartered Accountant having
professional income for more than Rs 10 crores is not required to deduct tax under this
section on his purchases.

Purchase of Goods from Seller who is exempted from Income Tax The provisions of
194Q of the Act shall not apply to purchase of goods from a person, being a seller, who as a
person is exempt from income tax under the Act (like person exempt under section 10) or
under any other Act passed by the Parliament i.e. RBI Act, ADB Act, etc.- Para 4.f of the
circular No. 13/2021 dated 30.06.2021

The said above clarifications would not apply if only part of the income of the seller is
exempt.

TDS on Imported Goods The buyer will not have any obligation to deduct tax under sec
194Q on imported Goods. This is because, in the case of import, the seller is a non-resident
and the obligation to deduct tax arises only when the payment is made to a resident seller.

TDS on Goods Exported abroad In the transaction of export of goods, the buyer is a
non-resident and the provision of section 194Q shall not apply to a non-resident buyer.
Hence the provision does not apply to the export of goods.

Rate of Tax The tax shall be deducted by the buyer of goods at the rate of 0.1% of the
purchase value exceeding Rs. 50 lakhs. If the seller is a specified person (non-filer of ITR for
the previous two years) and has not furnished his PAN or Aadhaar, the tax shall be deducted
at the rate of 5%.

Certificate for lower deduction of TDS The buyer does not have the option to approach
the assessing officer to issue a certificate for a lower tax deduction or to file a declaration for
nil deduction in respect of transactions covered under section 194Q. The Finance Bill, 2021,
has not extended the benefit to apply for a certificate for deduction of tax at lower rates or
to file a declaration for nil deduction in respect of transactions covered under Section 194Q.
Threshold of Rs 50 Lakhs for FY 2020-21 Section 194Q of the Act mandates buyers to
deduct tax on purchase value exceeding Rs 50 lakhs. This section is applicable w.e.f 01 July
2021.

The threshold of fifty lakh rupees is for the previous year. The calculation of the sum of Rs 50
lakhs for triggering TDS shall be computed from 1st April 2021. Hence, if a buyer has already
credited or paid fifty lakh rupees or more up to 30th June 2021 to a seller, the TDS under
section 194Q shall apply on all credit or payment during the previous year, on or after 01.07
2021, to such seller

TDS in respect of Advance paid before 01 July 2021 The tax is required to be deducted
on earlier of the two events (a) Credit of sum in the account of the seller or (b) on payment
of such sum.

It is clarified vide Para 4.2 of the circular No. 13/2021 dated 30.06.2021 that the
transaction would not be subjected to the provisions of section 194Q of the Act, if either of
the two events had happened before 1st July 2021. Thus, the tax is not required to be
deducted in respect of advance paid before 1st July 2021 and the sum credited thereafter.

TDS in respect of Advance paid after 01 July 2021: The provisions of section 194Q of
the Act shall apply to advance payment made by the buyer after 01 July 2021, as the
provisions apply on payment or credit whichever is earlier.

Adjustment for GST: The GST amount shall not be considered for TDS under section
194Q. When the component of GST comprised in the amount payable to the seller is
indicated separately, tax shall be deducted on the amount credited without including such
GST. –Para 4.3 of circular No. 13/2021 dated 30.06.2021.

However, if the tax is deducted on a 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 the GST component of the amount to be invoiced in the future.

Out-of-pocket expenses: The additional, allied, and out-of-pocket expenses shall form part
of the purchase value of goods where these expenses have been reflected in the purchase
invoice itself. If they are charged through a separate invoice, it should not form part of the
purchase value.

Purchase Returns: In the case of purchase returns, the money is refunded by the seller on
which the tax must have already been deducted under section 194Q. In such a case, the tax
deducted may be adjusted against the next purchase from the same seller.
No adjustment is required if the seller replaced the goods against the purchase return. In
that case, the purchase on which tax was deducted under section 194Q of the Act has been
completed with goods replaced.

TDS in the year of Incorporation: The Provision of Section 194Q shall not apply in the
year of incorporation as turnover from the business carried immediately preceding the
financial year will be NIL for the entity incorporated in the current year.

Transactions on which TDS deducted by E-Commerce Operator: The transactions on

Section 206(IH) Vs. Section 194Q: If a transaction is both within the purview of section
194-Q of the Act as well as sub-section (I H) of section 206C of the Act, the tax is required to
be deducted under section 194-Q of the Act.

However, if, for any reason, tax has been collected by the seller under sub-section (I H) of
section 206C of the Act, before the buyer could deduct tax under section 194-Q of the Act
on the same transaction, such transaction would not be subjected to tax deduction again by
the buyer.

Transactions carried through various Exchanges: The provisions of section 194Q shall not
apply to transactions in securities and commodities which are traded through recognized
stock exchanges or cleared and settled by the recognized clearing corporation.

Transactions in Electricity: The provisions of section 194Q shall not apply to transactions
in electricity, renewable energy certificates, and energy-saving certificates traded through
power exchanges registered in accordance with Regulation 21 of the CERC.

