Deduction of Tax at Source on Payment for Purchase of Goods

  • Last Updated on 27 July, 2021
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Topics covered in this article are as follows:

A. Deduction of Tax at Source on Payment for Purchase of Goods

  1. Who is responsible for tax deduction at source under section 194Q
  2. When tax has to be deducted at source
  3. Tax deduction account number
  4. Deposit of tax to the credit of Central Government
  5. Issue a certificate for tax deducted at source to unitholders
  6. Statement/returns to the Government
  7. Consequences of failure to deduct or pay tax, furnish returns, etc.

B. How to compute tax to be deducted under section 194Q

  1. Income subject to tax deduction under section 194Q
  2. Rates for tax deduction at source during the financial year 2021-22
  3. Income in respect of amount payable to Government or certain corporation
  4. Deduction of tax at lower rates [Sec. 197(1)]
  5. Who get credit for tax deducted

C. Tax deduction from payments to non-residents

  1. Who is required to deduct tax under sections 194E, 195 and 196A
  2. Payment from which deduction has to be made
  3. When tax has to be deducted
  4. Tax deduction account number
  5. Deposit of tax to the credit of Central Government
  6. Issue of certificate for tax deducted at source

A. Deduction of Tax at Source on Payment for Purchase of Goods

Who is responsible for tax deduction at source under section 194Q

61.1 Under section 194Q, tax is deductible by buyer of goods. “Buyer” for this purpose, means a person whose total sales, gross receipts or turnover from the business carried on by him exceed Rs. 10 crore during the financial year immediately preceding the financial year in which the purchase of goods is carried out. However, “buyer” does not include a person notified by the Central Government (subject to such conditions as may be specified therein).

Any person (being a buyer) who is responsible for paying any sum to any resident seller for purchase of any goods of the value (or aggregate of such value) exceeding Rs. 50 lakh in any previous year, is required to deduct tax at source under section 194Q with effect from July 1, 2021.

When tax has to be deducted at source

61.2 Tax should be deducted by the buyer, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier. Where, however, the above sum is credited to any account (whether called “suspense account” or by any other name) in the books of account of the person liable to pay such income, such credit of income shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

Tax deduction account number

61.3 See para 1.4 of Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

Deposit of tax to the credit of Central Government

61.4 Tax is to be deposited to the credit of the Central Government as follows –

61.4-1 Where to deposit – See para 1.5-1 of Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

61.4-2 Time within which tax has to be deposited – See para 37.4-2 of Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

Issue a certificate for tax deducted at source to unitholders

61.5 Every person deducting tax from income in respect of units is required to issue certificate in Form No. 16A.

61.5-1 Certificates are issued by downloading from TRACES Portal – See para 7.6-1 of Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

61.5-2 Time limit within which the certificate should be given See para 7.6-2 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

61.5-3 Issue of duplicate certificate – See para 1.6-4 of Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

Statement/returns to the Government

61.6 Quarterly return of income in respect of tax deducted under section 194Q is to be filed within the prescribed time-limit in Form No. 26Q [see para 37.6-2] of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

Consequences of failure to deduct or pay tax, furnish returns, etc.

61.7 The following are consequences of different defaults :

61.7-1 Failure to deduct and/or pay tax See para 1.8-1 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

61.7-2 Failure to comply with the provisions of section 203A regarding tax deduction account number – See para 1.8-2 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

61.7-3 Failure to issue certificates or submit return/statement See para 1.8-3 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

B. How to compute tax to be deducted under section 194Q

Income subject to tax deduction under section 194Q

62.1 If the following conditions are satisfied, then tax is deductible under section 194Q –

  1. Payer is “buyer” of goods.
  2. Payment/credit is on or after July 1, 2021.
  3. Payment/credit pertains to purchase of goods from seller.
  4. Aggregate payment/credit during the financial year exceeds Rs. 50 lakh.

If the above conditions are satisfied, the buyer is required to deduct tax at source under section 194Q.

62.1-1 When tax is not deductible – Tax is not deductible under section 194Q if the following cases –

Cases when TDS under  section 194Q not applicable Comments
Case 1 – If tax is deductible under any other section If tax is deductible under any other section, then tax shall be deducted under that section and not under section 194Q. Even when tax is deductible under any other section (but not actually deducted by the payer), TDS provisions of that section will apply and not TDS under section 194Q.
Case 2 – If tax is collectible under the provisions of section 206C [but other than sub-section (1H)] If a particular transaction is covered by TCS pro- visions of section 206C [other than sub-section (1H)], then tax will be collected by the seller (and tax is not deductible by the buyer under section 194Q).
If a particular transaction is covered by section 194Q as well as section 206C(1H), then TDS under section 194Q will apply and not TCS under section 206C(1H).

