Transactions involving the sale of shares by non-resident shareholders have traditionally been subject to withholding tax under the Income-tax Act, 1961 (“IT Act”), provided that the gains arising from such sales are taxable in India. However, for resident sellers, there was previously no requirement to withhold tax on gains from the sale of shares or securities.
With the introduction of Section 194Q, effective from July 1, 2021, certain buyers are now obligated to withhold tax on the purchase of ‘goods’ from resident sellers. Specifically, buyers making purchases exceeding INR 5 million in a financial year must withhold tax at 0.1% on the amount exceeding this threshold. This amendment has led to debates about whether Section 194Q applies to the sale of shares by resident shareholders. In this blog, we discuss key aspects of this issue.
Does ‘Goods’ Under Section 194Q Include ‘Shares and Securities’?
The IT Act does not explicitly define the term ‘goods’. However, under the Sales of Goods Act, 1930, shares are included within the definition of ‘goods.’ In contrast, under the Goods and Services Tax (GST) framework, ‘goods’ specifically exclude shares and securities.
The Central Board of Direct Taxes (CBDT), via Circular No. 13/2021 dated June 30, 2021 (“Circular”), clarified that tax under Section 194Q is not required to be deducted when securities and commodities are traded through recognized stock exchanges or settled by recognized clearing corporations. By implication, this suggests that off-market transactions, including sales of private or unlisted public company shares, may fall under the ambit of Section 194Q.
Although there is no explicit confirmation on whether securities qualify as ‘goods’ under Section 194Q, the Circular indicates that tax authorities may require buyers to deduct tax on off-market transactions involving securities, subject to the provisions of Section 194Q.
Who is Required to Deduct Tax Under Section 194Q?
The obligation to deduct tax under Section 194Q falls on the buyer. The section defines a ‘buyer’ as a person whose total sales, gross receipts, or turnover from business exceeds INR 100 million during the financial year immediately preceding the year of purchase.
The Circular further clarifies that only receipts from business activities (excluding non-business activities) should be considered when determining this threshold. Additionally, since the requirement is based on turnover in the preceding financial year, newly incorporated entities in the year of purchase are exempt from the provision.
Applicability of Section 194Q to Resident and Non-Resident Buyers?
Section 194Q does not explicitly state whether it applies only to resident buyers. However, the Circular clarifies that only resident buyers are subject to its provisions unless the purchase is connected to the permanent establishment of a non-resident buyer in India.
This means that:
Non-resident buyers are generally not required to deduct tax under Section 194Q.
If a purchase of securities by a non-resident is linked to their permanent establishment in India, the provisions of Section 194Q may apply.
Share transactions between two resident taxpayers may be subject to tax deduction under Section 194Q.
Tax Deduction on Sale of Shares at a Loss
Unlike Section 195 of the IT Act, which requires tax withholding on income chargeable to tax, Section 194Q mandates tax deduction from the sale consideration itself. Therefore, even if a transaction results in a loss, tax deduction may still be required.
The Circular also clarifies that Section 194Q will not apply if the seller is exempt from tax under the IT Act or other laws (e.g., RBI Act). However, this exemption does not apply to sellers whose income is only partially exempt from taxation.
Conclusion
The introduction of Section 194Q has added complexity to the taxation of securities transactions. While the Circular provides some clarification, uncertainties remain, particularly regarding whether securities should be classified as ‘goods’ for this purpose. Given the potential implications for off-market share transactions, buyers engaged in significant securities purchases should assess their withholding tax obligations carefully. Consulting a tax expert is advisable to ensure compliance with the latest legal interpretations and updates.
