Direct Tax Alert - CBDT issues guidelines on tax withholding from purchase of goods

Background

Finance Act, 2021 has inserted a new section 194Q in the Income-tax Act, 1961 (IT Act) which has come into effect from 1 July 2021. This provision brings the sale of goods within the fold of tax withholding. As per the section, a buyer1 who is responsible for paying any sum to any resident seller for purchase of any goods of the value or aggregate of value exceeding INR 5mn in any fiscal year (FY) is required to withheld tax (either at the time of credit or payment, whichever is earlier) at the rate of 0.1% on the sum exceeding INR 5mn.

This provision has raised concerns from various stakeholders. With a view to address such concerns, the Central Board of Direct Taxes (CBDT) has recently issued a Circular2 laying down guidelines for commonly asked questions. We, at BDO in India, have analysed and summarised the said circular and provided our comments on its impact hereunder:

1. Whether section 194Q of the IT Act be attracted to transaction carried through various Exchanges?

The circular provides that Section 194Q shall not apply to:

  • Transactions in securities and commodities which are traded through recognized stock exchanges3 or cleared and settled by the recognised clearing corporation4, including recognised stock exchanges or recognized clearing corporation located in International Financial Service Centre5.
  • Transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of Central Electricity Regulatory Commission.

2. Whether section 194Q of the IT Act will get attracted if either of the two events have occurred prior to 1 July 2021?

If either of the two events (i.e., credit of sum in the account of seller or payment of such sum) had happened before 1 July 2021, that transaction would not be subjected to the provisions of section 194Q of the IT Act.

3. How is the threshold of INR 5mn for FY 2021-22 computed?

Since threshold of INR 5mn pertains to a FY, for the purpose of calculating the threshold under section 194Q of the IT Act, a transaction undertaken from 1 April 2021 shall be considered. Thus, if a person, being buyer, has already credited or paid INR 5mn or more up to 30 June 2021 to a seller, the TDS under section 194Q of the IT Act shall apply on all credit or payment during the FY 2020-21 on or after 01 July 2021 to such seller.

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

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

5. Whether tax is required to be withheld from the GST component?

Referring to Circular No. 17 dated 19 July 2017, it has been clarified that where the component of GST comprised in the amount payable to seller is indicated separately, tax shall be withheld under section 194Q of the IT Act on the amount credited without including such GST. However, if tax is withheld on payment basis, the tax would be withheld on the whole amount since it is not possible to identify that payment with GST component of the amount to be invoiced in future.

6. In case of purchase return, whether the tax is required to be withheld from such purchase return?

In case of purchase return, if the money is refunded by the seller, then the tax deducted may be adjusted against the next purchase against the same seller. Further, it is also clarified that no adjustment is required if the seller replaces the purchase return with the goods.

7. Whether section 194Q of the IT Act is applicable when the buyer is non-resident?

Section 194Q of the IT Act shall not apply to a non-resident whose purchase of goods from seller resident in India is not effectively connected with the Permanent Establishment6 of such non-resident in India.

8. Whether tax is to be deducted in case where income of seller is exempt? 

  • It is clarified that section 194Q of the IT 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 IT Act. Similar clarification is provided that section 206C(1H) of the IT Act shall not apply to sale of goods to a person, being a buyer, who as a person is exempt from income tax under the IT Act (like person exempt under section 10 of the IT Act).
  • Further, it is also clarified that this exemption shall not apply if only part of the income of such person (seller or buyer, as the case may be) is exempt.   

9. Whether section 194Q of the IT Act shall apply to buyer in the year of incorporation?

One of the conditions for applicability of section 194Q of the IT Act is that the buyer is required to have total sales or gross receipts or turnover exceeding INR 100mn during the FY immediately preceding the FY in which the goods are purchased. Since this condition would not be satisfied in the year of incorporation, section 194Q of the IT Act shall not apply in year of incorporation.

10. Whether section 194Q of the IT Act will apply where the turnover or gross receipt exceeds INR 100mn but the total sales or gross receipts from business is INR 100mn or less?

