Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) are the prime mode for collection of Income Tax revenue by Government hence it is imperative that government takes all such ways and actions to widen the scope of both TDS and TCS. Now a days, one of such measures has become talk of the town as it has led whole the industry including dealers and professionals to confusion. Let’s try to throw light on this ongoing controversy regarding section 194Q and section 206C(1H).
Finance Act 2020 had amended section 206C of the Income-tax Act 1961 by inserting a new subsection (1H) which says that the seller is required to collect the tax if the sale of goods to buyers exceeds Rs.50 lakhs. Wheres, Finance Act 2021 inserted a new section 194Q which says that the buyer is required to deduct the tax if the purchase of goods from the seller exceeds Rs. 50 lakhs.
This article tries to decode both the section by explaining the provisions, issues and possible implications.
If a purchaser has his Sales,
turnover and Gross receipts in the Preceding Financial Year more than Rs. 10
Crore then he has to deduct 0.1% TDS on his purchases from a vendor in Excess
of Rs. 50 Lakhs in a financial year. It will be applicable from 1st July 2021.
The TDS under Section 194Q is to be deducted,
· on the Invoice value
· at the time of Purchases and
· if the payment is made in advance, then
· the TDS on such amount of advance is to be
· at the time of making such advance money to the
If a Seller has his Sale, turnover and Gross receipts in the
Preceding Financial Year is more than Rs. 10 Crore then he has to Collect 0.1%
TCS on the amount received on account of Sales made to him from a Purchaser in
Excess of Rs. 50 Lakhs in a financial year. It is already applicable from 1st.
The TCS under section 206C(1H) is to be collected,
· On Payment basis.
· the time of collection of TCS has nothing to do with the time of sale
· it has to be deducted when payment is received
from the purchaser
Do they overlap Each other?
A big question running into all minds throughout the industry. The answer is Yes, upto some
extent and subject to some circumstances. Let’s understand how:
Purchase and sales are two sides of a single coin. If X is selling goods to Y, then it is sale for X and
simultaneously it is purchases for Y also. Nothing new in it since every transaction has two parties and there are two aspects on a single transaction.
To understand more deeply, Let us have a look at some examples to understand how these two sections are simultaneously applicable on a single transaction in certain situations:
A and Company is a Seller and B and Company is a Purchaser. The sale of A and Company is Rs.100 Crore for the year ending on 31st. March 2021. The sale of B and Company is Rs. 9 Crores during the year ending with
31st. March 2021.
Now in this situation Section 206C(1H) is applicable but since the sale of Purchaser is Less than Rs. 10 Crore in previous year the Section 194Q will not apply. Here without any confusion the seller has to collect the TCS.
A and Company is a Seller and B and Company is a Purchaser. The sale of A and Company is Rs.100 Crore for the year ending on 31st. March 2021. The sale of B and Company has the sale of Rs. 20 Crores during the year ending with 31st. March 2021.
Now in this situation Section 206C(1H) is applicable but since the sale of Purchaser is also More than Rs. 10 Crore in previous year the Section 194Q will also apply.
This is the situation where a question arises which section is practically applicable? Whether Section 206C(1H) is applicable or Section 194Q is applicable means whether the Seller will collect the TCS or Purchaser will deduct the TDS or both will do the same simultaneously. The situation is that both the sections are overlapping each other and the situation may be confusing but the answer is very simple and clearly given in both the sections.
Answer for this controversy from Law itself:
Let’s try to have a look at relevant legal provisions of the law to solve this questions.
Section 194Q (5)
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 sub-section (1H) of section 206C applies.
Now, it is clear from the above that there is no exemption from TDS if the TCS is collectable under Section 206C(1H) i.e., TCS on Sales on Goods. If TCS is collectable under any other sub section of section 206(C) “except 206C(1H)” then the TDS under this section is not applicable hence it is clear that there is an exception of this exemption and which is lying in section 206C(1H) and this section relates to TCS on sale of Goods and if the
TCS applied under this section 206C(1H) then there is no exemption from section 194Q and TDS under section 194Q has to be deducted on purchase of Goods.
Now take a look at section 206C(1H) where the answer of this question is also given:
Proviso of the said section:
It is provided that the provisions of this sub section shall not apply, if the buyer is liable to deduct tax at source under any provision of this Act on the Goods purchased by him from the seller and has deducted such amount.
Hence when TDS provisions on purchase of Goods are applicable on purchaser then TCS provisions on the same transaction is not applicable on seller it means where Section 194Q is applicable then there is an exemption from section 206C(1H).
