Tuesday, February 9, 2021

TDS on Purchase of Goods - Section 194Q

Which person has to deduct TDS on purchase of goods?

The Finance Act 2021 has introduced the concept of TDS on Purchase of Goods under Section 194Q of the Income Tax Act, 1961, by which:

Turnover > 10 Crores: Any person whose total sales, gross receipts or turnover from business exceeds Rs. 10 crore in the previous financial year; and

Purchase > 50 Lakhs: purchases goods of a minimum value of Rs. 50 lakhs in a financial year from a resident seller; then

Time of Deduction: such buyer shall at the earlier of: (i) time of credit of such amount to the seller's account, or (ii) at the time of payment to the seller 

Rate of TDS: deduct TDS @ 0.1% of such sum exceeding Rs. 50 lakh

From when is this section coming into effect?

This section shall come into effect from 01-Jul-2021.

Is this section contradictory or complimentary to TCS on Sale of Goods under section 206C(1H)? What would happen if both seller and buyer need to collect or deduct TDS?

As per sub-section (5) of section 194Q, the provisions of this section shall not apply to a transaction on which:
(a) tax is deductible under any of the provisions of this Act; and
(b) tax is collectible under the provisions of section 206C other than a transaction to which section 206C(1H)applies.

Further, a proviso to section 206C(1H) states that the provisions of this section shall not apply, if the buyer is liable to deduct tax at source under any other provision of this Act on the goods purchased by him from the seller and has deducted such amount.

Thus, it can be understood that TDS is mandatorily required to be deducted by a buyer on purchase of goods above Rs. 50 lakhs if the purchaser has a turnover of over Rs. 10 crores in the previous financial year. If such buyer fails to deduct TDS, then the seller has to collect TCS on the sales exceeding Rs. 50 lakhs at 0.10%.

The buyer will be responsible to deduct TDS on purchase of goods @0.1% only if he fulfills the turnover criterion. In case the buyer's previous financial year's turnover is less than Rs. 10 crores, but the seller's turnover is above Rs. 10 crores, then the seller will be responsible to collect TCS @0.1%.

What is the repercussion of not deducting TDS on purchase of goods under this section?

As per section 40(a)(ia) of the Income Tax Act, 30% of the value of purchase will be disallowed while computing the taxable income of the buyer.

Whether TDS is to be deducted on the total invoice value including the GST?

In respect of Section 206C(1H), the CBDT has clarified vide Circular No. 17 dated 29-Sep-2020 that since the collection is made with reference to receipt of the amount of sale consideration, no adjustment on account of indirect taxes including GST is required to be made for the collection of tax under this provision.

As the TDS deduction u/s 194Q is to be made with reference to the purchase value, we may apply the same principle and conclude that GST shall form part of the purchase value, and TDS is deductible on the value inclusive of GST.