How to compute tax to be deducted (TDS) u/s 194Q?

Table of Contents

1. How to compute tax to be deducted under section 194Q?

1.1 Income subject to tax deduction under section 194Q
1.2 Rates for tax deduction at source during the financial year 2022-23
1.3 Income in respect of amount payable to Government or certain corporation
1.4 Deduction of tax at lower rates [Sec. 197(1)]
1.5 Who gets credit for tax deducted?

Check out Taxmann's Deduction of Tax at Source with Advance Tax and Refunds which provides legal analysis of the provisions relating to TDS, TCS, Advance Tax and Refunds under the Income-tax Act. It also includes guidance on all practical problems supported by illustrations, case laws, etc. This book is amended by the Finance Act 2022.

1. How to compute tax to be deducted under section 194Q?

1.1 Income subject to tax deduction under section 194Q

If the following conditions are satisfied, then tax is deductible under section 194Q –

1. 1. Payer is “buyer” of goods.
   2. Payment/credit is on or after July 1, 2021.
   3. Payment/credit pertains to purchase of goods from seller.
   4. Aggregate payment/credit during the financial year exceeds Rs. 50 lakh.

If the above conditions are satisfied, the buyer is required to deduct tax at source under section 194Q.

1.1-1 When tax is not deductible – Tax is not deductible under section 194Q if the following cases –

1.1-2 Removing any difficulty – If any difficulty arises in giving effect to the provisions of this section, the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty. These guidelines shall be laid before each House of Parliament and shall be binding on the income-tax authorities and on the e-commerce operator.

1.2 Rates for tax deduction at source during the financial year 2022-23

Tax is deductible under section 194Q with effect from July 1, 2021. Tax is deductible by buyer at the rate of 0.1 per cent of the amount paid or payable exceeding Rs. 50 lakh.

(i) If the recipient does not furnish his PAN to the deductor, tax will be deducted at the rate of 5 per cent by virtue of section 206AA. PAN of the deductee should be mentioned in any correspondence and document which is exchanged between the deductor and deductee.

(ii) If recipient is a non-filer of income-tax return, tax is deductible (by virtue of section 206AB) at the rate of 5 per cent [for detailed discussion, see Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds].

1.2-1 Clarifications by CBDT – Vide Circular No. 13/2021, dated June 30, 2021 and Circular No. 20/2021, dated November 25, 2021, the following clarifications are given by the Board pertaining to section 194Q –

• •  Transactions in securities – Section 194Q shall not be applicable in relation to, –

1. 1. 1. 1. transactions in securities and commodities which are traded through recognized exchanges;
         2. transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges.

• • Adjustment for GST and other State levies – 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 on the amount credited without including such GST. If, however, 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.The above clarification will also be applicable in the case of purchase/sale of goods which are not covered by GST but covered by other State levies (i.e., VAT, excise duty, etc.).
  • Purchase returns – 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 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.
  • Whether non-resident can be buyer under section 194Q – 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.
  • Whether tax is to be deducted when the seller is a person whose income is exempt – The provisions of section 194Q 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. However, this clarification would not apply if only part of the income of the seller is exempt.
  • Whether tax is to be deducted on advance payment – Since the provisions of section 194Q apply on payment or credit whichever is earlier, TDS shall apply to advance payment made by the buyer to the seller. 
  • Whether provisions of section 194Q shall apply to buyer in the year of incorporation – Under section 194Q a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding Rs. 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.
  • Whether provisions of section 194Q shall apply to buyer if the turnover from business is Rs.10 crore or less – 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 Rs. 10 crore during the immediately preceding financial year. Consequently, 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.
  • Cross application of section 194-O, section 206C(1H) section 194Q – Under section 194Q(5), the provision of this section shall not apply to a transaction on which –

1. 1. 1. 1. tax is deductible under any of the provisions of this Act; and
         2. tax is collectible under the provisions of section 206C [other than a transactions on which sub-section (1H)] applies.After conjoint reading of all these provisions the following clarifications are given by the Board –

1. 1. 1. 1. If tax has been deducted by the e-commerce operator on a transaction under section 194-O [including transactions on which tax is not deducted on account of sub-section (2) of section 194-O], that transaction shall not be subjected to tax deduction under section 194Q.
         2. Section 206C(1H) provides exemption from TCS if the buyer has deducted tax at source on goods purchased by him. To remove difficulties, it has been 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.
         3. If a transaction is both within the purview of section 194-O as well as section 194Q, tax is required to be deducted under section 194-O and not under section 194Q.
         4. 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 under section 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 under section 206C(1H) on the same transaction. Primary responsibility is on e-commerce operator to deduct the tax under section 194-O and that responsibility cannot be condoned if the seller has collected the tax under section 206C(1H). This is for the reason that the rate of TDS under section 194-O is higher than rate of TCS under section 206C(1H).
         5. If a transaction is both within the purview of section 194Q as well as section 206C(1H), the tax is required to be deducted under section 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 under section 206C(1H) on the same transaction. If, however, for any reason, tax has been collected by the seller under section 206C(1H), before the buyer could deduct tax under section 194Q on the same transaction, such transaction would not be subjected to tax deduction again by the buyer.