Purchase of Immovable property: The TDS shall not be deducted from the purchase of
immovable property as section 194 Q is applicable on purchase of goods and ‘goods’ means
every kind of movable property Thus; the immovable property shall not be treated as
‘goods.

The consequence of Non-Compliance: – If the Buyer fails to deduct the applicable TDS u/s
194Q then in addition to penal interest a disallowance of 30% of his purchases on which TDS
was required to be deducted will get attracted.
CBDT releases Guidelines under section 194Q of Income-tax Act, 1961 vide Circular No. 13 of
2021 | Dated: 30th June, 2021. Section 194Q takes effect from 1st day of July, 2021.

F. No. 370142/26/2021-TPL
Government of India
Ministry of Finance
Department of Revenue
(Central Board of Direct Taxes)
***********

Circular No. 13 of 2021 | Dated: 30th June, 2021

Finance Act, 2021 inserted a new section 194Q in the Income-tax Act 1961 (hereinafter referred to as
“the Act”) which takes effect from 1st day of 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 value
exceeding fifty lakh rupees 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, is required to deduct an amount
equal to 0.1% of such sum exceeding fifty lakh rupees as income tax.

2. Buyer is defined to be person whose total sales or gross receipts or turnover from the business
carried on by him exceed ten crore rupees during the financial year immediately preceding the
financial year in which the purchase of good is carried out. Central Government has been authorised
to specify by notification in the Official Gazette. person who would not be considered as buyer for
the purposes of this section.

3. Sub-section (3) of section 194Q of the Act empowers the Board (with the approval of the Central
Government) to issue guidelines for the purpose of removing difficulties. Various representations
have been received by the Board for issuing guidelines for removing certain In exercise of power
contained under sub-section (3) of section 194Q of the Act. the Board, with the approval of the
Central Government, hereby issues the following guidelines. These guidelines at some places have
also tried to remove difficulties in implementing the provisions of section 194-0 and sub-section (1
H) of section 206C of the Act using power contained in sub-section (4) of section 194-0 of the Act
and sub-section (II) of section 206C of the Act.

4. Guidelines

4.1 Applicability on transactions carried through various Exchanges:

4.1.1 It has been represented that there are practical difficulties in implementing the provisions of Tax
Deduction at Source (TDS) contained in section 194-Q of the Act in case of certain exchanges and
clearing corporations. It has been stated that sometime in these transactions there is no one to one
contract between the buyers and the sellers.

4.1.2 In order to remove such difficulties, it is provided that the provisions of section 194Q of the Act
shall not be applicable in relation to,-
(i) 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;

(ii) transactions in electricity. renewable energy certificates and energy saving certificates traded
through power exchanges registered in accordance with Regulation 21 of the CERC; and

For this purpose,-

(i) “recognized clearing corporation” shall have the meaning assigned to it in clause (i) of the
Explanation to clause (23EE) of section 10 of the Act;

(ii) “recognized stock exchange” shall have the meaning assigned to it in clause (ii) of the
Explanation I to sub-section (5) of section 43 of the Act; and

(iii) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of
section 2 of the Special Economic Zones Act, 2005.

4.2 Calculation of threshold for the financial year 2021-22.

4.2.1. Since section 194Q of the Act would come into effect from 1st July, 2021. it was requested to
clarify how the threshold of fifty lakh rupees specified under this section shall be computed and
whether the tax is required to be deducted in respect of advance paid before lot July 2021 and sum
credited thereafter.

4.2.2 It hereby clarified that,-

(i) Since section 194Q 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 is‘ July 2021. If either of the two events had happened before is‘
July 2021, that transaction would not be subjected to the provisions of section I94Q of the Act.

(ii) 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 Is‘ 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 194Q shall apply on all credit or payment during the previous year, on or after is‘ July
2021, to such seller.

4.3 Adjustment for GST, purchase returns

4.3.1 It is requested to clarify that whether adjustment is required to be made for GST or purchase
returns for the purpose of tax deduction under section 194Q of the Act. Vide circular no 17 of 2020
dated 29th Sept 2020 it was clarified that no adjustment on account of GST is required to be made for
collection of tax under sub-section (IH) of section 206C of the Act 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 of 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 _’VII-B of the Act 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.”

4.12 Accordingly with respect to TDS under section 194Q of the Act. 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 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.

4.3.3 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 under section 194Q of the Act 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 of the Act has been completed with goods replaced.

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

4.4.1 It is requested to clarify if the provisions of section 194Q of the Act shall apply to a buyer being
a non-resident. To remove difficulties, it is clarified that 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 nonresident 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.

4.5 Whether tax is to be deducted when the seller is a person whose income is exempt

4.5.1 It is requested to clarify if the provisions of section 194Q of the Act shall apply to a seller
whose income is exempt. To remove difficulty, it is clarified that the provisions of section 194Q of
the Act shall not apply on purchase of goods from a person, being a seller, who as a person is exempt
from income tax under the Act (like person exempt under section 10) or under any other Act passed
by the Parliament (Like RBI Act, ADB Act etc.).

