TDS Applicability on Purchase of Goods Under Section 194Q

Section 194Q

According to the Finance Act, 2021, Section 194Q was added to the Income Tax Act of India, which became effective on July 1st, 2021. This section addresses the deduction of tax at source on payments made for the purchase of goods. To ensure tax compliance and broaden the application of TDS 194Q Section was created. We will examine the many facets of TDS under Section 194Q, including its applicability, calculation, exemptions, and other crucial considerations, in this extensive guide.

Applicability of Section 194Q

Section 194Q of the Income Tax Act, 1961, came into effect on July 1, 2021. It applies to any buyer who is responsible for paying any sum to any resident seller for the purchase of any goods, the value or aggregate of value of which exceeds 50 lakhs 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% of such sum exceeding 50 lakhs as income tax.

The following conditions must be met for Section 194Q to apply:

• The buyer's total sales, gross receipts, or turnover from business carried on by that person must exceed 10 crores during the financial year immediately preceding the financial year in which the goods are purchased by such person.
• The seller must be a resident of India.
• The goods must be purchased for the purpose of business.

If Section 194Q applies, the buyer must deduct TDS and deposit it with the Income Tax Department within 30 days of the end of the month in which the payment is made.

Applicability of Section 194Q

Section 194Q of the Income Tax Act, 1961 applies to any person, referred to as the buyer, who is responsible for paying any sum to a resident seller for the purchase of goods. When the value or aggregate value of such goods exceeds fifty lakh rupees in any previous year, the provision is triggered. The total sales, gross receipts, or turnover of the buyer's business should have exceeded ten crore rupees during the financial year that ended right before the year of the purchase in order to determine whether the buyer is covered by this provision.

How to Calculate TDS Under Section 194Q?

The TDS is calculated in accordance with Section 194Q rate of 0.1% of the amount that exceeds fifty lakh rupees. For instance, if a buyer spends 60 lakh rupees on goods, the TDS will be deducted from 10 lakh rupees (60 lakh rupees - 50 lakh rupees). The TDS amount will therefore be 1000 rupees.

Who Will Deduct TDS Under Section 194Q?

Under Section 194Q of the Income Tax Act, the buyer, who is accountable for paying the resident seller for the purchase of goods costing more than fifty lakh rupees, must deduct TDS. The buyer is in charge of withholding the TDS at the agreed-upon rate and paying it over to the government.

When to Deduct TDS Under Section 194Q?

TDS under Section 194Q must be deducted; earlier, the dates listed below were:

1. At the time of crediting the sum to the account of the seller, or
2. At the time of making payment of the sum to the seller

Example of TDS Under Section 194Q?

Let’s use an illustration to better understand:

Mr A buys products worth 75 lakh rupees from Mr B, whose total sales in the previous fiscal year exceeded ten crore rupees. TDS under Section 194Q will be applicable in this situation. TDS will be calculated as follows.

Purchase price: Rs. 75,00,000

Threshold Limit: Rs. 50,00,000

TDS Amount: (75,00,000 - 50,00,000) * 0.1% = Rs. 25,000

As a result, Mr A must deduct 25,000 rupees as TDS when making the payment to Mr B.

Rate of TDS Under Section 194Q

The amount that exceeds fifty lakh rupees is subject to a 0.1% TDS rate under Section 194Q. However, if the seller's Permanent Account Number (PAN) is unavailable, the buyer would be required to withhold tax at a higher rate of 5%.

What If PAN Is Not Furnished By the Seller?

The buyer is required to withhold TDS at a higher rate of 5% instead of the usual rate of 0.1% if the seller fails to give the buyer their PAN. This measure promotes compliance and transparency by requiring sellers to provide their PAN.

Threshold Limit of TDS under Section 194Q

Under Section 194Q, there is a 50 lakh rupee threshold limit for TDS. TDS will not be applicable if the value of the goods purchased falls within this range.

Exemption From Section 194Q

Section 194Q does not apply to transactions where TDS is already deductible under other provisions of the Income Tax Act, or to transactions where Tax Collected at Source (TCS) is collectable under Section 206C, except for transactions covered by Section 206C(1H). Buyers must confirm whether TDS under Section 194Q is applicable in each individual case.

