TDS Section 194Q vs TCS. For SAP Users.

The proposed provisions of section 194Q is to a large extent similar to the provisions of section 206C(1H) of the Act. However, the trigger point for collection of TCS under section 206C(1H) of the Act is receipt of consideration whereas TDS under section 194Q is required to be made at the time of payment or credit, whichever is earlier.

Let us say, Mr. A purchased goods on credit for INR 40 Lakh in the Year 1 and for INR 35 lakh in Year 2. Entire payment for the above two consignments were made in Year 2. In such case, there would not arise any TDS requirement under section 194Q for any of the above years since the purchase made for any of these years do not exceed INR 50 lakh. The threshold of INR 50 lakh is to be reckoned based on the amount of purchase in a year and not the amount of consideration or advance paid in a year.

While going through the above, one would be able to immediately recall a similar section introduced vide the last Finance Act, 2020. Yes, the proposed provisions of section 194Q are akin to the provisions of section 206C(1H) of the Act.

The provisions of section 194Q take forward the objective of the Government towards widening and deepening tax base. It is ostensible that the main intention behind the bringing out the provision of 206C(1H) or this newly proposed section 194Q, is not to recover taxes but to widen the tax base.

Sub-section (5) of section 194Q provides for non-applicability of the provision in cases where tax is required to be deducted or collected under any other provisions of the Act except the transaction referred to in section 206C(1H) of the Act. This would mean that while determining liability to deduct tax at source of purchase of goods, one should first assess whether any other provision relating to deduction or collection of tax at source is applicable for such transaction. If the answer is yes, then tax should be deducted or collected in accordance with that section and not as per the provision of section 194Q.

Though, the non-applicability of section 194Q is not extended to the transactions covered under section 206C(1H) of the Act, the second proviso to section 206C(1H) of the Act reads as under:

Provided further that the provisions of this sub-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.

What emanates from the above is that if a buyer is liable to deduct tax at source under any other provision of the Act on the goods purchased by him and deducts such amount then such transaction will not again suffer collection of tax at source under section 206C(1H) of the Act. Thus, provisions of section 194Q and the provisions of section 206C(1H) are mutually exclusive.

The provisions of section 194Q requires the buyer to deduct tax at source on purchase of goods. TDS is to be made only in case of a resident seller, where the value or the aggregate value of purchases made from that seller exceeds INR 50 Lakh in a financial year. This condition needs to be evaluated separately for each seller and the amount needs to be evaluated separately every FY.

The question whether the purchase made prior to 01st July 2021 during FY 2021-22 is to be considered while computing the threshold of INR 50 lakh or not, is yet to be addressed by the Central Board of Direct Taxes (CBDT).

As a prudent measure, it is advisable that for the purpose of reckoning the threshold of INR 50 lakh, the purchase/s made prior to 01st July 2021 during FY 2021-22 shall be included. At same breath, it is also added that where the purchases made prior to 01st July 2021 already exceeded INR 50 lakh, the buyer need not to do TDS on that excess amount while paying or crediting further consideration to the account of the seller on or after 01st July 2021.

We also wish to make a mention that the CBDT vide its Circular No. 17 of 2020 while clarifying identical issue in case of application of section 206C(1H) of the Act, which came into effect from 01-Oct-2020 had mentioned that for the purpose of reckoning the threshold, consideration received from 01-Apr-2020 shall be considered.