Section 194Q of Income Tax Act

Section 194Q was introduced on July 1, 2021, by the Central Board of Direct Taxes (CBDT) in India. It requires buyers to deduct tax at source (TDS) at 0.1% when they purchase goods from sellers in India. This section is applicable only to those buyers whose total purchase amount exceeds Rs. 50 lakh in a financial year. The buyer needs to deduct this tax based on their total sales, gross receipts, or turnover from the previous financial year.

The main purpose of Section 194Q is to help the government track large transactions without including the Goods and Services Tax (GST) amount. This way, it monitors and detects any fraudulent or fake transactions. Let us understand the key provisions of Section 194Q in detail, check its applicability, and check the various exceptions offered. Also, we will learn the concept of TDS under GST and study some legislative provisions.

What is Section 194Q of the Income Tax Act?

Section 194Q requires buyers to deduct a tax (TDS) when they purchase goods from Indian sellers if the total amount exceeds Rs. 50 lakh in a financial year. The TDS rate is 0.1% and applies to the amount exceeding the threshold (Rs. 50 lakh). It must be noted that this section applies only to purchases made within India, and the buyer is responsible for deducting the TDS.

For more clarity, let us study a hypothetical example:

• Say Mr. A owns a manufacturing business in Mumbai.

• In the previous financial year, he purchased goods worth Rs. 70 lakh from a supplier, Mr. B, who is based in Kolkata.

• Here, we can observe that Section 194Q is applicable as Mr. A bought goods worth Rs. 70 lakh from Mr. B, which is more than the stipulated Rs. 50 lakh.

• The amount exceeds the threshold of Rs. 50 lakh by Rs. 20 lakh (Rs. 70 lakh - Rs. 50 lakh)

• So, Mr. A needs to deduct Rs. 2,000 (0.1% of 20 lakh) as TDS and pay it to the government.

Who does Section 194Q of the Income Tax Act apply to?

Section 194Q applies to buyers who have a total turnover, gross receipts, or sales exceeding Rs. 10 crores in the previous year. Additionally,

• The buyer must be purchasing goods from an Indian seller.

• The seller must be a resident of India.

• The purchases from the seller must exceed Rs. 50 lakh in aggregate during the financial year.

Hence, if you are a buyer with total sales over Rs. 10 crores in the previous year, and you buy goods worth more than Rs. 50 lakh from an Indian seller, you must deduct TDS at 0.1% on the amount exceeding Rs. 50 lakh. This helps the government monitor significant transactions and ensure transparency.

Section 194Q TDS calculation

Section 194Q of the Income Tax Act (ITA) became applicable on July 1, 2021. This means you need to start deducting TDS on purchases made after July 1, 2021. It is worth mentioning that even though the TDS deduction starts from July 1, 2021, the calculation of the Rs. 50 lakh threshold for purchases begins from April 1, 2021.

To understand the applicability better, let’s study a hypothetical scenario:

• Say you are a buyer who purchases goods from a seller.

• From April 1, 2021, you start counting the total value of your purchases from a particular seller.

• Assume by July 1, 2021, you've already purchased goods worth Rs. 40 lakh from this seller.

• After July 1, 2021, you buy additional goods worth Rs. 20 lakh from the same seller.

Now, your total purchases for the financial year from this seller are Rs. 60 lakh (40 lakh before July 1 + 20 lakh after July 1). Since the total purchases exceed the threshold of Rs. 50 lakh, you need to deduct TDS on the amount exceeding Rs. 50 lakh.

In this case, the excess amount is Rs. 10 lakh (60 lakh - 50 lakh). You have to deduct TDS of Rs. 1,000 (0.1% on Rs. 10 lakh).

Time of TDS deduction

As per Section 194Q of the Income Tax Act, you need to deduct TDS either when you pay the seller or when you record the amount in your accounts, whichever happens first.

Now, there could be two possible scenarios:

Scenario I: No advance payment

If you haven't paid any money in advance, you must deduct TDS when you actually purchase the goods. For example, say you buy goods on credit, so you deduct TDS when you record the purchase in your books.

Scenario II: Advance payment made

If you have paid the seller in advance, you must deduct TDS at the time of making this advance payment. For example, say you pay an advance of Rs. 10 lakh for goods. You need to deduct TDS at the time of making this payment.

Hence, we can say that if you pay first, deduct TDS at the time of payment. Whereas, if you haven't paid yet, deduct TDS when you record the purchase in your accounts. This rule ensures the government gets the tax due as soon as possible, whether it's through an advance payment or at the time of purchase.

Section 194Q TDS deduction rate

As per Section 194Q, if you buy goods from a seller and the total amount of your purchases from that seller is more than Rs. 50 lakh in a financial year, you need to deduct tax at source. This tax rate is 0.1% and applies to the amount that exceeds Rs. 50 lakh. However, if the seller does not have a PAN, the TDS rate increases to 5%.

Exceptions for Section 194Q TDS

Section 194Q requires buyers to deduct TDS on certain purchase transactions. However, there are several exceptions where Section 194Q does not apply. Let us check them out:

1. If another provision of the Income Tax Act (ITA) mandates TDS for a purchase transaction, Section 194Q does not apply. For example,

• Consider Section 194O, which deals with e-commerce transactions.

