Sections 194Q and 206C(1H) under the Income Tax Act, 1961

by Income Tax

The Income Tax Act, 1961 introduces various provisions regarding tax deduction and collection at source. Among these, sections 194Q and 206C(1H) have gained significant attention in recent times. Both provisions deal with tax on business transactions, particularly those related to the sale or purchase of goods, and require businesses to collect or deduct tax at the point of transaction. While these sections aim to broaden the tax base and ensure compliance, they also impose new responsibilities on taxpayers.

1. Section 194Q: TDS on Purchase of Good

Section 194Q was introduced by the Finance Act, 2021 and deals with the deduction of tax at source (TDS) on the purchase of goods. Here’s an overview:

  • Key Provisions of Section 194Q:
    • Effective Date: Applicable from 1st July 2021.
    • TDS Deduction: A buyer is required to deduct tax at the rate of 0.1% on the purchase of goods if the total value of the goods purchased in a financial year exceeds Rs. 50 lakhs.
    • Threshold: The section applies to businesses and professionals who are required to get their accounts audited under section 44AB of the Income Tax Act. This means it primarily targets larger businesses.
    • Payer and Payee: The buyer (payer) is required to deduct tax from the payment made to the seller (payee).
    • Payment Conditions: TDS under section 194Q is applicable only if the buyer is making payments to a resident seller.
  • Who is liable to deduct tax?
    • Any person, being a buyer, whose total purchases from a seller exceed Rs. 50 lakh in a financial year.
    • It includes businesses, professionals, and individuals who are required to get their accounts audited under section 44AB.
  • Rate of Tax Deduction:
    • 0.1% on the purchase value exceeding Rs. 50 lakh in a financial year.
  • Exemptions:
    • Goods not subject to TDS: TDS is not applicable to the purchase of exempted goods or goods where TDS is already levied under other provisions (e.g., Section 194I or 194J).
    • Small Purchases: If the transaction does not exceed the threshold limit of Rs. 50 lakh, no TDS will be deducted.
  • TDS Compliance:
    • The buyer is responsible for depositing the TDS with the government, filing regular TDS returns, and issuing TDS certificates to the seller.

2. Section 206C(1H): TCS on Sale of Goods

Section 206C(1H) was introduced by the Finance Act, 2020 and requires the seller to collect tax at source (TCS) on the sale of goods.

  • Key Provisions of Section 206C(1H):
    • Effective Date: Applicable from 1st October 2020.
    • TCS on Sale of Goods: Sellers of goods are required to collect tax at the rate of 0.1% on the sale of goods when the total sales during the financial year exceed Rs. 50 lakh.
    • Seller’s Liability: The seller (rather than the buyer) is responsible for collecting tax at source.
    • Threshold: TCS applies if the total sales during the financial year exceed Rs. 50 lakh.
    • Resident Sales: TCS is applicable only for sales made to residents. The rate is 0.1% unless the buyer does not provide a PAN or Aadhaar number, in which case the rate increases to 5%.
  • Who is liable to collect TCS?
    • Any seller whose total sales, gross receipts, or turnover from the sale of goods exceed Rs. 50 lakh during a financial year.
    • The section applies only to residential sales (sales to resident buyers).
  • Rate of Tax Collection:
    • 0.1% on the sale value exceeding Rs. 50 lakh during the year.
    • If the buyer fails to provide their PAN/Aadhaar, the rate increases to 5%.
  • Exemptions:
    • Exempted Goods: The provisions do not apply to the sale of goods that are exempt from TCS or those already covered under other sections (such as 206C(1) for the sale of certain items like scrap, liquor, and timber).
    • Small Sales: Transactions below the Rs. 50 lakh threshold in a financial year are not subject to TCS.
  • TCS Compliance:
    • The seller must deposit the TCS amount with the government, file TCS returns, and issue TCS certificates to the buyer.

