The salient features of Section 194 Q, Section 206 AB, and Section 206 CCA inserted in the Finance Act 2021 which are effective from 1st July 2021 are as under:

1. 194Q – TDS to be deducted on purchase more than INR 50,00,000

Summary

TDS should be deducted in case of purchases at the rate of 0.1% of value of purchases more than INR 50,00,000 in case all the following conditions are satisfied:

1. The purchases (individual or in aggregate for the year) exceeds INR 50,00,000 
2. It would be applicable in case the turnover of the assessee exceeds INR 10,00,00,000 during the financial year preceding the financial year in which the purchase is carried out
3. TDS is not deductible under any other section of the Income Tax Act, 1961
4. TCS is not collectible under 206C (However, this section is still applicable in cases where TCS is collected for sales exceeding INR 50,00,000)

Other important points

1. Tax is deductible at the time of credit to the account of the seller or at the time of payment, whichever is earlier. 
2. If the seller does not provide PAN, TDS is to be deducted at the rate of 5%. 
3. In case the assessees turnover does not cross INR 10,00,00,000 in the preceding financial year, the seller can collect TCS at 0.1% under 206C(1H) 

Relevant extract of the amendment

Sec 194 Q (1) : “  Any person , being a buyer who is responsible  for paying of any sum to any resident ( hereinafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, shall, at the time  of such credit of such sum to the account of the seller or at the time  of payment thereof by any mode, whichever is earlier ,deduct an amount equal to 0.1% of such sum exceeding fifty lakh rupees as income tax.” 

For the purposes of this sub section,” buyer” means a person whose total sales, gross receipts or turnover from the business carried on by him exceeds Rs 10 Cr during the financial year immediately proceeding  the financial year in which the purchase of goods is carried out, not being a person , as the Central Government may,  by notification in the Official Gazette ,specify for this purpose ,subject to such conditions as may be specified therein,

ii. 194Q (5): The provisions of this section shall not apply to a transaction on which – 

1. tax is deductible under any of the provisions of this Act; and
2.  tax is collectible under the provision of Section 206 C other than a transaction to which sub section (1H) of section 206 C applies.

iii. Tax is to be deducted at the time of payment or credit of invoice to the account of seller whichever is earlier. Simultaneously Sec 206AA [Sellers without PAN) is amended to provide for deduction at the rate of 5% of value of purchases instead of normal 20%. 

iv. Further, the tax is to be deducted only on purchases made after the threshold of Rs. 50 Lakhs is crossed. In other words, once the threshold of Rs. 50 Lakhs is crossed, TDS is applicable only on the incremental value.

v. As per Section 206(1H) which was introduced last year,  a seller ,who receives any amount as consideration for the sale of any goods of the value or aggregate of such value exceeding Rs 50 Lakhs in any previous year ,other than the goods exported out  of India or goods covered in sub-section (1) or subsection (1F) or sub section (1G) shall at the time of receipt of such amount ,collect from the buyer ,a sum equal to 0.1%  of the sale consideration exceeding Rs 50 Lakhs as Income Tax.  With the introduction of Sec 194Q, primarily the onus of withholding tax obligation shifts to buyer. In cases where buyer is not liable to deduct tax (i.e., if his turnover in preceding year is below INR 10 Crores) then for the said transaction Seller will collect tax on the transaction (if seller turnover exceeds INR 10 Crores in preceding year).

2. Section 206 AB (1) – Higher TDS rates for vendors who have not filed their Income tax returns or have not provided details of filing ITR

TDS in non-salary TDS cases is to be deducted at higher of for specified persons:

1. 2 X rate deductible as TDS under the provisions of that section, or
2. 2 X rate or rate in force, or
3. At the rate of 5%

Specified person for the purpose of this section is a person who satisfies the following conditions:

1. A person who has not filed his Income tax return for both previous two financial years preceding the year in which the transaction is taking place
2. Aggregate TDS is equal to greater than INR 50,000 in each of the two financial years preceding the year in which the transaction is taking place
3. The person is not a non-resident who does not have a permanent establishment in India

Relevant extract of the amendment 

Section 206 AB (1) : Effective from 1^st July 2021, tax  shall  be deducted at source for any sum or income or amount paid ,or payable or credited ,by a person to a specified person , u/s 193,194 194A, 194 C  to 194 Q (except 194LBC or 194 N) at the  higher of the following rates ,namely:

1. at twice the rate specified in the relevant provisions of the Act; or
2. at twice the rate or rates in force ; or
3. at the rate of 5%
4.  As per Sub section (3) to Sec 206AB, “specified person” means a  person who has not filed the return of income for both of the two assessment years relevant to the two previous assessment years immediately prior to the previous year in which tax is required to be deducted ,for which the time limit of filing return of income tax u/s 139(1) has expired; and the aggregate of the tax deducted at source and tax collected at source in his case is Rupees 50,000 or more in each of these two previous years. Specified person shall not include a non resident who does not have a permanent establishment in India 

