The Finance Act, 2020 inserted two new sections with effect from 1 October 2020 in the Income-tax Act, 1961 (IT Act) pertaining to tax withholding and tax collection. Section 194-O of the IT Act mandates an e-commerce operator to withhold tax (either at the time of credit or payment, whichever is earlier) at the rate of 1% of the gross amount of sale of goods or provision of services or both, facilitated through its digital or electronic facility or platform. Further, section 206(1H) of the IT Act mandates certain seller to collect from the buyer (at the time of receipt of sale consideration), a sum equal to 0.1% of the sale consideration received for sale of any goods exceeding INR 5mn as income-tax.
Subsequently, the Finance Act, 2021 inserted section 194Q in the IT Act bringing sale of goods within the ambit of tax withholding. As per this section, certain buyers of goods are required to withhold tax (either at the time of credit or payment, whichever is earlier) at the rate of 0.1% on the sum exceeding INR 5mn.
With respect to these provisions, various stakeholders had raised concerns. With a view to address the concerns, the Central Board of Direct Taxes (CBDT) issued a Circular1 containing guidelines on the issues faced by the stakeholders. In continuation of the said circular, the CBDT has recently issued a Circular2 laying down guidelines under section 194-O, 194Q and 206C(1A) of the IT Act.
We, at BDO in India, have analysed and summarised the aforesaid circular and provided our comments on its impact hereunder:
Applicability of section 194-O of the IT Act to e-auction carried out through electronic portal
The provisions of section 194-O of the IT Act shall not apply to e-auctioneers if all the following conditions are satisfied:
- The e-auctioneer conducts e-auction services to its clients on its electronic portal and is responsible for the price discovery only which is reported to the client.
- The price so discovered is not necessarily the price at which the transaction takes place and the parties (i.e., buyers and sellers) are free to either accept the price or negotiate it further.
- The transaction of purchase/sale takes place directly between the buyer and the seller party outside the electronic portal maintained by the e-auctioneer and the price discovery only acts as the starting point for negotiation and conclusion of purchase / sale.
- The e-auctioneer is not responsible for facilitating the purchase and sale of goods for which e-auction was conducted on its electronic portal except to the extent of price discovery.
- The payment for the transaction is carried out directly between the buyer and the seller outside the electronic portal of the e-auctioneer. The e-auctioneer does not have any information about the quantum and the schedule of payment which is decided mutually by the buyer and seller.
- For the payment made to the e-auctioneer for providing e-auction services, the client deducts tax under the relevant provisions of the IT Act.
It is also clarified that the buyer and the seller would be liable to deduct / collect tax as per the provisions of Section 194Q and 206C(1H) of the IT Act, as the case may be.
Adjustment of various state levies and taxes other than GST
It has been clarified that where the component of VAT / Sales tax / Excise duty / CST, as the case may be, is indicated separately, tax shall be withheld under section 194Q of the IT Act on the amount credited without including such VAT/Sales tax/Excise duty/ CST, as the case may be.
Further, where tax is withheld on payment basis, if it is earlier than the credit, the tax would be withheld on the whole amount since it is not possible to identify that payment with VAT / Sales tax / Excise duty / CST component of the amount to be invoiced in future.
With respect to purchase returns, the clarification provided in circular no. 13 of 2021 shall also apply to purchase return relating to non-GST products liable to VAT/Sales tax/Excise duty/ CST.
Applicability of Section 194Q of the IT Act in case of Government department not being a public sector undertaking or corporation
In case of any Government department not carrying out any business or commercial activity, the primary requirement for being a ‘buyer’ will not be fulfilled. Hence, such an organisation will not be considered as ‘buyer’ for the purposes of Section 194Q of the IT Act and will not be liable to deduct tax on the goods so purchased by them. If the said department is carrying a business or commercial activity, the provisions of Section 194Q of the IT Act shall apply subject to fulfilment of other conditions.
For the purposes of Section 194Q of the IT Act, Central or State Government shall not be considered as ‘seller’ and no tax is to be withheld by the buyer, in case where any such department is seller of goods.
Applicability of Section 194Q of the IT Act in case where exemption has been provided under section 206C(1A) of the IT Act
The provisions of Section 194Q of the IT Act does not apply in respect to transactions where tax is collectible under section 206C [except section 206C(1H)]. Since Section 206C(1A)3 of the IT Act provides that tax is not required to be collected for goods covered under section 206C(1) of the IT Act, it is clarified that in such cases, the provisions of Section 194Q of the IT Act will apply and the buyer shall be liable to withhold tax subject to other conditions.
This circular is a welcome clarification from the CBDT as it addresses several concerns raised by stakeholders. However, some of the issues continue to exist viz., for the definition of ‘goods’ whether reference should be made to Sale of Goods Act, 1930 or GST Act. Other issues like whether this circular can be applied to similar transactions as that of e-auctioneers - For instance, an e-platform where the buyer and seller would meet and the final price would be decided by offline and without any intervention / control of the platform provider / owner.
2Circular No. 20/2021, dated 25 November 2021.
3Section 206C(1A) of the IT Act provides that notwithstanding anything contained in section 206(1) of the IT Act, no tax is to be collected in case of a resident buyer if such buyer furnishes to the person responsible for collecting tax, a declaration to the effect that the goods are to be utilised for the purpose of manufacturing, processing or producing articles or things or for the purpose of generation of power and not for trading purpose