3. Comparison between 194Q and 206C(1H)

AspectSection 194Q (TDS)Section 206C(1H) (TCS)
TaxpayerBuyer (Purchaser)Seller (Supplier)
Transaction TypePurchase of goodsSale of goods
Threshold LimitRs. 50 lakh (for purchases from a seller)Rs. 50 lakh (for sales to a buyer)
Rate of Tax0.1%0.1%
Applicable toBusinesses/individuals who are required to get their accounts audited under section 44ABSellers whose turnover exceeds Rs. 50 lakh
Due Date of PaymentBy 7th of the next month (for monthly TDS deposits)By 7th of the next month (for monthly TCS deposits)
ExemptionsPurchases below Rs. 50 lakh or goods exempt from TDSSales below Rs. 50 lakh or goods exempt from TCS

4. Practical Implications for Businesses

  • Increased Compliance Burden: Both sections increase the compliance burden on businesses as they are now required to collect or deduct tax at the point of sale or purchase.
  • Documentation: Proper record-keeping and issuance of TDS/TCS certificates are mandatory for both the buyer and seller.
  • Impact on Cash Flow: The TDS under section 194Q reduces the immediate cash outflow for the buyer, whereas TCS under section 206C(1H) impacts the seller’s working capital.
  • Penalties for Non-Compliance: Failure to comply with these provisions can lead to penalties, interest, and disallowance of business expenses.

5. Conclusion

Sections 194Q and 206C(1H) are significant additions to the Income Tax Act, designed to enhance tax collection at the grassroots level. They require businesses involved in the sale and purchase of goods to comply with tax deduction and collection norms, respectively. While these provisions serve to widen the tax base, businesses must ensure proper documentation and timely deposit of taxes to avoid penalties.

It is crucial for all taxpayers to stay updated with any further amendments to these sections, ensuring smooth compliance and minimizing potential tax disputes.

By following the provisions of both sections, businesses can contribute to a more transparent and effective taxation system while also safeguarding themselves against future tax-related challenges.

For more information, you can visit us at Groomtax

Depreciation Under the Companies Act, 2013 vs Depreciation Under the Income Tax Act,1961

by Income Tax

Depreciation is a crucial accounting concept that reflects the reduction in value of a fixed asset over time due to usage, wear and tear, or obsolescence. Both the Companies Act, 2013 and the Income Tax Act, 1961 address depreciation, but they differ significantly in terms of methods, rates, and applicability. This blog will compare depreciation as per the Companies Act, 2013 and the Income Tax Act, 1961, providing an in-depth understanding of their differences and implications.

1.Depreciation Under the Companies Act, 2013 :

The Companies Act, 2013 mandates the accounting treatment for depreciation for companies in India. Depreciation is accounted for as per the provisions laid down in Schedule II of the Companies Act, which outlines the rates, methods, and other criteria for depreciation on various fixed assets.

Key Features of Depreciation as per the Companies Act, 2013:

a) Method of Depreciation:

  • The Companies Act allows two methods of depreciation: the Straight-Line Method (SLM) and the Written Down Value (WDV) Method.
  • SLM is used where the asset’s benefit is expected to be uniform over its useful life.
  • WDV is used when the asset’s usage or benefit decreases over time at a higher rate in the earlier years.

b) Useful Life of Assets:

  • Schedule II provides specific useful lives for different classes of assets, which companies must adhere to while calculating depreciation.
  • The useful life may be reviewed periodically, and adjustments can be made if required.

c) Residual Value:

  • A residual value is considered in calculating depreciation, and the minimum residual value is generally taken as 5% of the original cost of the asset.
  • The residual value should not exceed the asset’s cost, unless specifically indicated.

d) Depreciation on Revalued Assets:

  • If an asset is revalued, depreciation must be calculated based on the revalued amount, with the accumulated depreciation adjusted accordingly.
  • Revaluation surplus may be credited to a revaluation reserve

e) Transition to New Provisions :

  • For assets existing as of April 1, 2014, companies were required to adopt the provisions of Schedule II for depreciation calculation, considering the remaining useful life of assets.