3. Section 206CCA:

This is identical to Section 206AB and is applicable for TCS rates

CIRCULARS

Circular No 13 of 2021

CBDT has provided the following guidelines with respect to implementation of Section 194Q:

1. It is not applicable with respect to:

1. Transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation, including recognized stock exchanges, or recognized clearing corporation located in International Financial Service Centre.
2. transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC;

2. Calculation of threshold

The following clarifications were issued with respect to threshold

1. 194Q applies to credit to the account or payment whichever is earlier. CBDT has clarified that if either leg of the transaction i.e credit or payment has happened before 1July 2021, TDS need not be deducted on that transaction u/s 194Q
2. The threshold of INR 50,00,000 worth of transactions will be computed from 1 April 2021. Hence if purchases worth INR 50,00,000 has been exceeded by 30 June 2021, the assessee must start deducting TDS u/s 194Q from 1 July 2021

3. Adjustment for GST, purchase returns

1. If GST is indicated separately, then TDS u/s 194Q would be applicable on amount excluding GST. However, if tax is deducted on payment basis (if payment is earlier than credit to account) then TDS would be charged on the entire amount of advance as it is not possible to identify the GST component of the amount to be invoiced in the future
2. In case of purchase returns, TDS would have already been deducted on purchase amount. On purchase returns, the TDS already deducted can be adjusted against future payments / transactions with the seller

4.  194Q is not applicable to a non-resident

5. If the total income of the seller is exempt (example: agricultural income) then 194Q would not apply. However, if part of the income is exempt 194Q would still apply

6. Provisions of 194Q will not apply to buyer in year of incorporation of business

7. For the purpose of 194Q turnover of INR 10,00,00,000 in preceding year only gross receipts from business / sales will be considered. Non-business receipts resulting in gross receipts exceeding INR 10,00,00,000 will not be considered

TECHNOLOGICAL SOLUTION FOR 206AB & 206CCA

CBDT through Notification No 1 of 2021 by Directorate of Income tax (Systems) has said that it will introduce a new tool called ‘Compliance check for Section 206AB & 206CCA’ to assist persons responsible for deducting TDS with identifying ‘Specified Persons’ as per section 206AB & 206CCA. However, the functionality is yet to be released. Once, the functionality is released we will update this note for your easy reference.  Till then the steps suggested below can be used.

SUGGESTED STEPS FOR COMPLIANCE

IF YOUR TURNOVER IS MORE THAN INR 10 CRORES DURING THE LAST FINANCIAL YEAR: 

1. Intimate all your regular vendors from whom your purchases exceed / (likely to exceed) Rs. 50 Lakhs per annum that your turnover during the FY 2020-21 is above Rs. 10 Crores and you shall be deducting tax u/s 194Q at 0.1% from 1st July 2021, wherever applicable. (Refer Declaration Format 1 enclosed).In form that they need not collect tax u/s 206(IH)
2. Obtain a declaration (in format 2) from all the vendors for goods from whom your purchases exceed / (likely to exceed) Rs. 50 Lakhs per annum and other service vendors on whom you are liable to deduct TDS under any other provisions of the law ( as detailed in note2 above) that they have filed their return of income for AY 2019-20 and AY 2020-21 within the due date. Where the vendor has not filed the return of income, if applicable, obtain a declaration that their TDS credit is less than Rs. 50,000. 
3. Obtain declaration from your customer to whom your sales exceed / (likely to exceed) Rs. 50 Lakhs per annum stating whether their turnover for FY 2020-21 exceeds Rs. 10 Crores and whether they will be deducting tax at source u/s 194Q. Intimate that where no such declaration is received, you shall levy TCS at 0.1% u/s 206C(1H). (Refer Declaration Format 3 enclosed.)
4. Furnish a declaration to all your service providers who you are liable to deduct TDS under any provisions of the Act or customers who are liable to collect TCS  that you have filed your return of income for AY 2019-20 and AY 2020-21 within the due date (Refer  Format 4 enclosed) 

IF YOUR TURNOVER IS BELOW INR 10 CRORES DURING THE LAST FINANCIAL YEAR:

1. Obtain a declaration (in format 2) from all  service vendors on whom you are liable to deduct tax under any other provisions of the law/collect tax  ( as detailed in note2 above) that they have filed their return of income for AY 2019-20 and AY 2020-21 within the due date. Where the vendor has not filed the return of income, if applicable, obtain a declaration that their TDS credit is less than Rs. 50,000. 

2. Furnish a declaration to all your service providers who you are liable to deduct tax under any provisions of the Act or customers who are liable to collect tax  that you have filed your return of income for AY 2019-20 and AY 2020-21 within the due date (Refer Declaration Format 4 enclosed) 

Note:

1. Ensure that the declarations are sent / received at the earliest.

2. The above declarations to be obtained/furnished every year and every new vendor/customer identified during the year.