 62.1-2 Removing any difficulty – If any difficulty arises in giving effect to the provisions of this section, the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty. These guidelines shall be laid before each House of Parliament and shall be binding on the income-tax authorities and on the e-commerce operator.

Rates for tax deduction at source during the financial year 2021-22

62.2 Tax is deductible under section 194Q with effect from July 1, 2021. Tax is deductible by buyer at the rate of 0.1 per cent of the amount paid or payable exceeding Rs. 50 lakh.

If the recipient does not furnish his PAN to the deductor, tax will be deducted at the rate of 5 per cent by virtue of section 206AA. PAN of the deductee should be mentioned in any correspondence and document which is exchanged between the deductor and deductee.

If recipient is a non-filer of income-tax return, tax is deductible (by virtue of section 206AB) at the rate of 5 per cent [for detailed discussion, see para 10.2-2].

ILLUSTRATION

The following information is given pertaining to purchase of goods. TDS liability under section 194Q for the financial year 2021-22 is given in the last column.

Buyer Turnover of  buyer during financial year 2020-21 Turnover of buyer in financial year 2021-22 Seller Consideration for purchase of goods during – Requirement of TDS under section 194Q by buyer
April 1, 2021 and June  30, 2021 July 1, 2021 and March 31, 2022
X Rs. 10 crore Rs. 14 crore C Ltd. Rs. 40 lakh Rs. 90 lakh No TDS
Y Rs. 10.001 crore Rs. 8 crore D Ltd. Rs. 10 lakh Rs. 40.2 lakh TDS : 0.1% of Rs. 20,000
Z Rs. 15 crore Rs. 9 crore E Ltd. Rs. 40 lakh Rs. 80 lakh TDS : 0.1% of Rs. 70 lakh
A Ltd. More than Rs. 10 crore More than Rs. 10 crore F Ltd. Rs. 1 crore Rs. 2 crore TDS : 0.1% of Rs. 2 crore
B Ltd. Rs. 17 crore Rs. 8 crore G Ltd. Rs. 1.7 crore Rs. 10 lakh TDS : 0.1% of Rs. 10 lakh
Notified

person†

More than

Rs. 10 crore

More than

Rs. 10 crore

H Ltd. Rs. 10 lakh Rs. 4.9 crore No TDS

† It is a person notified by the Central Government under the Explanation to section 194Q(1).

The following points should be noted –

  1. If PAN of seller is not available, tax will be deducted under section 194Q at the rate of 5% (not at the rate of 0.1%).
  2. In the case of sale of goods by C Ltd. to X, TDS provisions of section 194Q is not applicable (in the preceding year turnover of the buyer is not more than Rs. 10 crore). If turnover of C Ltd. (i.e., seller) in the preceding year exceeds Rs. 10 crore, then C Ltd. is required to collect tax under section 206C(1H) at the rate of 0.1% of the consideration received during the financial year 2021-22 in excess of Rs. 50 lakh.
  3. In the case of sale of goods by D Ltd., E Ltd., F Ltd. and G Ltd., TCS under section 206C(1H) will not be applicable even if turnover of the seller is more than Rs. 10 crore in the preceding year. If, however, tax is not actually deducted by buyer in these cases, seller will have to collect tax at source within the parameters of section 206C(1H).
  4. Disallowance provisions of section 40(a)(ia) will be applicable even in the case of non-deduction of TDS under section 194Q. For instance, if A Ltd. fails to deduct tax from payment/credit to F Ltd. (i.e., seller), then 30% of Rs. 2 crore will be disallowed under section 40(a)(ia) for the previous year 2021-22.

Income in respect of amount payable to Government or certain corporation

62.3 No tax is deductible at source from income in respect of units payable to the following –

  1. the Government [sec. 196(i)]; or
  2. the Reserve Bank of India [sec. 196(ii)]; or
  3. a corporation established by or under a Central Act which is, under any law for the time being in force, exempt from tax on its income [sec. 196(iii)]; or
  4. a mutual fund specified under section 10(23D) [sec. 196(iv)].

