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)
| Aspect | Section 194Q (TDS) | Section 206C(1H) (TCS) |
| Taxpayer | Buyer (Purchaser) | Seller (Supplier) |
| Transaction Type | Purchase of goods | Sale of goods |
| Threshold Limit | Rs. 50 lakh (for purchases from a seller) | Rs. 50 lakh (for sales to a buyer) |
| Rate of Tax | 0.1% | 0.1% |
| Applicable to | Businesses/individuals who are required to get their accounts audited under section 44AB | Sellers whose turnover exceeds Rs. 50 lakh |
| Due Date of Payment | By 7th of the next month (for monthly TDS deposits) | By 7th of the next month (for monthly TCS deposits) |
| Exemptions | Purchases below Rs. 50 lakh or goods exempt from TDS | Sales 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.
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