TAX DEDUCTED AT SOURCE
Sections 194R,194N,194S,194Q
TDS or Tax Deducted at Source is income tax reduced from the money paid at the time of making specified payments such as rent, commission, professional fees, salary, interest etc. by the persons making such payments.
Section 194R
The Finance Act, 2022, introduced Section 194R, which pertains to the deduction of tax on benefits or perquisites in respect of businesses or professions.
Businesses, companies, or entities often extend multiple types of benefits and perquisites to their distributors, channel partners, agents, or dealers to incentivize and motivate them to promote further growth of a business. A few examples would include travel packages, gift cards or vouchers, products under incentive schemes or the usage of business assets, among others.
Purpose of Section 194R
The purpose of introducing the new Section 194R is to plug the possibility of tax revenue leakages (tax evasions) in businesses or professions. A few companies claimed expenses for business promotions while offering various gifts, perks, perquisites, or benefits to its distributors, dealers, or channel partners (on fulfilments of conditions of under agreement or as per prevalent norms/traditional practice followed over the years by the business entity) under Section 37 of Income-tax Act, 1961.
For instance, an electronics manufacturing company gave LCD televisions as incentives to those channel partners who achieved a particular revenue target. The company included these as expenses in its profit and loss account and claimed an Income Tax benefit. The recipients do not report this in their income return because this particular incentive is in kind and not in cash. This leads to the furnishing of incorrect particulars of income. Ideally, such an incentive or benefit in kind should be disclosed as income under the Income-tax Act, 1961 (ITA).
As per Section 28 (iv) of the ITA, the value of any benefit or perquisite—whether convertible into money or not—arising from business or in a profession, is to be charged as business income in the hands of the recipient of such benefit or perquisite. Now, under Section 194R, if a business gives its distributors or channel partners any such perquisites or incentives, which is partly in cash or kind, then they are required to deduct a TDS. In case the benefit is wholly in kind, the person providing such a benefit or perquisite is required to pay TDS on the value of such benefit or perquisites out of his own pocket.
So, the purpose of Section 194R is to widen the tax base and plug any scope of tax evasion.
Scope of Section 194R
The TDS to be charged under Section 194R is at 10%, which will come into effect from July 1, 2022. It applies only to resident recipients (receiver of a benefit) of benefits or perquisites.
However, Section 194R is not applicable where the aggregate of the value of benefit or prerequisite does not exceed Rs 20,000 during the financial year (FY) to one beneficiary. Also, it is not applicable for an individual or Hindu Undivided Family (HUF) to deduct TDS where total sales do not exceed Rs 1 crore in case of business or Rs 50 lakh in case of the profession in the immediately preceding financial year.
Section 194S
TDS @ 1% on Purchase Consideration of Virtual Digital Assets (VDA).
In line with the existing TDS section 194IA requiring deduction of tax at source @ 1% on purchase of any immovable property exceeding rupees fifty lakhs in a year, the Finance Bill 2022, has proposed a new section 194S applicable w.e.f. 1.7.2022, mandating deduction of tax at source @ 1% on the payment of purchase consideration to a resident person, on transfer of a virtual digital asset, as defined in another new section 2(47A). Further, two threshold limits, for the amount of purchase consideration, has been prescribed, to be liable for deduction of TDS under this new section 194S.
For ‘specified person’, i.e. an individual or HUF, whose total sales or gross receipts does not exceed rupees one crore, in case of business, or rupees fifty lakhs in case of profession, during the immediately preceding financial year, or, an individual or HUF, who does not have any income under the head business or profession, TDS under this new section 194S is required to be deducted only, if the amount of purchase consideration for purchase of virtual digital asset, exceeds rupees fifty thousand, during the financial year. In case of a person other than such specified person, including firms, LLPs and companies, TDS under this new section 194S is
srequired to be deducted only, if the amount of purchase consideration for purchase of virtual digital asset, exceeds rupees ten thousand, during the financial year.
Section 194N – TDS on cash withdrawal in excess of Rs 1 crore
To discourage cash payments, the finance minister has introduced Section 194N in Union Budget 2019 for tax deduction at source (TDS) on cash withdrawals exceeding Rs 1 crore.
In Budget 2020 the threshold limit for TDS under Section 194N is reduced to Rs 20 lakh for taxpayers who have not filed their income tax returns for past three years.
TDS shall be deducted at prescribed rates if cash is withdrawn in excess of Rs 20 lakh during the financial year by the taxpayer.
Let’s discuss Section 194N in detail:
What is Section 194N?
Section 194N is applicable on more than Rs 1 crore cash withdrawals from the bank account during a financial year. It will apply to the withdrawal of all the sums of money or an aggregate of sums from a particular bank in a financial year. The section will apply to withdrawals made by any taxpayer, including:
•An individual
•A Hindu Undivided Family (HUF)
•A company
•A partnership firm or an LLP
•An Association of Person (AOPs) or Body of Individuals (BOIs)
But it shall not apply if payment is made to-
•The Government
•Any bank (private or public sector)
•A co-operative bank
•A post-office
•Business correspondents of a banking company
•White Label ATM operators of any Bank.
How to calculate the threshold limit?
The payer shall deduct tax while making payment to any individual in cash from the individual’s bank account on the amount over Rs 1 crore.
The limit of Rs 1 crore in a financial year is with respect to per bank or post office account and not per the taxpayer’s account.