Rates of Depreciation :

  1. The rates for depreciation are provided for various categories of assets under Part C of Schedule II of the Companies Act, 2013. For example:
  • Buildings: 5% (SLM) or 10% (WDV)
  • Furniture & Fixtures: 10% (SLM) or 20% (WDV)
  • Machinery: 15% (SLM) or 25% (WDV)

2. Depreciation Under the Income Tax Act, 1961 :

Depreciation under the Income Tax Act, 1961 is governed by Section 32 of the Act. The Income Tax Act provides specific rates of depreciation on assets used for business or professional purposes, primarily to calculate taxable income.

Key Features of Depreciation as per the Income Tax Act, 1961:

1. Method of Depreciation:

  • The Income Tax Act mandates the Written Down Value (WDV) method for calculating depreciation.
  • SLM is not allowed for tax purposes. Depreciation is deducted from the WDV of the asset each year.

2. Rates of Depreciation:

  • The Income Tax Act specifies different rates for various categories of assets, which are subject to change through Finance Acts.
  • These rates are typically higher compared to the Companies Act to encourage investment.

Example of depreciation rates under the Income Tax Act:

  • Buildings: 10% (if used for business or office)
  • Furniture and Fittings: 10%
  • Machinery and Plant: 15% (general category), 40% (computers and related equipment)

3. Accelerated Depreciation:

  • The Income Tax Act offers higher depreciation rates on certain assets (e.g., computers, windmills, and solar power systems) to incentivize businesses to invest in specific assets.
  • This is designed to promote capital investment and growth in sectors like technology and renewable energy.

4. Depreciation on Revalued Assets:

Revaluation of assets does not affect depreciation for tax purposes. Depreciation is calculated on the original cost of the asset, irrespective of any revaluation.

5. Additional Depreciation:

  • A business can claim additional depreciation of 20% on new machinery and plant (excluding office buildings) in the first year of purchase, subject to certain conditions.

6. Block of Assets:

  • Depreciation is calculated on a block of assets, where assets of similar nature are grouped together. The block is depreciated at a prescribed rate on the aggregate cost of the block rather than individual asset cost.

Key Differences Between Depreciation under the Companies Act, 2013 and the Income Tax Act, 1961 :

AspectCompanies Act, 2013Income Tax Act, 1961
Method of DepreciationStraight Line Method (SLM) and Written Down Value (WDV)Only Written Down Value (WDV)
Rate of DepreciationAs per Schedule II of the Companies Act (specific rates)Prescribed under Income Tax Act (usually higher rates)
Asset ClassificationSpecific life for each class of asset (Schedule II)Assets grouped into blocks (e.g., machinery, building)
RevaluationDepreciation is recalculated based on revalued amountDepreciation is based on original cost, even if assets are revalued
Additional DepreciationNot availableAvailable for new machinery (20% in the first year)
Treatment of Residual ValueMinimum residual value of 5% is consideredNo specific residual value; depreciation is calculated on WDV

Conclusion :

Both the Companies Act, 2013 and the Income Tax Act, 1961 provide mechanisms for calculating depreciation, but with different objectives. The Companies Act governs the accounting of depreciation for financial reporting, while the Income Tax Act focuses on providing tax benefits to businesses. For businesses, it is essential to understand both frameworks to ensure compliance with financial reporting standards and optimize tax planning. In most cases, the depreciation calculated under the Income Tax Act will differ from the depreciation under the Companies Act due to differences in rates, methods, and criteria

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Exemptions and Benefits for Small Companies Under the Companies Act, 2013

by Legal

The Companies Act, 2013, provides several exemptions and benefits to small companies in India, recognizing their unique needs and limited resources. Below is a detailed analysis:

1. Definition of a Small Company :

As per Section 2(85) of the Companies Act, 2013, a small company is defined as a company, other than a public company:

  • Paid-up Share Capital: Not exceeding ₹50 lakh (or a higher amount prescribed, up to ₹5 crore).
  • Turnover: As per the last profit and loss account, not exceeding ₹2 crore (or a higher amount prescribed, up to ₹20 crore).