Recent Amendments Under Section 194Q

• The deduction of Tax Deducted at Source (TDS) is made according to Section 194Q of the Income Tax Act whenever any amount is credited to a "Suspense account" or any other account that is a part of the books of accounts of a person who becomes obligated to make the payment.
• When transactions take place under both Section 206C(1H) and Section 194Q of the Income Tax Act, the deduction is required specifically in these circumstances under Section 194Q only.
• Section 194Q of the Income Tax Act does not apply to any purchases made by a seller who is a non-resident. This section focuses specifically on business dealings involving resident sellers.
• The buyer might have their expenditures disallowed if they do not follow the tax deduction rules outlined in the Section 194Q amendment. The disallowance may represent as much as 30% of the transaction value. To avoid these consequences, it is crucial for buyers to follow the established tax deduction requirements.
• Both capital and revenue-related purchases are covered by Section 194Q.
• On purchases worth more than Rs. 50 lakhs, TDS will be deducted at a rate of 0.1%. However, the deduction will be made at a higher rate of 5% if the seller does not have a PAN.

Section 194Q Declaration Format

To,

Name and address of the buyer

Sub: Declaration or information required by Section 194Q of the Act for a source tax deduction.

Dear Sir/ Ma’am,

This relates to your letter from _________, which requested our declaration and information regarding tax withholding at the source under Section 194Q of the Act. The following information is being provided:

1. Since your business must withhold taxes under Section 194Q of the Act, you may deduct the tax at the rate of 0.1% of the sale consideration paid or credited by your business to us on the amount exceeding Rs. 50 lacs during the current financial year. Additionally, we reaffirm that beginning on July 1, 2021, we will not take any steps to collect tax at source in accordance with section 206C(1H) of the Act.
2. Our business's Permanent Account Number is AAAAA1234A. Additionally, in accordance with the data below, we have properly filed our income tax returns for the assessment years 2021–2022 and 2022–23.

Section 194Q vs Section 206C(1H) vs Section 194O (Which TDS/ TCS Compliance Required to Do?)

To determine which compliance applies to a specific transaction, it is crucial to comprehend the distinctions between Section 194Q, Section 206C(1H), and Section 194O. A quick comparison is given below:

1. Section 194Q: This TDS section is applicable to buyers who pay resident sellers for purchases of goods totalling more than Fifty Lakh Rupees in a calendar year, TDS be collected from the buyer at a rate of 0.1%.
2. Section 206C(1H): This provision applies to sellers of goods whose annual sales exceed ten crore rupees and mandates that, for sales of goods worth more than fifty lakh rupees, TCS be collected from the buyer at a rate of 0.1%.
3. Section 194O: This law, which is applicable to e-commerce operators who facilitate the sale of goods or services on their digital platforms, mandates that they withhold TDS at a rate of 1% from the seller.

• In the case of a transaction to which both Section 206C(1H) and Section 194Q applies, TDS is to be deducted under Section 194Q. 
• However, in the case of a transaction to which both Section 206C(1) or 206C(1F) or 206C(1G) and Section 194Q applies, TCS to be collected under Section 206C(1) or 206C(1F) or 206C(1G).
• In the case of a transaction to which both Section 194O and Section 194Q apply, TDS is to be deducted under Section 194O.
• Additionally, transactions involving non-resident sellers are not covered by Section 194Q.

Other Considerations Need to Know for TDS Under Section 194Q

Due Date of Deposit of TDS Under Section 194Q

Section 194Q TDS must be deposited to the government by the 7th of the month following the month in which the TDS is deducted. For instance, if TDS is withheld on August 15th, it must be deposited by September 7th. However, for TDS deducted in the March month, it can be deposited by 30th April.

Issue of TDS Certificate

The buyer must provide the seller with a TDS certificate in Form 16B within fifteen days of the due date for furnishing the TDS return after deducting TDS in accordance with Section 194Q.

The deductee may claim a TDS credit in their income tax return. Additionally, Form 26AS on the income tax department website contains information about the tax deducted in accordance with Section 194Q.

Filing of TDS Return

To report the TDS deducted under Section 194Q, the buyer is required to submit a TDS return in Form 26Q. By the deadlines specified, the TDS return must be submitted quarterly.

Points to Remember Under Section 194Q

• Buyers making payments to resident sellers for the purchase of goods totalling more than fifty lakh rupees per year are subject to section 194Q.
• The purchaser is required to withhold TDS at a rate of 0.1% of the amount over fifty lakh rupees.
• TDS should be taken out at a higher rate of 5% in cases where the seller's PAN is not readily available.
• Transactions that are already subject to TDS under other provisions or TCS under Section 206C (with the exception of 206C(1H)) are not covered by Section 194Q.
• After deducting TDS, keep accurate records and provide the seller with a TDS certificate (Form 16B).
• Quarterly TDS returns (Form 26Q) must be filed, and TDS must be deposited with the government by the deadline.

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