To be precise, this is how we can conclude the Answer:
Where both Sections 206C(1H) and 194Q are applicable in a
particular situation then
·the Purchaser will have to deduct TDS under
section 194Q and
· if he has deducted the TDS then the TCS 206C(1H)
will not apply.
However, where the Turnover of the purchaser is Less than Rs. 10 Crores then the Seller will continue to collect TCS on the payments received by it and if the Purchaser has turnover more than Rs. 10 Crores than the burden will shift on the Purchaser now from 1st. July 2021 and it is the purchase who in any case have to deduct the Tax under section 194Q. In such a situation section 206C(1H) is not applicable.
Some additional Points to be Noted:
- 1. In the section 206C(1H), additional words “has deducted such amount” added to the words “buyer is liable to deduct tax” hence the actual exemption from TCS is dependent not only on Lability of Purchaser for deduction of TDS but on “actual deduction of TDS”. This may be a matter for glitch. However, this problem can be resolved with better communication and coordination with the purchaser.
- 2. Please note here that if TDS under section 194Q is deducted then there is no need to collect TCS, but no such exemption is provided in Section 194Q hence though TCS is deducted by mistake or due to non-communication with or from purchaser even then TDS is to be deducted otherwise all the relevant provisions of Non deduction or non-deposit of TDS including section 40(ia) of 30% disallowance will apply. So be careful and timely inform your seller that you are liable and also deducting the TDS on your purchases hence the seller should not collect TCS on the Same.
So, Here due to overlapping of these two sections a new duty is cast on the Seller and Purchaser. It is now the duty of the Purchaser to inform the seller that he is liable to deduct TDS under section 194Q and he will deduct the Tax on his purchases hence seller should stop collecting TCS from his transactions under section 206C(1H).
- 3. The practical impact of introduction of Same type of provisions in Section 194Q and Section 206(C)(1H): The introduction, implementation and interpretation of section 194Q will certainly create confusion both on the Sellers and Purchases. Now burden will be shift from sellers to purchasers in some cases and in other cases the sellers will continue to collect the TCS.
If an entity has 500 dealers and the sale to these dealers are more than 50 Lakhs every year. Now till 30th June
2021 the company is collecting TCS from all these dealers but now from 1st. July 2021 they have to collect data from each dealer and to find that 350 are covered under section 194Q and rest 150 are below Rs.10 Crores Dealers. So, these 350 will deduct TDS under section 194Q and in case of rest 250 dealers, entity have to collect TCS under
206C(1H). This is what the situation of law demands right now.
Further, this would be a flexible figure and a yearly exercise. Entity cannot presume the eligibility of their purchasers under section 194Q from entity’s own sale. Say for example you have 100 dealers whose average purchases per year is less than Rs. 5 Crore so these all should continue be under TCS? It is not possible and it is not safe presumption because these dealers may have other sell/turnover also hence communication between the Sellers and Purchases is must for smooth and proper implementation of these two sections. So now, entities will have two Types of Dealer. One TDS Dealers and Other Group is TCS Dealers!
Non Deduction or Non Communication:
Have a look at one situation where purchaser failed to inform the seller that he is going to deduct TDS under section 194Q on his purchases from a particular transaction then naturally seller will continue to collect TCS on his sales to that purchaser. Now if TCS is collected then what will the duty of Purchaser? Since TCS is collected and the transaction is the same so he will be absolved from deducting the TDS?
Answer is: No because there is no provision in the law which says if TCS is collected under section 206C(1H) then TDS is not applicable hence in this situation purchaser is required to deduct the TDS also and, in that case, both TCS and TDS will be deducted and collected on the same transaction. To avoid such situation the Purchasers must communicate with the sellers immediately since 1st. July 2021 is not very much far from today. The communication between Sellers and Purchasers will avoid this type of situation. Even after collection of the TCS
communication between the two parties may solve this problem by issuing Debit / credit notes if the tax is collected but not deposited by the seller.
This is not the first instance where some amendments in provisions of law have created lots of confusion among the industry. Simplified Law may be a myth. Government has and will continue to have these kind of changes in action regarding scope of the sections which are key revenue generators. Interpretation plays a vital role here. It is obvious to have raise in controversy, lack of understanding and increased compliance burden at initial level of such changes but all will get sorted once government gradually clarifies each issue and understanding regarding these sets into minds of dealers and professionals.