Section 194Q of Income Tax Act: Applicability, TDS Rate, Example, Turnover Limit (2024)

The Finance Act, 2021, introduced Section 194Q of the Income-tax Act, 1961, which is related to Tax Deducted at Source (TDS) on purchase of goods and not to the provisions of services.

Section 194Q Applies to Whom?

This section applies to a buyer in the following cases:

• A buyer whose turnover or gross receipt or sales in the immediately preceding financial year was more than Rs 10 crore, and
• A buyer is responsible for making payment of a sum to the resident seller, and
• Such payment is to be done for the purchase of goods of the value/aggregate of the value exceeding Rs 50 lakh

Example

For a financial year (FY) that ended on March 31, 2021, a buyer whose turnover was more than Rs 10 crore in that year needs to deduct TDS from their resident seller on the purchase of goods above Rs 50 lakh in the current financial year 2021-22.

Rate of TDS

Tax is to be deducted at source at the rate of 0.1% on the amount exceeding Rs 50 lakh in a financial year from a seller from whom the buyer has purchased goods worth more than Rs 50 lakh.

Calculation of TDS

• Purchase above Rs 50 lakh in a financial year from a seller
• TDS to be deducted after deduction of Rs 50 lakh from the total value of purchases
• The threshold limit is Rs 50 lakh, which means a seller-wise deduction in every financial year

Example

Let’s say a buyer purchases goods worth Rs 20 lakh, three times each from a seller, meaning he bought total goods of Rs 60 lakh. Now he has to deduct Rs 50 lakh from the total value of goods purchased. The TDS has to be deducted only on Rs 10 lakh at the rate of 0.1%.

Applicability of Section 194Q

Section 194Q of the ITA is applicable from July 1, 2021. So, the TDS has to be deducted only on purchases after July 1, 2021. However, the threshold limit of purchase of Rs 50 lakh has to be taken into account from April 1, 2021.

Example

If a buyer has purchased goods worth Rs 80 lakh from a seller, then he has to deduct the first Rs 50 lakh from it as an initial deduction under Section 194Q and then deduct the TDS on the remaining Rs 30 lakh at 0.1%. So, the TDS applicable in this case would be Rs 3,000.

Role of GST

• Calculation of turnover: Excluding GST
• Calculation of TDS at the rate of 0.1%: Including GST

When to deduct TDS

The TDS is to be deducted at a time when such amount is credited to the seller or paid to him, whichever is earlier.

In other words, if you have not paid any advance amount, then you have to deduct this TDS at the time of purchase of goods. However, if you have made an advance payment, then you have to deduct TDS immediately.

Non-furnishing of PAN

In cases where a seller fails to furnish a Permanent Account Number (PAN) to a buyer, the TDS would be deducted at the rate of 5% instead of 0.1%.

It is important to note that without PAN information, the rate of tax applicable in other cases is 20%. In the case of Section 194Q, the TDS rate applicable is 5%.

TDS Deposit Due Date

The TDS is to be deposited on or before the seventh day of the month following the month in which the TDS is deducted. For example, if the deduction month is January, the due date of payment is February 7.

However, in the case of March, the TDS can be deposited up to April 30.

TDS Return: Form 26Q

For a quarter ending June 30, September 30, December 31, and March 31, the due date for filing TDS return is July 31, October 31, January 31, and May 31, respectively.

Exceptions

Section 194Q would not apply in cases where the TDS is to be deducted on the transaction of a purchase under any other provision of the ITA. For example, there may be a case where a purchase transaction comes under Section 194O as well as Section 194Q, then TDS would apply as per Section 194O, which relates to TDS on e-commerce transactions.

However, there is an exception in the case of Section 206C(1H), which provides for the collection of tax (TCS) by a seller for the amount received as consideration for the sale of goods if it is greater than Rs 50 lakh in any previous year.

If any transaction on purchase of goods attracts TDS under Section 194Q as well as tax collected at source under Section 206C(1H), then only Section 194Q shall apply in such a case.

Amendments under Section 194Q of the Income Tax Act

• Under Section 194Q of the Income Tax Act, the deduction of Tax Deducted at Source (TDS) occurs when any amount is credited to a 'Suspense account' or any other account that forms part of the books of account of a person who becomes obligated to make the payment.
• In situations where such transactions occur, the deductions are applicable under both Section 206C(1H) and Section 194Q of the Income Tax Act. However, specifically for these scenarios, the deduction is mandated under Section 194Q.
• When a seller is a non-resident, Section 194Q of the Income Tax Act is not applicable to any purchases made from them. This section specifically pertains to transactions involving resident sellers.
• If the buyer fails to comply with the tax deduction provisions outlined in the Section 194Q) amendment, they may be subjected to the disallowance of expenditure. Specifically, the disallowance can amount to up to 30% of the transaction value. It is essential for buyers to adhere to the prescribed tax deduction requirements to avoid such consequences.
• Section 194Q applies to purchases of both revenue and capital goods.
• The TDS deduction on purchases exceeding the value of 50 lakhs will be 0.1%. However, if the seller does not have a PAN, the deduction will be made at a higher rate of 5%.

Section 194Q Declaration Format

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:

Conclusion

Section 194Q is a recent addition to the Income Tax Act, 1961, introduced by the Central Board of Direct Taxes and effective from July 01, 2021. This section serves as a guideline for buyers who make purchases from Indian sellers exceeding Rs.50 Lakhs in the previous financial year. The applicable rate of TDS on such purchases is 0.1% when the PAN card details are provided.

Frequently Asked Questions (FAQs)

Will Section 194Q apply in the case of import of goods?

No, it is applicable only when a buyer has to pay a sum only to a resident seller.

What are the consequences of not deducting or depositing the TDS?

There could be two conditions:

• an amount has been paid to a resident seller on which TDS is to be deducted but not done so, or
• in case TDS is deducted, the same amount has not been deposited before the expiry of the time provided to furnish the income returns under Section 139 (1).

In both cases, 30% of the amount on which the TDS is to be deducted and deposited will be added to the income of that individual.

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