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Purchase of Goods: Withholding Tax vs Collection of Tax
Finance Act 2020 introduced provisions for the collection of taxes at source by the seller for sale of goods, effective from 1 October 2020. Similarly, provisions for withholding of taxes by e-commerce operators on sales of goods by participants listed with such e-commerce operators were also introduced. Furthermore, Finance Act, 2021 introduced provisions for withholding of taxes by buyers on the purchase of goods, effective from 1 July 2021.
Provisions for withholding/collection of taxes at source in case of purchase/sale of goods are mirror images of each other. Due to this, there are a lot of uncertainties. In addition, there is an overlapping of the provisions with withholding tax on e-commerce transactions. All this brings about a lot of anxiety of the taxpayers around the application of such provisions.
Recently, Central Board Direct Taxes (CBDT) has clarified a number of the issues vide Circular dated 30 June 20211, which are highlighted in brief as under:-
- Withholding tax provisions on ‘purchase of goods’ are not applicable in the following cases:-
- Non-residents not having a Permanent Establishment (PE) in India;
- Companies in their first year of incorporation;
- Electricity, listed securities & renewable/ energy saving certificates traded through power exchanges;
- Exempt entities provided their entire income is exempt (similar relaxation has been provided from the applicability of TCS provisions);
- In case of purchase returns, where the seller has refunded the money, tax deducted on such purchases may be adjusted against subsequent purchases. However, no adjustment would be required where such purchase returns are accompanied by replacement of goods;
- Threshold of INR 5 million, beyond which taxes are to be withheld, needs to be determined effective from 1 April 2021, even if the provisions of the section are applicable from 1 July 2021;
- Threshold of INR 100 million for identification of ‘buyer’ to be checked only in relation to the business turnover of the buyer;
- Exclusion of GST where liability for withholding tax is on account of ‘credit’ to the seller. In case of advance payment, taxes to be withheld on the entire amount;
- Cross Application of provisions of withholding & collection of tax at source:-
- If a transaction is classifiable within the purview of e-commerce transaction as well as the sale of goods, tax is deductible on it as an e-commerce transaction;
- If a payment is subject to withholding tax as an e-commerce transaction and is also subject to tax collection, provisions of withholding tax will apply);
- If a transaction falls within the purview of sale of goods on which withholding tax applies as well as becomes subject to tax collection provisions, the same will be subject to withholding tax. However, if the same has been subjected to tax collection before withholding tax, then tax will not have to be withheld.
1. CBDT Circular No. 13 of 2021 dated 30 June 2021
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Our Comments
This is a welcome move by CBDT. While the circular irons out many of the creases, it still doesn’t relieve the industry from obtaining declarations/confirmations before withholding taxes. Furthermore, the issue regarding the treatment of taxes withheld where there are purchase returns and there is no possibility of adjustment in subsequent transactions, is still unclear.
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