Exceptions: The following are not considered small companies:

2. Exemptions Available to Small Companies :

The Act grants the following exemptions to small companies:

  • Board Meetings (Section 173): Small companies are required to hold only two board meetings annually, with a minimum gap of 90 days between them, instead of four.
  • Cash Flow Statement (Section 2(40)): Preparation of a cash flow statement as part of financial statements is not mandatory.
  • Annual Return (Section 92): Small companies can have their annual return signed by the company’s director instead of a company secretary, simplifying compliance.
  • Auditor Rotation (Section 139(2)): Small companies are exempt from the mandatory rotation of auditors.

3. Benefits in Compliance Framework :

  • Less Stringent Penalties: Smaller penalties and leniency in certain cases of non-compliance.
  • Filing Fees: Reduced fees for filings with the Registrar of Companies (RoC).
  • Declaration of Solvency: Simplified procedures for schemes like mergers or amalgamations (Section 233).

4. Simplified Accounting and Auditing :

  • No mandatory inclusion of certain notes or disclosures in the financial statements, which reduces complexity.
  • Exemption from specific procedural requirements under the Act.

5. Corporate Governance Relaxations :

  • Fewer requirements for holding general meetings and related documentation.
  • Simplified quorum requirements and voting procedures.

    6. Merger and Amalgamation Benefits :

    Section 233 allows small companies to merge without going through the cumbersome process of seeking approval from the National Company Law Tribunal (NCLT), subject to certain conditions and notifications to the Registrar and Official Liquidator.

    Conclusion :

    Small companies play a critical role in the Indian economy, and these exemptions and benefits are designed to reduce their compliance burden, enabling them to focus on growth and innovation. However, it is essential to stay updated with amendments and notifications to leverage these advantages fully.

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    Provision for Tax Deducted at Source (TDS) and Tax Collected at Source (TCS)

    by Income Tax

    Tabular Summary based on the Key Provisions:

    AspectTDS (Tax Deducted at Source)TCS (Tax Collected at Source)
    Relevant SectionsChapter XVII-B, e.g., Sections 192, 194, 206AAChapter XVII-BB, e.g., Sections 206C, 206CC, 206CCA
    Applicable OnPayments like salaries, interest, rent, fees for professionals, etc.Sale of specified goods (e.g., alcohol, tendu leaves, scrap, minerals)
    Deductor/CollectorPerson making specified payments to a residentSeller receiving payment for specified goods
    RatesPrescribed by Income Tax Act, subject to changes in Finance ActsSpecified in the Act, often percentage-based (e.g., 1% for scrap)
    Non-Filer ImpactHigher TDS for non-filers under Section 206ABHigher TCS for non-filers under Section 206CCA
    PAN RequirementMandatory; otherwise higher rates under Section 206AAMandatory; otherwise higher rates under Section 206CC
    Time of DeductionAt the time of credit/payment, whichever is earlierAt the time of debiting amount or receipt of payment, whichever is earlier
    Filing ReturnsForm 26Q, 27Q for reportingQuarterly statements in prescribed forms
    Consequences of DefaultDeemed assessee-in-default; penalties and interest applyDeemed assessee-in-default; penalties and interest apply

    Section-Wise Tabular Summary of the TDS and TCS Provisions:

    TDS Provision :