Section 197A(1F) – Tax is not deductible from a specified payment to a notified institution, association or body or class of institutions, associations or bodies [see para 6.3] of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

Deduction of tax at lower rates [Sec. 197(1)]

62.4 If the Assessing Officer is satisfied that the total income of the recipient justifies tax deduction at lower rate or no deduction of tax, as the case may be, he should on an application [Form No. 13] made by the recipient of income from units, may issue him a certificate for tax deduction at lower rate.

62.4-1 Time-limit for soliciting the favour – Since no time-limit is prescribed for making an application to the Assessing Officer, application can be filed at any time before deduction of tax at source. Further, in absence of any time-limit for the Assessing Officer for taking an action on such application, the Assessing Officer is expected to take a decisions on such application within a reasonable period of time.

62.4-2 How lower rate is determined – See para 6.6-1b of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

62.4-3 Validity of the certificate – See para 6.6-1d of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

62.4-4 Other points See para 6.6-1c of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

Who get credit for tax deducted

62.5 Any tax deducted from income from units in accordance with the provision of section 194Q and paid to the Central Government is treated as a payment of tax on behalf of unitholder. Tax credit is, therefore, given to him for the amount so deducted at the time of assessment.

Chapters 63 & 64
Deduction of tax at source from payments to non-residents as required under sections 194E, 195 and 196A
How to proceed
¬ Ascertain whether you are a person responsible for paying to a non-resident (not being a company), or to a foreign company any interest, not being “interest on securities”, or any other sum not being salary – see para 63.1 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]
¬ Find out whether the payment you are making is covered by the expression “other sums” used in section 195, for determining the meaning of the expression “other sums” – see para 64.1 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]
¬ Find out the rate of income-tax in force at the relevant time – see para 64.6 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]
¬ Deduct tax at the rates in force – see paras 64.7 and 64.8 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021] for certain exceptions
¬ Deposit the tax deducted to the credit of the Central Government, for the place of payment, time of payment and the number of challan form for payment – see para 63.5 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]
¬ Issue a certificate of deduction at source to payee – see para 63.6 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]
¬ File returns of tax deducted at source to the concerned Assessing Officer – see para 63.7 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]
Related Issues
¬ Tax deduction account number – see para 1.4 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]
¬ Certificate for tax deduction at lower rate – see para 64.8 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]
¬ Consequences of failure to deduct or pay tax, furnish return, etc. – see para 63.8 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

C. Tax deduction from payments to non-residents

Who is required to deduct tax under sections 194E, 195 and 196A

63.1 Any person responsible for paying any income referred to in section 115BBA is required to deduct tax at source [Sec. 194E].

Any person responsible for paying to non-resident (not being a company), or to a foreign company any interest (not being interest on securities), or any other sum (not being salary) is required to deduct tax at source, if the amount payable is chargeable under the Act.

63.1-1 Payer/Principal officer is person responsible for tax deduction – For this purpose, the payer himself is treated as “person responsible for paying” such amount. If, however, the payer is a company, the company itself, including the principal officer thereof, is the person responsible for paying such amount.

63.1-2 In case of consideration for transfer of foreign exchange amount – Where the sum payable to a non-resident Indian represents consideration for the transfer of any foreign exchange asset (other than a short-term capital asset), the “authorised dealer” responsible for remitting such sum or crediting such sum to Non-resident (External) Account of the payee shall be the “person responsible for the paying”.

63.1-2a Non-resident Indian – For this purpose “non-resident Indian” means an individual, being a citizen of India or a person of Indian origin who is not resident. A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand parents was born in undivided India.

63.1-2b Foreign exchange asset – Foreign exchange asset means any of the following asset which the transferor has acquired/purchased with, or subscribed to in, convertible foreign exchange :

  1. shares in Indian company;
  2. debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 ;
  3. deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 ;
  4. any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944;
  5. such other assets as the Central Government may specify in this behalf by notification in the Official Gazette.

Payment from which deduction has to be made

63.2 Any payment to a non-resident/foreign company of interest (not being on securities) or amount referred to in section 115BBA or any other sum (not being salary) chargeable under the Act is subject to tax deduction [for detailed discussion, see paras 64.1 to 64.3] of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

¬ Foreign or non-resident companies are also covered by sections 195 but where payments are to be made by head office of non-resident company, and not by its permanent establishment in India, to non-resident suppliers of technologies to be used by the company in India, no deduction of tax is to be made by company’s head office while making such payments as payments in question cannot be deemed to accrue or arise in India—Advance Ruling P. No. 13 of 1995, In re [1997] 94 Taxman 171/228 ITR 487 (AAR – New Delhi).

