New Withholding Tax Provisions: Where to Use and How to Use

The scope of the TDS provisions was widened by the Finance Act, 2021 with the introduction of Section 194Q in the Income Tax Act 1961 ("IT Act") which came into effect from July 1, 2021 applicable on payment of any sum to any resident for purchase of goods. Further, the new provision provides to impose higher rates of TDS/TCS in certain cases of non-filers of income tax returns. In this article, we have provided an overview of the applicability of TDS/TCS provisions as applicable with effect from July 1, 2021. 

TDS on Purchase of Goods – Section 194Q

1. TDS introduction at 0.1 per cent on purchase of goods

Every buyer, whose total turnover from business exceeds Rs  10 Crores in the immediately preceding Financial Year('FY') is liable to deduct TDS at 0.1 per cent while making any payment to a resident as purchase consideration of any goods exceeding Rs 50 Lakh in any FY. The TDS liability shall arise at the time of credit or payment, whichever is earlier. 

2. Enhanced Rate of TDS at 5 per cent in certain cases 

If the seller fails to provide PAN to the buyer, the applicable rate of TDS shall be enhanced to 5 per cent following section 206AA of the IT Act. Likewise, the applicable rate of TDS would be enhanced to 5 per cent where resident seller to whom payment is being made is a non-filer of tax returns as specified in section 206AB of IT Act.

3. Exceptions to the Provision

TDS provision u/s 194Q would not be applicable in cases where a buyer is required to withhold tax on such amount of purchase consideration under any other TDS provisions. For instance, in respect of the purchase of goods from an e-commerce platform, tax is to be deducted by the e-commerce operator from a payment made to e-commerce participant/seller u/s 194-O, and accordingly, the provisions of 194Q would not be made applicable in such case.

Similarly, Section 194Q is not applicable where the seller is required to collect TCS on such amount (other than under section 206C(1H) of the Act – TCS on sale of goods). 

Key Considerations and Clarifications

Applicability of provision from Buyer's Perspective

This new provision is applicable only when both the purchases are recorded and effected after July 1, 2021.

Determination of Purchase Consideration

Provision shall apply if purchase consideration payable to a particular resident seller exceeds Rs 50 Lakh in an FY and a view can be taken that for calculating threshold limit of Rs 50 Lakh, purchases made from 1 April 2021 to 30 June 2021 shall also be taken into consideration.

Tax to be deducted on the amount exceeding Rs 50 Lakh 

The TDS would be deducted on such a portion of purchase consideration that exceeds the threshold limit of Rs 50 lakhs. Further, if the quantum of purchases before 1 July 2021 already amounts to Rs 50 Lakh or more to a particular seller then TDS is applied to all the purchases made from 1 July 2021 onwards.

Certain Clarifications Required

Since the Finance Act 2021 has not specifically amended section 197 of the IT Act to include section 194Q under its ambit and as such, the seller, at present, does not have an option to approach the assessing officer to issue a certificate for a nil or lower tax deduction in respect of TDS under this section.

There is no clarification on whether tax is to be deducted on the total bill amount or only amount towards purchase where the invoice contains amount towards services like freight, insurance, installation, etc. However, till such clarification is provided by the CBDT, it would be advisable to deduct TDS on the entire invoice value including ancillary or incidental charges which are part of the invoice.

Whether TDS would be applicable on the GST component in the invoice is also not clear. In terms of circular no. 23/2017 issued by CBDT, the amount of consideration for calculating levy of TDS shall be exclusive of GST. However, currently, there is no clarity on the same and it is advisable to deduct TDS on the gross amount including GST, till such clarification is issued. 

Applicability of Higher rate of TDS and TCS in case of non-filers

Following Section 206AB of IT Act, where TDS is required to be deducted on any sum paid or payable or credited by a person to a specified person, who has not filed its income-tax return ('ITR') for preceding 2 FY's for which due date under section 139(1) of the IT Act has expired and aggregate of TDS and TCS deducted in its case for each of the aforesaid 2 FYs is Rs 50,000 or more, then TDS rate applicable shall be higher of twice the rate specified in the relevant section, twice the rate or rate in force or 5 per cent.

Likewise, in the case of TCS, the TCS rate is provided under section 206CCA of the Act as higher than twice the rate specified in the relevant section or 5 per cent.

However, in a case where both section 206AA (higher TDS rate in case of no PAN) and section 206AB of the Act is applicable, the TDS rate applicable is higher than the TDS rates as per Section 206AA or Section 206AB. Similarly, in the case of TCS, higher the TCS rates as per section 206CC and section 206CCA of the Act shall be applicable.

The author is the founder , RSM India

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