    SectionParticularsApplicable OnRateThreshold LimitKey Notes
    192TDS on SalarySalaries paid to employeesAs per slab ratesBasic exemption limitDeduction considering employee’s declaration (Form 12BB).
    194TDS on DividendsDividends by companies10%₹5,000Applicable to resident shareholders only.
    194ATDS on Interest (except securities)Interest by banks, financial institutions10%₹40,000 (₹50,000 for senior citizens)Not applicable to certain exempted entities.
    194CTDS on ContractsPayments to contractors/sub-contractors1% (individual/HUF), 2% (others)₹30,000 per contract/₹1,00,000 annuallyApplicable to contracts including supply of labour.
    194HTDS on Commission/BrokerageCommission or brokerage2%₹15,000Excludes insurance commission covered under Section 194D.
    194ITDS on RentRent for land, building, plant, or machinery2% (plant/machinery), 10% (land/building)₹2,40,000 annuallyIncludes sub-letting cases.
    194JTDS on Professional FeesFees for professional/technical services10% (general), 2% (technical)₹30,000 annuallyApplicable to consultancy services as well.
    194QTDS on Purchase of GoodsPayment to resident for goods exceeding limit0.1%₹50,00,000 annuallyDeductor must ensure supplier’s compliance.
    206ABHigher TDS for Non-filersTDS for non-filers of ITR in specified casesTwice the rate or 5%, whichever is higherNANon-filers as defined in the Act.

    TCS Provision:

    SectionParticularsApplicable OnRateThreshold LimitKey Notes
    206C(1)TCS on Specified GoodsAlcohol, tendu leaves, scrap, minerals1%-5%No limitRate depends on the type of goods sold.
    206C(1F)TCS on Sale of Motor VehiclesSale of motor vehicles exceeding limit1%₹10,00,000Applicable to all sellers.
    206C(1G)TCS on Overseas RemittanceRemittances under LRS, overseas tours5%-20%₹7,00,000 (for education/medical cases)Higher rates for others.
    206C(1H)TCS on Sale of GoodsSale of goods (exceeding limits)0.1%₹50,00,000Seller turnover must exceed ₹10 crore.
    206CCAHigher TCS for Non-filersTCS for non-filers of ITRTwice the rate or 5%, whichever is higherNASimilar applicability to Section 206AB.

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    Section 80JJAA: Deduction to businesses for employing new employees

    by Income Tax

    Eligibility:

    • Applicable to Assessees:
      • Indian companies or individuals, HUFs, partnerships, or other entities engaged in business.
      • Assessee must have income from business and must be liable for audit under Section 44AB (Tax Audit).
    • Eligible Business:
      • All businesses except businesses engaged in manufacturing or production of apparel, footwear, or leather products (for which separate provisions apply).

    Quantum of Deduction:

    • Deduction Amount:
      • 30% of additional employee cost for three assessment years, including the year in which the employment is created.

    Key Definitions:

    • Additional Employee:
      • A person employed during the financial year.
      • Excludes:
        • Employees whose total monthly emoluments exceed ₹25,000.
        • Apprentices under the Apprentices Act, 1961.
        • Employees working for less than 240 days in a year (150 days for businesses in the manufacturing of apparel, footwear, or leather products).
        • Rehired employees or employees transferred from another business.
    • Additional Employee Cost:
      • Total emoluments paid or payable to additional employees during the financial year.
      • For existing businesses: Only the increase in employee cost over the previous financial year is considered.
      • For new businesses: The total emoluments paid or payable are treated as additional employee cost.
    • Emoluments:
      • Wages paid or payable to employees but excludes:
        • Employer contributions to provident funds or other funds.
        • Perquisites as defined in Section 17(2).
        • Any lump-sum payments like gratuity or severance pay.

    Conditions for Claiming Deduction:

    • Payment through Banking Channels:
      • Salary or wages must be paid through bank transfers or account payee cheques to qualify.
    • Statutory Compliance:
      • Employers must comply with statutory obligations like provident fund and employee welfare contributions.
    • Audit Requirement:
      • The deduction can only be claimed if the taxpayer’s accounts are audited, and the auditor certifies the details in the prescribed Form 10DA.
    • Threshold for Days of Employment:
      • Employees must work for at least:
        • 240 days in the financial year (general).
        • 150 days for businesses in manufacturing apparel, footwear, or leather products.