When tax has to be deducted

63.3 Tax shall be deducted as follows :

63.3-1 Payments referred to section 115BBA – In the case of payments referred to in section 115BBA, tax shall be deducted :

  1. at the time of credit* of such income to the account of the payee, or
  2. at the time of payment thereof in cash or by issue of cheque or draft or by any other mode,

whichever is earlier.

63.3-2 Interest of mutual fund payable to non-residentTax on interest of mutual fund under section 10(23D) or of specified company payable to a foreign company or a non-resident (other than a foreign company) shall be deducted at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by any mode, whichever is earlier. Where the aforesaid income is credited to any account (whether called “suspense account” or by any other name) in the books of account of the payer, such crediting shall be deemed to be credit of such income to the account of the payee.

63.3-3 Any other payments – In cases not covered by paras 63.3-1 and 63.3-2 tax shall be deducted as follows :

  1. at the time of credit* of income to the account of the payee; or
  2. at the time of payment thereof in cash; or
  3. at the time of payment thereof by issue of cheque or draft by any other mode,

whichever is earlier.

¬ If deposit is made by a non-resident after March 31, 2005, tax is not deductible by an offshore banking unit [Sec. 197A(1D)].

63.3-4 Private arrangement of paying income tax-free cannot discharge obligation under sections 194E, 195 and 196A – The liability to deduct tax at source under sections 194E, 195 and 196A cannot be discharged merely because under a private contract the payee has undertaken to pay any interest (not being on securities) and any other sum (not being salary) tax-free [see also para 47.3] of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

Tax deduction account number

63.4 See para 1.4 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

Deposit of tax to the credit of Central Government

63.5 Tax has to be deposited to the credit of the Central Government as follows :

63.5-1 Where to depositSee para 1.5-1 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

63.5-1a e-Payment of tax – After March 31, 2008, all corporate assessees and other assessees (who are subject to compulsory audit under section 44AB) will have to make electronic payment of tax through internet banking facility offered by authorized banks (irrespective of the assessment year or the financial year for which the payment of tax has to be made). Alternatively, these taxpayers can make electronic payment of tax through internet by way of credit or debit cards. For detailed discussion, see para 1.5-1a of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

63.5-2 Time of deposit† – Rule 30 prescribes the following time-limit applicable in respect of tax deducted on or after April 1, 2010 –

63.5-2a When tax is deducted by Government – Where tax is deducted by or on behalf of the Government tax should be deposited within the time-limit given below–

If tax is to be deposited without production  of any income-tax challan Tax should be deposited on the same day on which tax is deducted
If tax deposit is accompanied by an income- tax challan Tax should be deposited on or before 7 days from the end of the month in which tax is deducted

63.5-2b When tax is deducted by any other person – In any other case, tax should be deposited within one week from the last date of month in which tax is deducted. However, tax deducted in the month of March can be deposited on or before April 30 after the end of the financial year.

63.5-3 Payment through challan The tax deducted at source is required to be deposited in Challan Form No. ITNS 281.

63.5-3a When tax is deducted/collected by a Government office and paid without production of a challan – See para 1.5-3a of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

63.5-4 Claim for refund – A claim for refund for TDS paid to the credit of the Central Government under Chapter XVII-B shall be furnished by the deductor in Form No. 26B electronically under digital signature.

Issue of certificate for tax deducted at source

63.6 Every person deducting tax at source is required to issue a quarterly certificate in Form No. 16A.

¬ It may be noted that the recipient of income must be given a certificate in Form No. 16A within the stipulated time even if tax is borne by the payer of the income—Circular No. 785, dated November 24, 1999.

63.6-1 Certificates are issued by downloading from TIN website† – See para 7.6-1 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

63.6-2 Time limit – TDS certificate in Form No. 16A shall be issued on quarterly basis as given below –

Different quarters TDS certificate should be given on or  before the dates given below
For the quarter ending June 30 of the financial year August 15 of the financial year
For the quarter ending September 30 of the financial year November 15 of the financial year
For the quarter ending December 31 of the financial year February 15 of the financial year
For the quarter ending March 31 of the financial year June 15 of the financial year immediately following the financial year in which tax is deducted

63.6-3 Issue of duplicate certificateSee para 1.6-4 of  Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds [34th Edition | 2021]

Deduction of Tax at Source with Advance Tax and Refunds

Deduction of Tax at Source on Payment of Certain Sum for Purchase of Goods

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Author: Taxmann

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