As you may be aware, Finance Act 2021 has inserted sec 194Q under Income Tax Act 1961 w.e.f 1st July 2021, introducing TDS (Tax Deducted at Source) on purchase of goods @ 0.1%. Buyers whose total turnover exceeds INR 10 crores in the immediate Previous Year are liable to deduct TDS on the value of the purchase of goods exceeding INR 50 lakhs.
Additionally, Sec 206AB has also been introduced wherein a higher rate of TDS is applicable in case the seller has not filed Income Tax Return for 2 previous years.
It increases the compliance burden and hence to comply with it, everyone has to make declarations regarding the same comply with it. Declaration format is provided for the ease of compliance to everyone.
The government in the year 2020 has made an important change in TCS provisions by making them applicable to the Goods sector at a large scale. Vide Finance Act 2020, Section 206C was amended by inserting a new subsection (1H) to allow the government to collect TCS on the Sale of Goods. This provision has been made effective from 1st October 2020. It is interesting here to note that, despite the Covid challenge, said provision has got implemented and there was no extension for it. As per said provisions, the supplier is required to collect and pay tax at 0.10% to the government on the amount received from a customer. There are some conditions for the application of these provisions. It was the first attempt to include the Goods sector at a large scale under TCS provisions.
To date, TDS provisions were applicable primarily on receipt of Services. However, to increase the scope of TDS provisions in the Goods sector, the Government has introduced new Section 194Q (TDS on Purchase of Goods) in the Finance Act 2021 which is going to be applicable from 1st July 2021. As per said provisions, now TDS is required to be deducted at 0.10% on the purchase of goods if conditions are satisfied.
As many taxpayers are still facing difficulties in complying with provisions of section 206C(1H), the insertion of new section 194Q has created lots of confusion among Professionals and Trade as to which section to be complied with.
- LEGAL PROVISIONS – SEC 206C (1H) AND SEC 194Q:
- Section 206C (1H) TCS on Sale of Goods:
Every person, being a seller, who receives any amount as consideration for the sale of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, other than the goods being exported out of India or goods covered in sub-section (1) or sub-section (1F) or sub-section (1G) shall, at the time of receipt of such amount, collect from the buyer, a sum equal to 0.1%. Of the sale consideration exceeding fifty lakh rupees as income tax.
“Seller” means
- A person whose total sales, gross receipts or turnover from the business carried on by him exceeds ten crore rupees during the financial year immediately preceding the financial year in which the sale of goods is carried out.
- Not being a person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.
◊ Section 194Q TDS on Purchase of Goods:
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% 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,
- Not being a person, as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.
♦ INTERPLAY/COMPARISON OF SECTION 194Q AND SEC 206C (1H)
| PARTICULARS | DETAILS OF SEC 194Q | DETAILS OF SEC 206C(1H) |
| Who is Liable to deduct TDS or collect TCS? | ‘Buyer’ Whose total sales, gross receipts or turnover from the business exceeds Rs. 10 Crores during the financial year immediately preceding the financial year in which such goods are purchased. | ‘Seller’ Whose total sales, gross receipts or turnover from the business exceeds Rs. 10 Crores during the financial year immediately preceding the financial year in which the sale of goods is carried out. |
| Applicable From | With effect from 1st July 2021 | Already in motion i.e., from 1st Oct 2020. |
| When is it Applicable? | Buyer Purchases goods from a resident person and the purchase/ payment is of value or aggregate of such value exceeding 50 Lakh rupees in any previous year. | Seller receives consideration for the sale of any goods from the Buyer (other than goods exported out of India) of the value or aggregate of such value exceeding 50 Lakh rupees in any previous year. |
| When to Deduct/ Collect Tax? | At the time of entry in the books of account of the buyer or at the time of payment thereof by any mode, whichever is earlier | At the time of receipt of such amount. |
| Applicable Rate | 0.1% of purchase/ payment exceeding 50 Lakh rupees If the deductee (i.e., seller) has not provided the Permanent Account Number to the deductor (i.e., buyer) then at the rate of 5%. | 0.1% of the sale consideration exceeding 50 Lakh rupees If the collectee (i.e., buyer) has not provided the Permanent Account Number or the Aadhaar number to the collector (i.e., seller) then at the rate of 1%. |