4.5.2 Similarly, with respect to sub-section (1H) of section 206C of the Act, it is clarified that the
provisions of this sub-section shall not apply to sale of goods to a person, being a buyer, who as a
person is exempt from income tax under the Act (like person exempt under section 10) or under any
other Act passed by the Parliament (Like RBI Act, ADB Act etc.).

4.5.3 The above clarifications would not apply if only part of the income of the person (being a seller
or being a buyer. as the case may be) is exempt.

4.6 Whether tax is to be deducted on advance payment?

4.6.1 It is requested to clarify if the provisions of section 194Q of the Act shall 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 of the Act shall apply to advance payment made
by the buyer to the seller.

4.7 Whether provisions of section 194Q of the Act shall apply to buyer in the year of
incorporation?

4.7.1 It is requested to clarify if the provisions of section 194Q of the Act shall apply to a buyer in the
year of its incorporation. It is clarified that under section 194Q of the Act a buyer is required to have
tota! sales or gross receipts or turnover from the business carried on by him exceeding ten crore
rupees 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 Act shall not apply in the year of incorporation.

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

4.8.1 It is requested to clarify if the provisions of section 194Q of the Act shall apply to a buyer who
has turnover or gross receipt exceeding Rs 10 crore but total sales or gross receipts or turnover from
business is Rs 10 crore or less. It is clarified that for the purposes of section 194Q of the Act, a buyer
is required to have total sales or gross receipts or turnover from the business carried on by him
exceeding ten crore rupees during the financial year immediately preceding the financial year in
which the purchase of good is carried out. Hence, the sales or gross receipts or turnover from
business carried on by him must exceed Rs 10 crore. His turnover or receipts from non-business
activity is not to be counted for this purpose.

4.9 Cross application of section 194-0, sub-section (111) of section 206C and section 194Q of the
Act.

4.9.1 It is requested to clarify how section 194-0. sub-section (1H) of section 206C and section 194Q
of the Act, apply on the same transaction.

4.9.2 Under sub-section (3) of section 194-0 of the Act. a transaction in respect of which tax has been
deducted by the e-commerce operator under sub-section (1), or which is not liable to deduction under
sub-section (2), shall not be liable to tax deduction at source under any other provision of chapter
XVII of the Act.

4.9.3 Under second proviso to sub-section (1H) of section 206C of the Act, provisions of this sub-
section shall not apply, if the buyer is liable to deduct tax at source under any other provisions of this
Act on the goods purchased by him from the seller and has deducted such tax.

4.9.4 Under sub-section (5) of section 194Q of the Act, the provision of this section shall not apply to
a transaction on which-

(i) tax is deductible under any of the provisions of this Act; and

(ii) tax is collectible under the provisions of section 206C, other than a transactions on which sub-
section (1 H) of section 206C applies

4.9.5 After conjoint reading of all these provisions the following is clarified:
(i) If tax has been deducted by the e-commerce operator on a transaction under section 194-0 of the
Act [including transactions on which tax is not deducted on account of sub-section (2) of section 194-
0]. that transaction shall not be subjected to tax deduction under section 194Q of the Act.

(ii) Though sub-section (1H) of section 206C of the Act 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
operator.

(iii) If a transaction is both within the purview of section 194-0 of the Act as well as section 194Q of
the Act, tax is required to be deducted under section 194-0 of the Act and not under section 194Q of
the Act.

(iv) Similarly, if a transaction is both within the purview of section 194-0 of the Act as well as sub-
section (1H) of section 206C of the Act, tax is required to be deducted under section 194-0 of the Act.
The transaction shall come out of the purview of subsection (1 H) of section 206C of the Act after tax
has been deducted by the e-commerce operator on that transaction. Once the e-commerce operator
has deducted the tax on a the seller is not required to collect the tax under sub-section (1H) of section
206C of the Act on the same transaction. It is clarified that here primary responsibility is on e-
commerce operator to deduct the tax under section 194-0 of the Act and that responsibility cannot be
condoned if the seller has collected the tax under sub-section (1H) of section 206C of the Act. This is
for the reason that the rate of TDS under section 194-0 is higher than rate of TCS under sub-section (I
H) of section 206C of the Act.

(v) If a transaction is both within the purview of section 194-Q of the Act as well as sub-section (1 H)
of section 206C of the Act, the tax is required to be deducted under section 194-Q of the Act. The
transaction shall come out of the purview of sub-section (1H) of section 206C of the Act 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 under sub-section (1H) of section 206C of the Act on the
same transaction. However, if, for any reason. tax has been collected by the seller under sub-section
(1 H) of section 206C of the Act, before the buyer could deduct tax under section 194-Q of the Act 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 subsection (1H) of section 206C of the Act.

(Ankit Jain)

Under Secretary to the Govt. of India

Circular No. 13 of 2021