Payments made in advance may not absolve you from TDS/TCS provisions

Buyers will have to deduct tax at source at 0.1 per cent of the amount paid for goods for all purchases made during the year post June 30, 2021 if the value of purchases or advance payments during the year between April and June exceeds Rs 50 lakh.

In a clarification issued by the Central Board of Direct Taxes (CBDT), it said that since the threshold of Rs 50 lakh for the payment of TDS or TCS is with respect to the previous year, calculation of sum for triggering TDS under Section 194Q shall be computed from April 1, 2021.

"Hence, if a person being a buyer has already credited or paid Rs 50 lakh or more up to June 30, 2021 to a seller, the TDS under Section 194Q shall apply on all credit or payment during the previous year, on or after July 1, 2021 to such seller," said the CBDT circular clarifying the applicability of TDS/TCS provisions on amount paid for purchase of goods.

The Finance Act, 2021 inserted a new Section -- 194Q -- in the Income-Tax Act, 1961, which took effect from July 1, 202I.

It applies to any buyer who is responsible for paying any sum to any resident seller for purchase of any goods of the value or aggregate of value exceeding Rs 50 lakh in any previous year.

The buyer, at the time of credit of such sum to the account of the seller or at the time of payment, whichever is earlier, is required to deduct an amount equal to 0.1 per cent of such sum exceeding Rs 50 lakh as income tax.

For the purpose of this tax, the buyer is defined to be a person whose total sales or gross receipts or turnover from the business carried on by him exceed Rs 10 crore during the financial year immediately preceding the financial year in which the purchase of good is carried out.

"The clarification puts to rest applicability of tax on purchase of goods by businesses. Even though the tax come into force from July 1, any amount paid on purchases during the three-month period between April and June would qualify for determining the Rs 50 lakh threshold. So, payments beyond that amount in the balance period of FY22 (post June 30) could be taxed," said a chartered accountant familiar with the CBDT intent on the TDS taxation.

The CBDT has, however, categorically clarified that the TDS/TCS provision will not apply in relation to transactions in securities and commodities which are traded through recognised stock exchanges or cleared and settled by the recognised clearing corporation, including recognised stock exchanges or recognised clearing corporation located in the International Financial Service Centre (IFSC).

It will also not apply on transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges.