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MoF: Clarifications on deduction and collection of tax at source under S.194-O, 194Q & 206C(1H) of Income Tax Act, 1961

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Central Board of Direct Taxes (CBDT) recently issued Circular 20 of 2021 dated November 25, 2021 to issue further guidelines for applicability of S.194-O, S.194Q, and S.206C(1-I) of Income Tax Act, 1961. The Finance Act, 2020 and the Finance Act, 2021 inserted S. 194-O, 194Q, and 206C(1H) for mandating deduction and collection of tax at source on certain transactions.

E-auction services carried out through an electronic portal

In an e-auction, the e-auctioneer is only responsible for the price discovery, and the transaction of purchase/sale is carried out directly by the purchase & seller. Further, the price so discovered can be negotiated between parties without the knowledge of the e-auctioneer.

Thus, it has been clarified that S.194-O will not apply to e-action activities carried out by e-auctioneers if the prescribed conditions have been satisfied. Further, it was also clarified that the buyer and seller would still be liable to deduct/ collect tax as per the provisions of S.194Q and 206C(1H) of IT Act.

TDS on the component of indirect taxes other than Goods and Services Tax (GST)

It has been clarified that if the component of Value Added Tax (VAT), sales tax, excise duty, etc., has been indicated separately in the invoice, then TDS under S.194Q will be deducted without including such amounts.

Applicability of TDS if exemption is provided under S. 206C(1A)

S. 206C (1H) provides for Tax Collection at Source (TCS) by a seller from the amount received as consideration for the sale of goods if it exceeds INR 50 lakhs in any previous year. It also provides that no tax will be collected in respect of goods that are covered by sub-section (1), (1F), or (1G). Further, S.206C(1A) provides that the seller is not required to collect TCS from resident buyer if such buyer has filed a declaration that goods are purchased for manufacturing, processing, or producing articles or things or for generation of power and not for trading purpose.

Considering the above, it was highlighted that in respect of goods that are covered under sub-section (1) but exempted under sub-section (1A), no TCS would be collectible as S.206C(1H) categorically exclude the goods which are covered under sub-section (1).

The provisions of S.194Q don’t apply to those transactions where tax is collectible under S.206C except sub-section (1H) thereof. Since under S. 206(1A), tax is not required to be collected for goods covered under sub-section (1), it has been clarified that provisions of S.194Q will apply, and the buyer shall be liable to deduct tax if specified conditions are fulfilled.

TDS in case of the Department of Government other than Public Sector Undertaking or Corporation

A government department that is not carrying out any business or commercial activity is not regarded as a ‘buyer’ for the purpose of S.194Q. Thus, such organisations are not required to deduct TDS on goods purchased by them.

It has been clarified that the Central Government or State Government shall not be considered as a ‘seller’ and hence, no tax shall be deducted under S. 194Q if the seller of goods is Central Government or State Government.

Further, it has also been clarified that any other person, such as a Public sector Undertaking or corporation established under Central or State Act or any other such body, authority, or entity, shall be required to comply with provisions of S.194Q and tax shall be deducted accordingly.

We hope you will find the update useful. Copy of the official Circular is attached for your reference.