| What if Both the Sections “194Q and 206C(1H)” are Applicable to the same transaction? | Then Sec 194Q will prevail and Tax shall be deducted under Section 194Q only. | In this case, since the Buyer is liable to Deduct Tax (194Q) on the goods purchased from the Seller, section 206C (1H) shall not apply. |
| Cases when respective sections will not be applicable | (a)Tax is deductible under any of the provisions of this Act; and (b)Tax is collectable under the provisions of section 206C other than a transaction to which subsection (1H) of section 206C applies.’ (c) Payment of any sum other than to resident from whom such goods are purchased | (a) Receipts of Consideration of goods being exported out of India or (b) Goods which are covered under 206C(1) such as Tendu leaves, Timber, Scrap, etc or (c) Goods like Motor Vehicles covered under section 206C(1F) or (d) Goods covered under section 206C (1G) where money is received by an authorized dealer for remittance. (e) 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. |
| Date from which the Threshold limit of Rs.50 Lakhs is to be considered. | The limit shall be computed from the start of the Financial Year i.e., from 01/04/2021 (For FY 2021-22). If the limit crosses before 01/07/2021 then from the next transaction i.e., after 01/07/2021 itself TDS shall be computed and deducted on all the transactions after 01/07/2021. | For FY 2021-22 threshold limit of 50 Lakhs shall be computed from 01-04-2021 and TCS shall be applicable as and when consideration received crosses 50 Lakhs (including any previous dues/advance received) |
EXAMPLE ON APPLICABILITY AND CALCULATION FOR BETTER UNDERSTANDING:
(Amounts in CRORE)
| Particulars | Scenario 1 | Scenario 2 | Scenario 3 |
| Turnover of Seller – XYZ (In cr.) | 15 | 8 | 15 |
| Turnover of Buyer -ABC (In cr.) | 8 | 15 | 15 |
| Sale of Goods/Purchase of Goods (In cr.) | 2 | 2 | 2 |
| Sale Consideration Receipts/Payment during the year (In cr.) | 1 | 1 | 1 |
| Who is Liable to Deduct/Collect Tax? | Seller XYZ under section ‘206C(1H)’ | Buyer ABC under section ’194Q’ | Buyer ABC under section ’194Q’ |
| Rate of Tax | 0.1% | 0.1% | 0.1% |
| Amount on which Tax to be Deducted/Collected (In cr.) | 0.5 (1-0.5) | 1.5 (2-0.5) | 1.5 (2-0.5) |
| Tax to be Deducted/Collected | 5000 Rs. | 15,000 Rs. | 15,000 Rs. |
SOP – STANDARD OPERATING PROCEDURES TO BE FOLLOWED FOR APPLICABILITY OF TDS/TCS ON PURCHASE/SALE OF GOODS
a) If Buyer’s turnover is more than Rs 10 crore in the previous financial year, then Buyer will be required to deduct tax under sec 194 Q. [ In such case, the seller is not required to collect tax under Sec 206C(1H)]
b) Buyer shall communicate to the seller, by preparing ‘declaration letter’, on its letterhead stating that the buyer is liable to deduct Tax under section 194Q, and that the seller need not collect TCS under Sec 206C(1H). This communication will reduce the confusion as to who shall comply with the provisions. The buyer shall at the time of placing an order through Purchase Order shall again choose to communicate to the seller that the buyer is liable to deduct Tax and that the Seller need not collect Tax.
(Refer Annexure A enclosed below – for Draft “Declaration Letter” to be sent by Buyer to Seller if his turnover is more than Rs 10 Crore)
c) As there might be confusion as to who shall comply with the provisions, the seller shall also communicate with the buyer, through a “confirmation letter” asking whether the buyer is liable to deduct tax under section 194Q, if the buyer’s response is positive (i.e., he is liable to deduct tax) then the seller shall not collect tax and if the reply is negative then the seller shall collect tax accordingly.
(Refer Annexure B enclosed below – for Draft “Declaration Letter” to be sent by Seller to Buyer if his turnover is more than Rs 10 Crore)
(On the Letterhead of the Buyer)
To,
(Supplier’s/Seller Name & Address)
Sub: Regarding the change in compliance due to the insertion of new sections under the Income Tax Act. Deduction of TDS u/s 194Q and non-applicability of TCS u/s 206C (1H) of Income Tax Act.
Dear Sir / Madam,
We, (name of the buyer), having PAN (PAN of the buyer) hereby inform you that our total sales/gross receipts/turnover from Business during FY 2020-21 has been more than Rs.10 Crore. Therefore, provisions of Section 194Q inserted in the Income Tax Act vide Finance Act 2021 with effect from 01.07.2021 apply to our company. Hence, we shall be deducting tax at source as per provisions of the above section from purchase consideration paid/ credited on or after 01.07.2021 to you against supplies made by you at the rate of 0.1 per cent of purchase consideration paid/credited exceeding rupees 50 lacs during the current financial year.