    Exclusions:

    • Employees employed by a business in case of reconstruction or reorganization of an existing business.
    • Employees in cases where the business takes over another business.

    Illustration:

    • Suppose a business employs 50 new employees, each with a monthly salary of ₹20,000.
    • The annual emoluments for these employees = ₹20,000 × 12 × 50 = ₹1,20,00,000.
    • Deduction: 30% of ₹1,20,00,000 = ₹36,00,000 (for 3 consecutive years).

    Important Points:

    • Carry Forward of Unclaimed Deduction:
      • No provision exists for carrying forward this deduction if not claimed in the respective assessment year.
    • Applicability to Startups:
      • Startups also benefit from this deduction as long as they meet the criteria.
    • Misreporting or Non-Compliance:
      • Any misreporting in claiming this deduction may result in penalties or disallowance of the deduction.

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    Income Tax Provisions on Sale of Listed Equity Shares

    by Income Tax
    • Income Tax Provisions on Sale of Listed Equity Shares:
      • Short-Term Capital Gains (STCG):
        • Applicable if shares are held for 12 months or less.
        • Tax Rate: 20% (under Section 111A) + surcharge + cess.
        • Condition: Sale must take place on a recognized stock exchange and attract Securities Transaction Tax (STT).
      • Long-Term Capital Gains (LTCG):
        • Applicable if shares are held for more than 12 months.
        • Tax Rate: 12.5% (under Section 112A) on gains exceeding ₹1,25,000 in a financial year, without indexation benefit.
        • Condition: Sale must take place on a recognized stock exchange and STT must be paid.
    • Exemptions Available Under the Capital Gains Head:
      • Under Section 54F:
        • Applicable if the entire net sale consideration (not just capital gain) is reinvested in a residential house property within the specified time limits:
          • Purchase: Within 1 year before or 2 years after the sale.
          • Construction: Completed within 3 years of the sale.
        • Conditions:
          • The taxpayer should not own more than one residential house (other than the new house) on the date of transfer.
          • Exemption is proportionate if only part of the sale consideration is invested.
    • Set-Off of Capital Gains:
      • STCG can be set off against any capital loss (short-term or long-term).
      • LTCG can be set off only against long-term capital loss.
    • Special Cases and Notes:
      • Non-Resident Taxation:
        • For non-residents, tax on LTCG and STCG is the same, but exemptions under Sections 54F and 112A may not apply unless specified in Double Taxation Avoidance Agreements (DTAAs).

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    Section 79-Carry forward and set-off of losses in Income Tax

    by Income Tax

    Section 79 of the Income Tax Act pertains to the carry forward and set-off of losses in case of certain companies, primarily addressing restrictions on carrying forward losses when there is a change in the company’s shareholding. Below is a summary:

    1. General Restriction:
      Losses incurred in prior years cannot be carried forward if there is a significant change in shareholding during the previous year. Specifically, shares carrying at least 51% of voting power must be held beneficially by the same persons on:
      • The last day of the year when the loss was incurred, and
      • The last day of the previous year.
    2. Exceptions to General Restriction:
      • Eligible Startups: For companies qualifying under Section 80-IAC, losses can be carried forward if all shareholders of the year in which the loss was incurred remain shareholders in the year of set-off.
      • Family Transfers: Changes due to death or gifts to relatives are excluded.
      • Foreign Subsidiaries: Changes due to the merger or demerger of a foreign company are exempt if 51% of shareholders remain in the merged company.
      • IB Code Resolution Plans: Changes in shareholding approved under the Insolvency and Bankruptcy Code, 2016, are exempt.
      • Government Intervention: Shareholding changes in companies under Central Government’s intervention due to mismanagement are excluded.
      • Strategic Disinvestment: Former public-sector companies continue to carry forward losses if 51% of voting power remains with the original government-linked ultimate holding company​.

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