Section 194Q of the Income Tax Act

Section 194Q of the Income Tax Act was recently introduced by the Central Board of Direct Taxes and became effective from July 01, 2021. It offers a framework predominantly to buyers who are purchasing goods from sellers in India exceeding ₹50 Lakhs in a preceding financial year. Under Section 194Q, TDS rate on the purchase of goods is as low as 0.1%.

Income tax is only deducted from the buyer’s account. The amount is calculated after taking into consideration the total sales, turnover, and gross receipts. In case the annual turnover is exceeded by ₹10 Crores and if the goods purchased by a buyer from sellers holds equal value or aggregate of a value crossing ₹50 Lakhs in the preceding year.

You must remember that Section 194Q of the Income Tax Act does not apply to the import purchases that have taken place from a supplier who is residing outside India.

Under Section 194Q, TDS at the rate of 0.1% on the total amount exceeding ₹50 Lakhs when the buyer purchases goods over the exemption threshold of ₹50 Lakhs. 

• Calculation of TDS at the rate of 0.1%: including GST

• Calculation of turnover: excluding GST

Section 194Q of the Income Tax Act, 1961 has come into effect from 1st July, 2021. Hence, under Section 194Q, TDS will be deducted on purchases that have been made only after 1st July, 2021. However, the upper limit of purchase of ₹50 Lakhs is to be considered from 1st April, 2021.

Section 194Q applies to sellers in the following cases: 

• When the buyer’s turnover, gross receipt or sales exceeds ₹10 Crores for the previous financial year 

• The buyer is liable for making payments to a resident seller 

• When the payment is to be made for purchase of goods whose total values exceeds ₹50 Lakhs

Here’s an example to help you understand the applicability of Sec 194Q a little bit better - let’s suppose that you are a buyer who decides to purchase goods worth ₹25 Lakhs each time and you’ve purchased from the same seller thrice during the financial year. Now, your seller can deduct ₹50 Lakhs from the total value of the goods, which means the TDS will now be 0.1% of ₹25 Lakhs.

TDS should be accounted for and deducted when the amount is credited or paid to the seller, depending on whichever is earlier. 

In case you haven’t made any advance payments, then you’d be required to deduct TDS when you make the purchase. On the other hand, if you have paid an advance amount, then you would be required to deduct TDS when you make the advance payment itself.

If you as a seller have failed to furnish your PAN(Permanent Account Number) to the buyer, then TDS will be deducted at the rate of 5% instead of 0.1%. It’s important to remember that without PAN information, the tax rate that will be implemented in other cases will be 20%. However, for Section 194Q, the applicable  TDS rate when PAN information is not linked is 5%.

You must deposit your TDS on or before 7th of the following month. For instance, if the TDS month is February, the due date of payment is March 7. However, there exists an exception to this rule in case of March’s TDS, TDS from March can be deposited up to 30th, April without attracting any penalty. 

Section 194Q does not apply when the TDS should be deducted purchases under other provisions of the Income Tax Act. For instance, let’s assume a transaction falls under both Section 194Q and Section 194O, in such a case, TDS will apply as per Section 194O, which deals with TDS applicable on e-commerce transactions specifically.

However, it’s important to note that there exists an exception under Section 206C(1H). Section 206C(1H) which deals with the collection of tax (tax collected at source) by the seller when the payment received on the sale of goods is over ₹50 Lakhs during the previous financial year. 

In case TDS is applicable on a transaction related to purchase of goods under both Section 194Q and also as tax collected at source under Section 206C(1H), in that case, only Sec 194Q of the Income Tax Act will be applicable.

• Significance of Section 194(Q)

The main objective of the government for introducing Section 194(Q) of the Income Tax Act from July 2021 is tracing the huge amount of transactions without taking the help of the GST amount. The government has framed this law to audit huge amounts of transactions. It helps in tracking and controlling the frivolous or fake transactions that were taking place under the name of TDS provisions.

• How is the point of taxation calculated under Section 194(Q) of the Income Tax Act?

The taxation under Section 194 Q of the Income Tax Act will take place in those scenarios when the buyer’s account is debited with an amount exceeding ₹50 Lakhs. The TDS deduction will take place on the threshold amount being exceeded. For instance, if the buyer has purchased the goods from the seller worth ₹85 Lakhs. The buyer, in this case, will be liable to pay TDS on ₹35 Lakhs. It is 0.1% of the amount. 

• How is the purchase return calculated under Section 194(Q) of the Income Tax Act?

As far as purchase returns are concerned, tax deductions occur at the time of payment credited to the buyer’s account. In case any of the purchase return takes place, the money deducted as TDS on purchase of goods from the buyer’s account will be refunded by the seller. Another option could be that the tax deduction may get adjusted in the next purchase made with the same seller. In case the goods get exchanged or replaced, then no tax adjustments will take place. 

• The TDS deduction takes place under Section 194 (Q) of the Income Tax Act, for any amount that is credited to ‘Suspense account’ or any other account that is a part of the books of account of a person who becomes liable to give the payment.

• All those transactions are deducted under Section 206C(1H) and Section 194Q. In such scenarios, the deduction is liable under Section 194Q.

• If a seller is non-resident, Section 194(q) is not applicable on any purchases.

• In case the buyer does not comply with the provisions of tax deductions under Section 194(Q) amendment, the buyer has to face the disallowance of expenditure up to 30% of the transaction value.

• The Section 194(Q) provision is applicable on purchases of both types of goods i.e., revenue as well as capital.

• The TDS deduction on exceeding the purchase value above 50 lakhs will be 0.1%. But in case the seller does not have PAN, the deduction will be taken place at @5%

• The tax collected under Section 206C of the Income Tax Act or under the sub-section (1 H) of Section 206C.

• Is the tax collection done under Section 206C of the Income Tax Act? Then there are no provisions of TDS deduction Sec 194Q.

• Section 194(Q) is not applicable if the seller is an NRI

Section 194Q of the Income Tax Act is a new version of Section 206(1H) of the Income Tax Act. If one is following Section 194Q, then the buyer TDS will deduct in place of the seller’s TCS under Section 206C (1H).

Example of working of Section 194 Q and declaration form format

If the seller sold goods to the buyer and is making a TCS deduction under Section 206C(1H). However, after the introduction of Section 194(q) from July 2021, no one can deduct the seller’s TCS. In place of TCS, the buyer’s TDS will get deducted.

Here is a table representation:

In the letterhead of the seller

To,

Buyer’s Name & Address

Sub: Declaration / information for deduction of tax at source u/s 194Q of the Act.

Dear Sir,

This is with reference to your letter dated_________requiring our declaration / information in regard to deduction of tax at source u/s 194Q of the Act. The information is being provided hereunder:

1. Since your company is liable to deduct tax u/s 194Q of the Act, you may deduct the tax @0.1 % of sale consideration paid /credited by your company to us on the amount exceeding Rs.50 lacs during the current financial year. We also confirm that we will not take any action to collect tax at source under section 206C(1H) of the Act w.e.f. 01.07.2021. 

2. The Permanent Account Number of our company is . Further, we have duly filed our returns of income for Assessment Years 2019-20 and 2020-21 as per the information given here under:

Section 194Q is a relatively new section in the Income Tax Act, 1961. Section 194Q was introduced by the Central Board of Direct Taxes and came into effect from July 01, 2021. It acts like a guide to buyers that are purchasing goods from sellers in India exceeding ₹50 Lakhs in a preceding financial year. The rate of TDS on the purchase of goods is 0.1%, when PAN card details are furnished.