Since we are liable to deduct tax at source under section 194Q of the Act, you may ensure not to take any action to collect tax at source under section 206C (1H) of the Act w.e.f. 01.07.2021, in case provisions of section, apply to you considering your amount of turnover and our purchases being of more than rupees 50 lacs.
You are also requested to intimate your Permanent Account Number. In case you fail to provide your PAN, the tax will be deducted at a higher rate in terms of Section 206AA of the Act.
Further, you are also required to confirm that in your case amount of TDS/TCS was Rs.50,000/- or more in previous years relevant to Assessment Years 2019-20 and 2020-21 and you have filed your returns of income for these assessment years according to section 139(1), otherwise, tax is required to be deducted at a higher rate in terms of Section 206AB of the Act.
Further, as per Rule 114AAA, higher TDS/TCS will be applicable in case PAN and AADHAR are not linked. This is applicable only in the case of Individual.
You may send to us your declaration in the enclosed draft on or before 25.06.2021 to enable us to take note of the same and modify our accounting software accordingly. In case we do not receive your declaration by the above date, we will modify our software to deduct tax at the higher rate and it would be difficult for us to take corrective action to reduce the rate during the current financial year.
Further, we confirm that (name of the buyer) has filed its Income Tax Return for the previous year 2018-19 & 2019-20. You may accordingly ensure that in case of applicability of Tax deduction u/s 194Q, TDS is deducted @ 0.1% on all purchases from us. The status of return of Income filed by (name of the buyer) is as under: –
| Assessment year | Acknowledgement No. | Filing Date |
| AY 2019-20 | ||
| AY 2020-21 |
Important to note here, that any financial loss which (name of the buyer) would incur, due to said non-compliance at your end, will have to be indemnified by you. We, therefore, look forward to your full cooperation in the process.
Thanks,
For (name of the buyer)
Authorized Signatory
(On the letterhead of the seller)
To,
(Buyer Name & Address)
Sub: Declaration/information for deduction of tax at source u/s 194Q of the Act.
Dear Sir,
This is concerning your letter dated requiring our declaration/information regarding deduction of tax at source u/s 194Q of the Act. The information is being provided hereunder:
1. Since your company is liable to deduct tax u/s 194Q of the Act, you may deduct the tax @0.1 % of sale consideration paid /credited by your company to us on the amount exceeding Rs.50 lacs during the current financial year. We also confirm that we will not take any action to collect tax at source under section 206C(1H) of the Act w.e.f. 01.07.2021.
2. The Permanent Account Number of our company is (PAN of the seller). Further, we have duly filed our returns of income for Assessment Years 2019-20 and 2020-21 as per the information given hereunder:
| Assessment year | Acknowledgement No. | Filing Date |
| AY 2019-20 | ||
| AY 2020-21 |
3. Our PAN and AADHAR is linked. This is applicable only in the case of Individual.
Please take note of the above information and confirmation and deduct tax at the appropriate rate-taking cognizance of the above information.
Thanks,
For (Seller Name)
Authorized Signatory
CONFIRMATION LETTER
(Draft “Confirmation Letter” to be sent by Seller to Buyer if his turnover is more than Rs 10 Crore. To be printed on the letterhead of the seller, Who is liable to collect TCS under section Sec 206C(1H))
To,
Name and Address of Buyer
(To whom goods are sold/might be sold more than Rs 50 lakhs)
Subject: Confirmation requested from you on the applicability of TDS under Sec 194Q to you, else we will be collecting TCS on Sale made to you
Dear Sir/Madam,
As per the newly inserted section 194Q of Income Tax Act 1961, the Buyer (who is satisfying the conditions of said provision) is liable to deduct TDS. At the same time, on a supply made by us to you, we are also required to collect Tax under Sec 206C(1H). However, at the same time, there cannot be two tax on the same transaction.
Therefore we ——————-( Name)……………(address)………. having PAN _________, hereby request for your confirmation, that whether you are liable to deduct TDS u/s Section 194Q or not, on purchases made by you from us. Please choose from the below options and let us know.
a) We confirm that we are liable to deduct TDS, on purchase made by us, from you, u/s 194Q.
b) We confirm that we are not liable to deduct TDS on purchase made by us from you, u/s 194Q.
Please note that, If we don’t receive your reply within one week, then our accounts department will collect TCS u/s 206(1H).
For ————————–
Authorised Signatory
