In a major move towards ease of doing business, new guidelines direct that businesses buying shares or commodities traded through recognised exchanges will not be  required to deduct TDS on the transaction.

The Central Board of Direct Taxes (CBDT) has brought into effect a provision relating to tax deducted at source (TDS) applicable to businesses with turnover of over Rs 10 crore.

The Finance Act, 2021 inserted a new section 194Q in the Income-tax Act 1961 which takes effect from July 1, 2021. It applies to any buyer who is responsible for paying any sum to any resident seller for purchase of any goods of the value or aggregate of value exceeding Rs 50 lakh rupees in any previous year.

The buyer, at the time of credit of such sum to the account of the seller or at the time of payment, whichever is earlier, is required to deduct an amount equal to 0.1 per cent of such sum  exceeding Rs 50 lakh as income tax. Buyer is defined to be a person whose turnover from the business exceeded Rs 10 crore during the financial year immediately preceding the financial year in which the purchase of goods is carried out.

The CBDT circular said that it has been represented that there are practical difficulties in implementing the provisions of Tax Deduction at Source (TDS) contained in section 194-Q of the  Act in case of certain exchanges and clearing corporations. It has been stated that sometime in these transactions there is no one to one contract between the buyers and the sellers.

"In order to remove such difficulties, it is provided that the provisions of section 194Q of the Act shall not be applicable in relation to, transactions in securities and commodities which  are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation including recognized stock exchanges or recognized clearing corporation located in International Financial Service Centre," the circular said.

Further, the provisions would also not be applicable to transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC.

Rajat Mohan, senior partner at AMRG & Associates said that the new provisions surrounding the applicability of TDS on the purchase of goods have taken the stock evangelists by surprise.

"There were complications in implementing TDS in the case of transactions on exchanges, as a one-to-one contract between buyers and sellers is not always available. Eyeing these difficulties,  the government exempted the transactions in securities and commodities traded through recognized stock exchanges or settled by the recognized clearing corporation from the applicability of TDS," he said.

He further said that it has also been clarified that no TDS applies to a buyer who does not have a business activity, irrespective of the turnover or receipts from non-business activity. Thereby households, regardless of the non-business financial transactions value, are not liable to deduct any TDS under these provisions, he added.