• This section takes precedence over Section 194Q if a purchase transaction falls under both Section 194O and Section 194Q.

• In this case, TDS is controlled by Section 194O.

2. Section 206C(1H) section requires sellers to collect tax at source (TCS) when the sale of goods exceeds Rs. 50 lakh in a financial year. If a purchase transaction falls under both Section 194Q (buyer deducting TDS) and Section 206C(1H) (seller collecting TCS), Section 194Q takes priority. This means the buyer will deduct TDS under Section 194Q, and the seller does not need to collect TCS under Section 206C(1H) for the same transaction.

Role of GST

TDS (Tax Deducted at Source) under GST is a mechanism where a specified percentage of tax is deducted from the payment made to suppliers of taxable goods and/or services. This is done by certain specified individuals as mandated by the GST laws. The TDS rate under GST is 2%. When specified individuals make payments to suppliers for goods or services, they need to deduct 2% of the payment amount as tax.

Be aware that the rules and provisions for TDS under GST are laid out in Section 51 of the Central Goods and Services Tax (CGST) Act. Additionally, CGST Rule 66 provides further guidelines on how TDS should be implemented and managed.

Moreover, to comply with TDS under GST, certain documents need to be submitted. These commonly include

• Details of the transactions

• The amount of TDS deducted, and

• Other relevant information as required by the GST authorities.

It is important to maintain proper records to avoid any penalties or interest charges for non-compliance. If there is any delay or failure in deducting or depositing TDS under GST, the specified individuals might face interest and penalties. The government has implemented these measures to ensure timely compliance. Also, they discourage any lapses in adhering to the TDS provisions.

Section 194Q declaration format

The Section 194Q declaration is a document that a buyer provides to a seller to inform them that the buyer is responsible for deducting the Tax Deducted at Source (TDS) on purchases exceeding Rs. 50 lakh in a financial year.

By following the correct declaration format, you can ensure that all essential details are covered and prevent any potential complications related to TDS under Section 194Q.

Let’s look at some key elements of the declaration:

Section I: Header

Clearly label the document as a declaration under Section 194Q of the Income Tax Act, 1961.

Section II: Your details

Include your name and Permanent Account Number (PAN). If you are acting on behalf of a company, include the company name and the company's PAN. Mention your designation if applicable.

Section III: Turnover declaration

State your total turnover for the previous financial year. Confirm whether your turnover exceeds Rs. 10 crore, which makes you liable to deduct TDS under Section 194Q.

Section IV: Indemnity clause (optional)

You can include a clause that protects the seller from any consequences if the information provided in the declaration is incorrect.

Section V: Date and signature

Sign the declaration and include the date to make it official and authentic.

For better comprehension, have a look at an example format of the declaration:

Header:

Declaration under Section 194Q of the Income Tax Act, 1961

Your details:

Buyer Name: [Your Name]

PAN: [Your PAN]

Designation: [Your Designation] (if applicable)

Company Name: [Your Company Name] (if applicable)

Company PAN: [Your Company PAN] (if applicable)

Turnover declaration

I, [Your Name], hereby declare that the total turnover of [My Company] for the financial year [Previous Year] exceeded Rs. 10 crore. Therefore, I am liable to deduct TDS under Section 194Q of the Income Tax Act, 1961, on purchases exceeding Rs. 50 lakh in the current financial year.

Indemnity clause (optional):

I indemnify the seller for any consequences arising from any incorrect information provided in this declaration.

Date and signature:

Date: [Date]

Signature: [Your signature]

Important points to consider for 194Q of the Income Tax Act

To ensure compliance with Section 194Q and avoid any penalties, consider the following important points:

1. Timing of TDS deduction

You need to deduct Tax Deducted at Source (TDS) at the earlier of two events: when you pay the seller or when you record the amount in your accounts. Please note that the act of “recording the amount” includes crediting it to a 'Suspense account' or any other account in your books.

2. Resident sellers only

Section 194Q does not apply to purchases made from non-resident sellers. It only applies to transactions involving sellers who are residents of India.

3. Consequences of non-compliance

If you fail to deduct TDS as required, you may face penalties. Specifically, you could be disallowed from claiming up to 30% of the transaction value as an expense. This disallowance increases your taxable income, and you end up paying more taxes.

4. Types of goods

Section 194Q applies to the purchase of both revenue goods (goods for sale) and capital goods (goods for long-term use, like machinery).

5. TDS rate

The TDS rate on purchases exceeding Rs. 50 lakh is 0.1%. If the seller does not have a PAN, the TDS rate increases to 5%.

Conclusion

Section 194Q of the Income Tax Act was introduced on July 1, 2021, by the Central Board of Direct Taxes (CBDT) to monitor large transactions and prevent fraudulent activities. This section mandates buyers to deduct the Tax Deducted at Source (TDS) at 0.1% on purchases exceeding Rs. 50 lakh in a financial year. However, if the seller does not have a PAN card, the TDS rate increases to 5%.

194Q is applicable to buyers with a turnover exceeding Rs. 10 crores in the previous year. This rule applies to purchases from resident Indian sellers and must be implemented either at the time of payment or when recording the purchase, whichever is earlier.

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