Tax compliance in India took a complex turn with the introduction of sections 194Q and 206C(1H) of the Income Tax Act.
Both provisions aim to regulate tax collection and deduction at the source, yet they create overlapping situations.
This blog aims to dissect these sections, highlight their interaction, and guide businesses in maintaining compliance with these rules.
What is Section 194Q?
Applicability and Scope: On July 1, 2021, Section 194Q went into effect after being introduced by the Finance Act of 2021. This section requires buyers to deduct tax at source (TDS) on purchases of goods. It applies when:
- Over ₹10 crore was made by the buyer in the previous fiscal year.
- The total purchase value from a single seller exceeds ₹50 lakh in the financial year.
Rate and Timing: TDS under section 194Q is deductible at 0.1%. The deduction must be made at the earlier of:
- When the seller's account is credited with the purchase.
- The time of payment, whichever comes first.
Exploring Section 206C(1H)
Applicability and Conditions: Section 206C(1H) pertains to the collection of tax at source (TCS) by sellers and has been in effect since October 1, 2020. It mandates sellers to collect TCS on sales of goods when:
- The seller made more than ₹10 crore during the previous fiscal year.
- Over ₹50 lakh is the sale value to a buyer in a fiscal year.
Rate and Timing: TCS charges a 0.1% rate as well, but it is applied when the buyer sends the money.
The Priority of TDS Over TCS
The key question is, what happens when both sections 194Q and 206C(1H) apply simultaneously? The answer lies in the hierarchy established by the Central Board of Direct Taxes (CBDT).
According to CBDT Circular No. 13/2021, when both provisions are applicable, TDS under section 194Q takes precedence over TCS under section 206C(1H).
Implications of the Circular:
- TDS First: The seller is exempt from collecting TCS under section 206C(1H) if the buyer deducts TDS under section 194Q.
- Seller's Responsibility: If the buyer fails to deduct TDS despite being liable under 194Q, the seller must proceed with TCS collection as per section 206C(1H).
Key Differences and Similarities
Differences:
- Trigger Point: TDS under section 194Q is deducted at the time of credit/payment, while TCS under section 206C(1H) is collected upon receipt.
- Liability Party: The seller collects taxes under section 206C(1H), while the buyer deducts them under section 194Q.
Similarities:
- Turnover Criteria: Both sections apply when the annual turnover of the entity (buyer or seller) exceeds ₹10 crore.
- Threshold: The tax is levied on transactions exceeding ₹50 lakh with a single party in a financial year.
Practical Scenarios to Consider
To make the application clearer, let’s walk through practical situations:
Scenario 1: Buyer Deducts TDS First
- Case: A buyer with a ₹12 crore turnover buys ₹60 lakh worth of goods from a seller.
- Outcome: The buyer deducts TDS at 0.1% on ₹10 lakh (the excess over ₹50 lakh). The seller does not collect TCS.
Scenario 2: Seller Collects TCS First
- Case: Before the buyer's TDS deduction, the seller collects TCS on receiving an advance payment.
- Outcome: The buyer is exempted from TDS under section 194Q if the TCS has already been collected.
Scenario 3: No TDS or TCS Due to Exemptions
- Exempt Entities: Transactions with government bodies, local authorities, and specific notified organizations are exempt from both provisions.
Implications of Non-Compliance
Failing to comply with sections 194Q and 206C(1H) can have serious consequences:
1. Penalties and Interest:
- For TDS: If a buyer fails to deduct TDS under section 194Q, they are liable for the entire amount, plus applicable interest under section 201. Penalties include a 1% interest per month from the date of default until tax payment.
- For TCS: Non-collection of TCS leads to interest at 1% per month until the amount is paid. The seller could also face penalties under section 271H.
2. Loss of Business Relationships:
- Vendors and buyers may hesitate to transact with businesses known for compliance issues. Missteps in deducting TDS or collecting TCS can erode trust.
3. Disallowance of Expenses:
- Under section 40(a)(ia), if TDS is not deducted or paid as required, the related expenditure could be disallowed as a business expense in the buyer’s income tax return.
Challenges and Compliance Tips
Navigating these overlapping sections can be tricky for businesses. Here are essential tips for ensuring compliance:
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Maintain Comprehensive Records: Document all purchases and payments meticulously to track TDS and TCS obligations and avoid duplication.
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Validate PAN: Ensure seller’s PAN is collected and validated. If not provided, the tax rate increases to 5% for TCS or TDS.
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Issue Certificates Timely:
- Form 16A for TDS deductions should be issued to sellers.
- Form 27D should be given to buyers for TCS collection.
- Regularly Update Accounting Systems: Integrate software solutions capable of handling these tax deductions and collections automatically to minimize manual errors.
Complexities in Application
Understanding the specifics is critical, especially with different interpretations of payment terms and sales credits.
For example, if goods are supplied on credit terms and payments are staggered, companies must decide at which point to deduct or collect tax. Missteps in compliance could lead to penalties and disputes with tax authorities.
Future Outlook and Strategic Considerations
As businesses adapt to these sections, the tax landscape is bound to evolve. The government may introduce more clarifications or changes, especially as companies report issues. Here’s what businesses should anticipate:
- Greater Digitization: Expect more digital tools from tax authorities to assist in reconciling data between TDS and TCS filings.
- Periodic Updates: Staying informed through trusted sources and professional advice is crucial. Changes or new notifications from the CBDT can impact strategies for managing these provisions.
Navigating the Interplay Smoothly
The overlap between TDS under section 194Q and TCS under section 206C(1H) introduces a nuanced aspect of tax management.
By understanding which section takes precedence and how to document transactions correctly, businesses can minimize tax-related risks.
Ultimately, adherence to the correct provision—prioritizing TDS deduction and understanding exceptions—streamlines operations and ensures smooth tax compliance.
Frequently Asked Questions (FAQs)
Q1. What happens if TDS and TCS rates differ due to non-PAN availability?
If the seller does not provide a PAN, the TDS rate under section 194Q rises to 5%, and TCS under section 206C(1H) increases similarly. This ensures tax compliance even when seller details are not fully available.
Q2. Can the same transaction be subject to both TDS and TCS?
Ideally, no. If section 194Q applies and TDS is deducted, section 206C(1H) does not apply. However, a lack of clarity on timing and execution can lead to confusion in practical applications.
Q3. Are exports subject to these sections?
No. Exports of goods are generally not covered by these provisions, as the objective is to monitor domestic sales and purchases.
Q4. How should businesses choose between TDS and TCS software?
Accounting and tax software should have robust features for tracking both TDS deductions and TCS collections. Automation can minimize manual errors, streamline compliance, and ensure real-time updates on transactions surpassing the ₹50 lakh threshold.
Q5. Is TDS under section 194Q applicable to services?
No, section 194Q is specific to the purchase of goods. For services, other TDS provisions, such as section 194C or 194J, would apply based on the nature of the service.
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