Let's resolve the confusion
The concept of Tax Deduction at Source ("TDS") and Tax Collection at Source ("TCS") was introduced with an aim to collect tax from the very source of income.
As per this concept, a person who is liable to make payment of specified nature to any other person shall deduct tax at source and a person who receives payment from any other person shall collect tax at source and remit the same into the account of the Central Government.
Now with the basic understanding of TDS and TCS let's dive into the concept of Section 194Q and 206C(1H).
There arise some difficulties in application of these new sections as its sale and purchase are the flip-side of a transaction. It attracts the liability to collect tax on part of seller or liability to deduct tax on part of buyer on purchase of goods. This results into a conflict about which section is to be applied.
Understanding Sections 194Q and 206C(1H):
Section 206C(1H) was made applicable from 1st October, 2020 in order to levy tax on buyers' purchases above Rs 50 Lakh which will be collected by seller if seller's turnover during preceding financial year exceeds Rs 10 Crores.
Even after the imposition of this section, various buyers evade themselves from tax implications by purchasing goods from small or medium supplier whose turnover is below the specified limit and thus this section won't apply to them.
After recognizing the problem prevailing in the system, the tax authorities brought into action Section 194Q with effect from 1st July, 2021 which made buyer's liable to deduct tax at source on purchases above Rs 50 Lakh if his turnover during the preceding financial year exceeds Rs 10 Crores. The provisions of this section shall not apply to a transaction on which tax is collectible under the provisions of section 206C [other than a transaction to which sub-section (1H) of section 206C applies.]
Thus, in the present scenario, both the large buyers and sellers are covered under the tax regime.
Graphical Presentation of Sections 194Q and 206C(1H):
In general, both the section looks quite similar but on carefully examination, we can come across many variations which are incorporated in these sections by the policymakers from various perspectives which are as follows:
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Buyer's Turnover exceeds Rs. 10 Crores in the preceding financial year.
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Seller's Turnover exceeds Rs. 10 Crores in the preceding financial year.
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Buyer shall be liable for Tax Deduction.
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Seller shall be liable for Tax Collection.
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Time of Deduction/ Collection
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At the time of credit or payment, whichever is earlier (Accrual Basis)
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At the time of Receipt (Cash Basis)
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Amount on which tax to be deducted/collected
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On the amount of purchase in excess of Rs. 50 lakhs.
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On the amount of sale consideration in excess of Rs. 50 lakhs.
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If Seller's PAN not available, Rate of TDS shall be 5%.
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If Buyer's PAN not available, Rate of TCS shall be 1%.
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Purchaser is first liable to deduct the tax if the transaction could be subject to both provision
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Seller shall be liable to collect the tax only if purchaser is not liable to deduct the tax or purchaser failed to deduct tax
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Let's understand the above discussed points with the help of some cases:
Case 1: Suppose the turnover of the previous year of the buyer and seller are
The transaction entered between both parties is Rs 55 lakh in the current financial year. In such a case, Section 194Q is not applicable because the turnover of the buyer in the previous FY does not exceed Rs 10 Crore. However, Section 206C(1H) is applicable. TCS @0.1% on the amount of Rs 5 lakh will be collected by the seller. (Provided the buyer's PAN is available). In the case Buyer's PAN is not available, then TCS will be collected by the seller @1% on Rs 5 Lakh.
Case 2: Suppose the turnover of the previous year of the buyer and seller are
The transaction entered between both parties is Rs 58 lakh in the current financial year. In such a case, Section 194Q is applicable because the turnover of the buyer in the previous FY exceeds Rs 10 Crore. Section 206C(1H) is not applicable. TDS @0.1% on the amount of Rs 8 lakh will be deducted by the buyer. (Provided the seller's PAN is available). In the case seller's PAN is not available, then TDS will be deducted by the buyer @5% on Rs 8 Lakh.
Case 3: Suppose the turnover of the previous year of the buyer and seller are
The transaction entered between both parties is Rs 58 lakh in the current financial year. In such a case, Section 194Q is applicable because the turnover of the buyer in the previous FY exceeds Rs 10 Crore and of the seller also exceeds Rs 10 Crore. As per Section 206C(1H), in case when both the sections are applicable, then Section 194Q will prevail and thus TDS @0.1% on the amount of Rs 8 lakh will be deducted by the buyer. (Provided the seller's PAN is available). In the case seller's PAN is not available, then TDS will be deducted by the buyer @5% on Rs 8 Lakh.
Case 4: Suppose the turnover of the previous year of the buyer and seller are
The transaction entered between both parties is Rs 58 lakh in the current financial year. In such a case, TDS and TCS sections will not be applicable because the turnover of the buyer in the previous FY does not exceeds Rs 10 Crore and of the seller also does not exceeds Rs 10 Crore. Thus, no party is liable for compliance of TDS or TCS provisions.
As per the study discussed above regarding Section 194Q and Section 206C(1H), here comes a small analysis for the better understanding:
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Sale/Purchase Transaction between parties
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After having understanding of both the sections, we can easily conclude that the primary liability is on the buyer to deduct TDS. If the buyer is liable to deduct TDS under Section 194Q, then the seller shall not collect TDS on the same, but if the buyer is not liable for TDS deduction, then the seller must collect TCS under Section 206C(1H).
Above all, Section 206C(1H) provides a clear exclusion of TCS applicability in case TDS has already been deducted by the buyer when making payment for purchase of goods under section 194Q.
Where the Turnover of the purchaser is less than Rs. 10 Crores then the Seller will continue to collect TCS on the payments received by it and if the Purchaser has turnover more than Rs. 10 Crores then the burden will shift on the Purchaser and it is the purchaser who in any case have to deduct the Tax under section 194Q. In such a situation section 206(C)(1H) is not applicable.
We can say that as a rational and responsible citizen of a country, every person is required to comply with The Income Tax Act 1961 as it has become an important part of their life and non-compliance of it would lead to legal consequences.