For example, if a person has three bank accounts with three different banks, he can withdraw cash of Rs 1 crore * 3 banks, i.e., Rs 3 crore without any TDS.
The cash withdrawal made by any taxpayer from the bank accounts maintained by such taxpayer (recipient) will only attract TDS under Section 194N.
For instance, if a bank makes a cash payment of more than Rs 1 crore in a FY to its account holder (i.e., any taxpayer) from the account maintained by such taxpayer, then the bank will have to deduct TDS.
The provision of Section 194N will be applied to the payments made on or after 1 September 2019. But the limit of Rs 1 crore will apply to the cash payments/withdrawals made during FY 2019-20.
Rate of TDS under Section 194N
The payer will have to deduct TDS at the rate of 2% on the cash payments/withdrawals of more than Rs 1 crore in a financial year under Section 194N.
Thus, in the above example, TDS would be on Rs 50,000 at 2%, i.e., Rs 1,000.
If the individual receiving the money has not filed an income tax return for three years immediately preceding the year, the tax deduction limit is reduced to Rs 20 lakh.
The TDS will be deducted at:
-2% on the cash payments/withdrawals of more than Rs 20 lakh and up to Rs 1 crore
-5% for withdrawal exceeding Rs 1 crore.
TDS on purchase of Goods- Section 194Q
It would be the first moment in the history of income tax that TDS is levied on the procurement of products. Section 194Q of the Act would engage numerous transactions encompassing the acquisition of products under this umbrella. In the Finance Act of 2021, the government added Section 194Q to the Income Tax Act of 1961. The government’s intention in enacting this law is to create a trail of high-value sales and purchases of products. There are several additional provisions that allow for the deduction of tax at source on various transactions; however, the deduction of tax on the sale of goods has been made relevant by introducing Section 194Q into the Income Tax Act of 1961.
New Regulations
According to the new provision – 194Q of the Income Tax Act, the buyer of the goods is obliged to deduct the TDS of the seller of the goods if the products purchased by the buyer from a specific seller have an annual value of Rs.50,00,000/- or more. This indicates that if you buy items from ‘X’ and your yearly purchases exceed Rs.50,00,000/-, you must deduct TDS on purchases above the Rs.50,00,000/- limit. This will take effect on July 1, 2021.
Who is obligated to deduct TDS?
Any individual (deductor) who purchases goods from another person (deductee) and the value of those goods exceeds Rs.50,00,000/- in a calendar year. However, the following individuals are not deductors and are not obligated to deduct TDS:
•New business — This does not apply to the year the business is founded or incorporated.
•Turnover limit – This will not apply to individuals who had a gross turnover of less than Rs. 10 crores in the year before the year in which items are purchased.
•Non-resident — This does NOT apply to non-resident purchasers. However, if the buyer has a Permanent Establishment (PE) in India, this may apply
What kind of transactions would be subject to this TDS.
This TDS is levied on transactions involving the acquisition of items worth more over Rs.50 lakhs. The following transactions, however, are NOT covered by this TDS:
1. Purchase deals worth less than Rs. 50 lakhs.
2. Securities and commodity transactions are conducted through recognised stock exchanges and clearing organisations.
3. Power exchanges facilitate the trading of electricity, renewable energy certificates, and energy-saving certificates.
4. Other sections of the Income Tax Act apply to transactions on which TDS is deducted.
Deductor turnover limit
The applicable turnover limit for these TDS provisions is Rs. 10 crores. This indicates that you must have total sales or gross revenues of Rs. 10 crores or more in the year before the buying transaction. If you have interest income, capital gains income, or rental revenue in a given year, they may be considered receipts, but they are not considered “business turnover”. A “business turnover” is required for these requirements to be applicable. As a result, until your business revenue exceeds Rs. 10 crores, you are not required to deduct tax on purchases of items.
TDS transaction limit
TDS on purchases of goods is levied only when the total amount of such transactions exceeds Rs. 50 lakhs in a calendar year. TDS is to be deducted on purchases above Rs. 50 lakhs. These rules are effective on 01/07/2021; however, if your transaction limit exceeded Rs.50 lakhs before 01/07/2021, you must begin TDS on 01/07/2021, since the transaction limitations will be applicable on a yearly basis, beginning on 01/04/2021. The following factors may be taken into account while calculating the Rs.50 lakh limit.
•The amount of GST may be deducted from the total amount of bills paid.
•If the amount is paid in advance or before crediting the purchasing party’s accounts in books of account, TDS may be needed on the entire amount, including GST, because it is not practicable to separate GST from the number of purchases.
•TDS must be deducted on a payment basis in the event of advance payments because TDS is applicable at the time of crediting the amount in books or payment, whichever comes first.
TDS deposit rate and dates
TDS is levied at a rate of 0.1 per cent of the transaction value of items purchased in excess of Rs. 50 lakhs. If the deductee fails to provide his or her PAN to the deductor, this rate may be as high as 5%. TDS should be deducted when the purchases are credited to the seller’s account in the seller’s books of account. This is true even if the funds are credited to the suspense account. TDS must be deposited on or before the 7th day of the month following the month in which TDS is deducted. TDS for the month of March, on the other hand, must be submitted on or before April 30th of the next fiscal year. TDS returns have the same due dates as other TDS requirements.
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