The Finance Act, 2021 has widened the scope of TDS by introducing a new set of provisions in the Income-tax Act, 1961 (“the Act”) with the insertion of Section 194Q1 which deals with TDS on purchase of goods, w.e.f. 1st July 2021. The provisions of Section 194Q brings under its gambit implications on various transactions that come under the umbrella of “purchase of goods”. The Central Board of Direct Taxes (“CBDT”) sought to clarify the operation of the new provision vide Circular No. 13 dated 30th June 20212.
One of the factors to be considered in case of any transaction involving the purchase and sale of shares and securities is the impact of tax laws on such transactions. This article provides insights on the impact of the new tax regime on M&A transactions from a buyer’s and seller’s lens.
How are the new provisions applicable?
The new Section 194Q of the Act, requires a buyer of goods of an amount exceeding INR 50 lakhs (approx. USD 70,000) from a resident seller, to deduct tax at source (“TDS”) at 0.1%, on the earlier of either the date of the amount credited to the account of the resident seller or the date of payment. Further, the threshold of INR 50 lakhs for triggering TDS shall be computed from 1st April 2021. The said provisions will not apply on any sum credited or paid before 1st July 2021.
In this case, a buyer is defined as a person whose total sales, gross receipts or turnover from business carried on by him (excluding turnover or receipts from non-business activity) exceeds INR 10 crore (approx. USD 1.5 million) during the financial year immediately preceding the financial year in which the purchase of goods is carried out.
The said provision shall not apply:
to the buyer in the year in which the business is started or incorporated.
to the buyer who has a gross turnover or receipts of less than INR 10 crore in the preceding financial year in which the goods are bought.
to non-resident buyer(s) whose purchase of goods from a seller resident in India is not effectively connected with the fixed Permanent Establishment3 (“PE”) of such non-resident in India.
to transactions in securities and commodities which are traded through recognized stock exchanges4 or cleared and settled by the recognized clearing corporation5 located in the International Finance Service Centre (“IFSC”)6.
to transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges.
to transactions on which TDS is deductible under other provisions of the Act.
Whether unlisted shares and securities would come under the ambit of Section 194Q?
The CBDT circular has clarified that tax would not be required to be deducted for on-market purchase of shares and securities through recognized stock exchange / clearing corporation, including that located in the IFSC. However, there has been no mention of the implications with respect to off-market purchase of shares and securities which in turn include shares of private and unlisted public companies. Further, there is also no clarity whether tax would be required to be deducted where such off-market sale of securities result in loss or gain.
Coming back to the provisions of Section 194Q of the Act, which deals with deductions for the “purchase of goods”. The term “goods” has not been defined in the Act and has been the subject matter of judicial review on numerous occasions. Here it is imperative to note that:
Section 2(7)7 of the Sale of Goods Act, 1930 defines the term ‘goods’ to include stocks and shares.
While Section 2(52)8 of the Central Goods and Services Tax Act, 2017 has defined ‘goods’ to exclude securities but include actionable claims.
Section 2(22)9 of the Customs Act, 1962 defines ‘goods’ to include currency, negotiable instrument and any other kind of movable property.
Further, Section 2(bb) of the Securities Contracts (Regulation) Act, 1956 defines the term ‘goods’ to include every kind of movable property other than actionable claims, money and securities.
While Article 366(12) of The Constitution Of India defines ‘goods’ to include all materials, commodities and articles.
This lands the buyer in a quandary as to whether the term shares and securities falls within the purview of the definition of goods. Since the Act does not provide for any definition of goods and the definitions as provided under the other laws are contradicting, one may end up taking either position. This could become a grey area while determining TDS specifically in the case of unlisted shares and securities, which necessitates further clarification on the same.
We have gathered that many market participants have taken a conservative view with respect to tax deducted at source by buyers, in relation to off-market purchases and purchases of unlisted shares & securities. This also holds true with regard to slump sale transactions pertaining to movable assets as well as in case of transactions pertaining to National Company Law Tribunal (“NCLT”) approved merger, demerger. In light of the same, parties have been opting for the conservative approach (after due expert consultation) and are expected to do so till the time complete clarification on this is not provided for by the authorities. This in turn necessitate parties to have in place appropriate tax representation, warranty and indemnity structure in such acquisition transaction(s) to avoid any future liabilities.
The issuance of the guidelines is indeed a welcome move by the CBDT. These guidelines map out the much-needed clarification required on various issues, whilst some issues still remain in the grey area.
While providing clarity that the provisions of Section 194Q applies to a non-resident buyer only if it has a fixed PE in India, the determination of whether a non-resident is having a PE in India itself is an extensive and cumbersome exercise all-together. Infact clarity has also been provided only with regard to a fixed PE in India with no mention for the other types of PEs. To add to that, the guidelines also require the identification of whether the purchase transaction by the non-resident buyer is “effectively connected” with the PE in India to determine the applicability of the said provisions, which is another onerous task. Thus the obligation of determination of a PE, the interpretation on the type of PE and whether or not the transaction is effectively connected to the PE in India could all lead to disputes in the long run.
It would be interesting to note that, Section 2(22) of the Customs Act, includes any kind of movable property under the definition of “goods”. This in turn would open the pandora’s box as to whether stock transfers from one branch to another would come under the purview of the provisions as laid down under Section 194Q.
Further, going by the definition of “goods” as provided for by the various legislative measures, it could be inferred that the term goods either include shares and securities or they don’t in entirety. The definitions provide no bifurcation between them being on-market or off-market shares and securities. In light of the above, while the guidelines provide for clarification on non-applicability of TDS in respect of a transaction pertaining to listed securities on a stock exchange (including that located in the IFSC), out of abundant caution, the buyer (after due expert consultation) may insist on deducting TDS:
on purchase of unlisted shares and securities from resident seller(s);
in case of slump sale transactions pertaining to movable assets;
in case of transactions pertaining to NCLT approved merger, demerger
subject to the fulfilment of the other conditions such as the threshold limits are satisfied. Such clarification will go a long way in providing certainty when structuring an M&A transaction, where tax considerations arise where a buyer and seller are entering into a transaction on the basis of purchase and sale of shares.
In a nutshell, though the clarifications as issued by the CBDT do aim to remove difficulties to a great extent, some of the open issues if clarified, would augment the government’s efforts towards bringing about ease of doing business in India.
 Section 194Q: Deduction of tax at source on payment of certain sum for purchase of goods.
 Notification no.: F. No. 370142/26/2021-TPL
 Permanent Establishment has been defined to include a fixed place of business through which the business of the enterprise is wholly or partly carried out.
 Shall have the same meaning assigned to it as under Section 43(5), explanation 1(ii) of the Act.
 Shall have the same meaning assigned to it as under Section 10(23EE), explanation (i) of the Act.
 Shall have the same meaning assigned to it as under Section 2(q) of the Special Economic Zones Act, 2005.
[7“] Every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.”
8 “Every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.”
9 "goods" includes (a) vessels, aircrafts and vehicles; (b) stores; (c) baggage; (d) currency and negotiable instruments; and (e) any other kind of movable property”
This article is intended for informational purposes only and does not constitute a legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This article is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial / quasi-judicial authorities may not take a position contrary to the views mentioned herein.