In this communication, we are going to touch base on an important change in the law that is proposed by the recent Budget & going to impact drastically each business operating in India. this is wrt TDS on Purchase Transactions.

 

It is our endeavor to always keep you updated on the latest but important changes that come into force on all commercial and business laws. In the same direction, few important changes wrt TDS on Purchase Transactions are going to be implemented effective 1st July 2021 as proposed by Honb’le Finance Minister Ms. Nirmala Sitharaman in her Budget speech on 1st Feb 2021. Request you going thru the following paras covering the important topics and also simultaneously raising concerns since there is already a provision existing to cover TCS (Tax Collection at Source) on Sales transactions. In case you have some queries wrt same do mail us to enable us getting back to you with requisite inputs.

 

Tax Deducted at Source (TDS) under section 194-Q at 0.10% shall be applicable on aggregate Purchases over & above Rs 50 Lacs from a Supplier in India in a financial year.

 

Salient features of TDS under Section 194Q on Purchase of Goods

 

• All my friends may note that this is for the very first time in the history of Budget proposals & Income Tax Act in India that Purchase Transactions are proposed to be subject to TDS provisions.
• This new section 194Q is proposed to be applicable from 1st July 2021, though it seems to be a very small change so far as various TDS provisions of the Income Tax Law are concerned it carries very vital and important ramifications on the allowability of important Purchase transactions are conc.
• As per charging proviso to this section, this is often going to be applicable to any person being a customer responsible for making payment to a resident (Not applicable for Import Purchases from suppliers outside India) for purchase of goods (NA to services) when value or aggregate of purchases from a supplier or payment, whichever is earlier, exceeds Rs 50 Lacs during the previous year. The transaction with any supplier with the addition of which your aggregate purchase/ payments for purchase from that supplier exceeds Rs 50 lacs, that will be the transaction effective which TDS will have to be deducted @ 0.10% of the Purchase transaction or payment thereof whichever is earlier.
• This section can apply to an assessee whose mixture Turnover in the immediate previous year exceeded Rs 10 crore.
• The above provisions will be effective from July 1, 2021.

 

How TDS under Section 194Q will be calculated?

 

The below illustration explains how TDS will be calculated if Mr. XYZ purchases goods worth Rs 1 Crore for his business. XYZ might track purchases from each supplier from the very beginning to ascertain that as soon as purchases exceed Rs 50 lacs TDS will be deducted @ 0.10% of the purchase transaction or payment thereof. In the above case, the first 50 Lacs of purchase shall be without TDS, and on the rest of Rs50 Lacs TDS underneath section 194-Q will be deducted i.e. Rs 5000. For the remainder of all the transactions during the year TDS deducted subtracted from each purchase transaction.

 

What happens in case provisions of section 194Q are not complied with?

 

Readers may please go thru the consequences of various noncompliances connected to this section as mentioned earlier in our write up that ramifications are very vital:

 

1. If the seller is not having PAN then the TDS rate applicable will be 5% of the Purchase transaction/ Payment thereof

2. If the Purchaser fails to deduct TDS as applicable, Section 40A (IA) is going to provide that the value of Purchase transactions on which TDS is not deducted will be subject to 30% disallowance means thereby that even Purchases supported by Bills or GR’s can be disallowed to the extent of 30% of the transaction value if TDS is not deducted.

In the Illustration cited above even if a small amount of TDS was required to be deducted i.e. Rs 5000 only but if not deducted, a huge disallowance of Rs 15,00,000/- will have to be borne by XYZ (Purchaser)

 

When TDS is not required to be deducted under section 194Q?

 

It is provided in the fifth proviso to the section that if TDS is deducted on the transaction under any other section of the Income Tax Act (other than TCS collected under section 206 C (1H) of the Act) then TDS is not required to be deducted on the transaction. For example, if TDS is deducted on the transaction under section 194C then no TDS is required to be deducted under section 194Q but if Seller is required to collect TCS under section 206 (1H) then Purchaser will still be required to deduct TDS under section 194 Q irrespective of TCS collected by Seller.

 

Readers may carefully note that section 206 C (1H) is currently being followed and 2nd proviso to the same provides that TCS will not be required to be collected if TDS is applicable on the transaction for a deduction on the transaction under any other provision of law. Maximum Assessee has suitably made provisions in their respective Accounting Software’s/ ERP’s to collect TCS in the Invoice itself though the same doesn’t seem to be compliant of the provision in case of Advance payments. But consequent to the applicability of subject provision effective 1st July 2021 there will not be a requirement to collect TCS under section 206 C (1H) in case Purchaser (s) is required to deduct TDS under section 194-Q.

 

Will TDS under Section 194Q be deducted on the GST amount also?

 

Since the purchaser is required to deduct the TDS under section 194-Q on the number of Purchases but while paying to the supplier payment of GST is also needed to be created. though to stay the life simple deducting TDS on the Gross quantity doesn’t involve disobedience on a part of the vendee but for the provider, it might involve income reduction so far as GST liability for payment on its sale is concerned. In our opinion, like in other transactions lined underneath 194C, we tend to typically deduct TDS on the basic amount only, here too deduction of TDS be made on internet quantity solely & the GST amount is paid fully while creating the payment to the supplier. appropriate changes to the respective software/ ERP’s may be customized to require care of this requirement.

 

Why section 194-Q was required by Law?

 

The motive behind Govt. having implemented this section seems to very clearly bring about a change where a few large amounts of transactions are being traced without any trail where GST amounts are being misappropriated. Govt. intends to bring all such purchase transactions under some audit trail so that fake or frivolous transactions could be tracked or bring under the trail of TDS provisions and checked in the future if required.

 

Though it is noticed that with this having been implemented there might be the applicability of both the sections on a single transaction and will involve complexities of compliances for assessee’s covered by such transactions. Thus it is recommended to implement either of the two provisions i.e. section 206 C (1H) or section 194 Q.

 

Request my fellow friends to check out the applicability of the provisions properly and take care of the implementation further……