• • E-auction services carried out through electronic portal – The provisions of section 194-O shall not apply in relation to e-auction activities carried out by e-auctioneers if the following parameters are satisfying –

1. 1. 1. 1. the e-auctioneer conducts e-auction services for its clients in its electronic portal and is responsible for the price discovery only which is reported to the client;
         2. the price so discovered through e-auction process is not necessarily the price at which the transaction takes place and it is up to the discretion of the client to accept the price or to directly negotiate with the counter-party;
         3. the transaction of purchase/sale takes place directly between the buyer and the seller outside the electronic portal maintained by the e-auctioneer and price discovery only acts as the starting point for negotiation and conclusion of purchase/sale;
         4. the e-auctioneer is not responsible for facilitating the purchase and sale of goods for which e-auction was conducted on its electronic portal except to the extent of price discovery;
         5. payments for the transactions are carried out directly between the buyer and the seller outside the electronic portal and the e-auctioneer does not have any information about the quantum and the schedule of payment which is decided mutually by the client and the counterparty;
         6. for payment made to e-auctioneer for providing e-auction services, the client deducts tax under the relevant provisions of the Act other than section 194-O.This clarification shall not apply if any of the aforesaid parameters are not satisfied. Moreover, the buyer and seller would still be liable to deduct/collect tax as per the provisions of sections 194Q and 206C(1H), as the case may be.

• • Applicability of section 194Q in cases where exemption has been provided under section 206C(1A) – Under section 206C(1A), tax is not collectible in case of a resident buyer, if the buyer furnishes to the person responsible for TCS a declaration to the effect that the goods [as referred to in section 206C(1)] are to be utilized for the purposes of manufacturing/processing of articles or for the purposes of generation of power and not for trading purposes. Since by virtue of section 206C(1A), the tax is not required to be collected for goods covered under sub-section (1) of the said section, the Board has clarified that the provisions of section 194Q will apply and the buyer shall be liable to deduct tax under the said section if the conditions specified therein are fulfilled.
  • Applicability of the provisions of section 194Q in case of Government department (not being a public sector undertaking/corporation) – In case of any Government department (which is not carrying out any business or commercial activity), the primary requirement for being considered as a “buyer” (i.e., turnover of the preceding year exceeding Rs. 10 crore) will not be fulfilled. Consequently, such an organization will not be subject to TDS provisions of section 194Q. If, however, the said department is carrying on a business/commercial activity (turnover of the preceding year exceeds Rs. 10 crore), the provision of section 194Q shall apply subject to the fulfilment of other conditions.
    It may be noted that for the purpose of section 194Q Central Government/State Government (or any department of Government) shall not be considered as “seller” and no tax is to be deducted by the buyer, in cases where any department of Central or State Government are seller of goods. However, any other person (such as a public sector undertaking or corporation established under Central or State Act) shall be required to comply with the provisions of section 194Q.

1.3 Income in respect of amount payable to Government or certain corporation

No tax is deductible at source from income in respect of units payable to the following –

1. 1. the Government [sec. 196(i)]; or
   2. the Reserve Bank of India [sec. 196(ii)]; or
   3. a corporation established by or under a Central Act which is, under any law for the time being in force, exempt from tax on its income [sec. 196(iii)]; or
   4. a mutual fund specified under section 10(23D) [sec. 196(iv)].

• •  Section 197A(1F) – Tax is not deductible from a specified payment to a notified institution, association or body or class of institutions, associations or bodies [see Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds].

1.4 Deduction of tax at lower rates [Sec. 197(1)]

The provisions of section 197 (pertaining to lower/nil TDS certificate from the Assessing Officer) are not applicable in respect of tax deductible under section 194Q.

1.5 Who gets credit for tax deducted?

Any tax deducted from income from units in accordance with the provision of section 194Q and paid to the Central Government is treated as a payment of tax on behalf of unitholder. Tax credit is, therefore, given to him for the amount so deducted at the time of assessment.