For section 194Q of the IT Act to apply, the sales or gross receipts or turnover from business carried on by buyer must exceed INR 100mn. It is clarified that the turnover or receipts from non-business activity should not be considered for determining the threshold of INR 100mn.

11. Interplay of section 194-O and section 194Q of the IT Act

  • If tax is withheld by the e-commerce operator under section 194-O of the IT Act (including transactions on which tax is not deducted on account of sub-section 2), such transaction shall not be subjected to TDS under section 194Q of the IT Act.
  • If a transaction is both within the purview of section 194-O of the IT Act as well as section 194Q of the IT Act, tax is required to be withheld under section 194-O of the IT Act only.

12. Interplay of section 194-O and section 206C(1H) of the IT Act

  • If a transaction is both within the purview of section 194-O of the IT Act as well as section 206C(1H) of the IT Act, tax should be withheld under section 194-O of the IT Act. The transaction shall come out of the purview of section 206C(1H) of the IT Act after tax has been deducted by the e-commerce operator on that transaction. Once tax is deducted by the e-commerce operator, the seller is not required to collect tax under section 206C(1H) of the IT Act on the same transaction.
  • Primary responsibility is on e-commerce operator to deduct tax under section 194-O of the IT Act and such responsibility cannot be condoned if the seller collects tax under section 206C(1H) of the IT Act.

13. Interplay of section 194Q and section 206C(1H) of the IT Act

  • If a transaction is both within the purview of section 194Q of the IT Act as well as section 206C(1H) of the IT Act, tax is required to be withheld under section 194Q of the IT Act. The transaction shall come out of the purview of section 206C(1H) of the IT Act after tax has been deducted by the buyer on that transaction. Once the buyer has deducted tax on a transaction, the seller is not required to collect tax under section 206C(1H) of the IT Act on the same transaction.
  • However, if, for any reason, tax has been collected by the seller under section 206C(1H) of the IT Act, before the buyer could deduct tax under section 194Q of the IT Act on the same transaction, such transaction would not be subjected to tax deducted again by the buyer. 

BDO comments

A welcome clarification from the CBDT as it addresses several concerns raised by stakeholders. However, some of the issues continue to exist viz., for the definition of ‘goods’ whether reference should be made to Sale of Goods Act, 1930 or GST Act.

While Circular 23 of 2017 dated 19 July 2017 had clarified that tax withholding is not required on the GST on Services, the applicability of the said circular when it comes to GST on Goods was uncertain. This Circular clarifies that similar exemption from tax withholding would be available when it comes to GST on Goods. It is pertinent to note that while for section 194Q of the IT Act tax is not required to be withheld from the GST component, for the purpose of section 206C(1H) of the IT Act, the tax is to be collected on the entire amount inclusive of GST.

Further, with respect to purchase return, it is clarified that the taxes withheld shall be adjusted against next purchase against the same seller. Thus, it appears that the rolling of TDS is permitted. Whether such rolling will be permitted if the next purchase is done in subsequent year?

Also, the taxpayer (i.e., buyer) will now need to obtain a declaration from the seller where the seller is exempt from tax.

1Buyer is defined to be person whose total sales or gross receipts or turnover from the business carried on by him exceed INR 100 mn during the FY immediately preceding FY in which the good are purchase.

2Circular No. 13/2021, dated 30 June 2021

3“recognized stock exchange” shall have the meaning assigned to it in Explanation 1 to Section 43(5)(ii) of the IT Act.

4“recognized clearing corporation” shall have the meaning assigned to it in Explanation to Section 10(23EE)(i) of the IT Act.

5“International Financial Service Centre” shall have the meaning assigned to it in Section 2(q) of the Special Economic Zones Act, 2005.

6Permanent Establishment shall mean to include a fixed place of business through which the business of the enterprises is wholly or partly carried out

Subscribe to receive the latest BDO News and Insights

Please fill out the following form to access the download.