Explore the applicability of TDS on advance payments for goods following CBDT's clarification. Learn about threshold calculations, exemptions, and FAQs.
Will TDS Be Deducted on Advance Payment?
Yes, TDS (Tax Deducted at Source) will be deducted on advance payment in certain cases. TDS is a mechanism for collecting income tax in India, where the payer deducts a certain percentage of tax from the payment made to the payee and deposits it with the government on behalf of the payee.
As per the Income Tax Act, 1961, TDS is applicable on advance payments made for certain types of income, such as salary, interest, commission, rent, and professional fees. For example, if a company pays an advance salary to an employee, TDS will be deducted on the amount of the advance payment.
The rate of TDS and the threshold limit for deduction vary depending on the type of income and the status of the payee. For instance, the TDS rate on advance rent payment is 10% if the annual rent exceeds Rs. 2.4 lakhs, while the TDS rate on advance payment of professional fees is 10% for individuals and 2% for companies.
TDS on Advance Payment under Section 194QA
Recent clarifications by the Central Board of Direct Taxes (CBDT) have raised questions about the applicability of Tax Deducted at Source (TDS) on advance payments for goods. Let’s dive into the details and unravel the intricacies of this important development.
-
CBDT’s Clarification on Advance Payments
In a significant clarification, the CBDT stated that TDS at 0.1% would be applicable to the amount paid for goods for all purchases made during the year post-June 30, 2021, if the cumulative value of purchases or advance payments between April and June exceeds Rs 50 lakh.
-
Threshold Calculation
The threshold of Rs 50 lakh for TDS is determined concerning the previous year, with calculations commencing from April 1, 2021. This means that if a buyer has already paid or credited Rs 50 lakh or more to a seller by June 30, 2021, TDS under Section 194Q applies to all credit or payments to that seller during the subsequent year, starting from July 1, 2021.
-
Who Does It Apply To?
For the purpose of this tax provision, a buyer is defined as a person whose total sales, gross receipts, or turnover in their business exceeds Rs 10 crore during the financial year immediately preceding the year in which the purchase of goods is carried out.
-
Clarity on Applicability
The CBDT’s clarification provides much-needed clarity on the applicability of TDS on advance payments. While the tax came into force on July 1, any amount paid for purchases between April and June plays a crucial role in determining whether TDS applies. Payments beyond the Rs 50 lakh threshold during the remainder of FY22 (post-June 30) may be subjected to taxation.
-
Exemptions and Exceptions
It’s important to note that the TDS/TCS provisions will not apply to certain transactions:
– Securities and commodities traded through recognized stock exchanges or cleared and settled by recognized clearing corporations, including those in International Financial Service Centres (IFSC).
– Transactions involving electricity, renewable energy certificates, and energy-saving certificates traded through power exchanges.
Significance and Consequences of TDS on Advance Payment
The implications of TDS on advance payment are significant for both the payer and the payee –
- For the payer, it is important to ensure that the correct rate of TDS is applied and deposited with the government within the due date to avoid penalties and interest.
- For the payee, TDS on advance payment can affect their cash flow and tax liability, as they may have to wait until the end of the financial year to claim a refund or adjust the TDS against their tax liability.
The Bottom Line
In conclusion, understanding the nuances of TDS on advance payments for goods is essential for businesses and individuals. The CBDT’s clarification sheds light on the threshold calculation, ensuring that tax compliance is maintained.
Stay informed, and consult with tax experts from Vakilsearch to navigate advance tax regulations effectively. Request a free callback from our experts right away!
Frequently Asked Questions
Is TDS applicable to all advance payments for goods?
TDS applies to advance payments for goods made during the year post-June 30, 2021, if the cumulative value of purchases or advances between April and June exceeds Rs 50 lakh.
How is the threshold for TDS calculated?
The threshold of Rs 50 lakh is determined concerning the previous year, starting from April 1, 2021.
Are there any exceptions to the TDS provisions on advance payments?
Yes, transactions involving securities, commodities, electricity, renewable energy certificates, and energy-saving certificates have exemptions from TDS/TCS provisions, as specified by the CBDT.
