Section 194Q of the Income Tax Act: TDS on Purchase of Goods

Section 194Q of the Income Tax Act, 1961, introduced by the Finance Act, 2021, and effective from July 1, 2021, mandates Tax Deducted at Source (TDS) on the purchase of goods. This provision aims to broaden the tax base and enhance transparency in high-value business transactions, especially for buyers with significant turnover.

Applicability of Section 194Q

Section 194Q applies to a transaction when the following conditions are met:

• Payer (Buyer): Any person (including individuals, HUF, companies, firms, etc.) whose total sales, gross receipts, or turnover from the business carried on by him exceeds INR 10 crore during the financial year immediately preceding the financial year in which the purchase of goods is carried out.
• Payee (Seller): A resident seller. This section does not apply to purchases from non-resident sellers.
• Nature of Transaction: Purchase of goods. This section does not apply to services. It covers both revenue and capital goods.
• Threshold Limit: The value or aggregate value of goods purchased from a single seller exceeds INR 50 lakh in any previous year.

Example: If a buyer's turnover in FY 2023-24 was INR 12 crore, and they purchase goods worth INR 70 lakh from a resident seller in FY 2024-25, TDS under Section 194Q would apply on the amount exceeding INR 50 lakh, i.e., INR 20 lakh.

Exclusions from Section 194Q

Section 194Q provisions do not apply in the following cases:

• Purchases of goods imported from outside India.
• Transactions where TDS is deductible under any other provision of the Income Tax Act (e.g., if TDS is applicable under Section 194O for e-commerce operators, Section 194Q will not apply).
• Transactions where Tax Collected at Source (TCS) is collectible by the seller under Section 206C(1H). In such cases, Section 194Q overrides Section 206C(1H).
• Purchases made by Central or State Government institutions.
• Purchases of goods or commodities by stock exchanges.
• Transactions involving renewable energy and electricity.

TDS Rate under Section 194Q

The rate of TDS under Section 194Q is typically:

• 0.1% of the purchase value exceeding INR 50 lakh.
• 5% if the seller fails to furnish a valid Permanent Account Number (PAN), as per the provisions of Section 206AA of the Income Tax Act.

TDS Calculation Base and GST

The TDS is to be calculated on the amount exceeding the INR 50 lakh threshold. Regarding GST (Goods and Services Tax):

• GST is generally included in the value of goods for calculating the amount on which TDS is to be deducted under Section 194Q.
• However, for determining the buyer's INR 10 crore turnover threshold, the GST component should be excluded.
• If the GST component is indicated separately in the invoice or contract, and TDS is deducted at the time of credit, some interpretations suggest excluding GST from the value subject to TDS. However, if TDS is deducted at the time of payment (which is earlier than credit), GST is generally included. Clarification via CBDT circulars is important here.

Time of Tax Deduction

The buyer is required to deduct TDS under Section 194Q at the earliest of the following two events:

• At the time of credit of the sum to the account of the seller (this includes crediting to a "Suspense Account" or similar account in the buyer's books).
• At the time of actual payment of such sum, by any mode.

For advance payments, TDS must be deducted at the time of making the advance payment.

Responsibilities of the Buyer (Deductor)

Buyers responsible for deducting tax under Section 194Q must adhere to the following compliance procedures:

• Obtain TAN: Obtain a Tax Deduction and Collection Account Number (TAN).
• Verify Seller's PAN: Ensure the seller provides their valid Permanent Account Number (PAN) to avoid deduction at a higher rate.
• Deduct Tax: Deduct TDS at the rate of 0.1% (or 5% if PAN is not available) on the amount exceeding INR 50 lakh.
• Deposit Tax: Deposit the deducted TDS to the credit of the Central Government by the 7th of the following month. For deductions made in March, the due date is April 30.
• File TDS Returns: File quarterly TDS returns in Form 26Q.
• Issue TDS Certificates: Issue TDS certificates in Form 16A to the seller as proof of tax deduction.
• Maintain Records: Keep proper records of all purchases and TDS deducted for audit purposes.

Consequences of Non-Compliance: Failure to comply with the provisions of Section 194Q can lead to serious repercussions:

• Disallowance of Expenditure: If the buyer fails to deduct TDS or fails to deposit it to the government, 30% of the value of the purchases on which TDS was not deducted or deposited may be disallowed as an expense under Section 40(a)(ia). This will increase the buyer's taxable income.
• Interest: Interest under Section 201(1A) for delay in deduction (1% per month or part thereof) and for delay in deposit (1.5% per month or part thereof).
• Penalty: Penalty under Section 271C, which can be equal to the amount of TDS that was not deducted or not paid.
• Late Filing Fees: Fees for delay in filing TDS returns (Section 234E).

Overlap with TCS on Sale of Goods (Section 206C(1H))

A significant aspect of Section 194Q is its interaction with Section 206C(1H), which deals with Tax Collected at Source (TCS) on the sale of goods. Both sections apply to transactions involving the purchase/sale of goods exceeding INR 50 lakh. To avoid double taxation:

• Section 194Q specifically states that its provisions shall not apply to a transaction on which TCS is collectible under Section 206C(1H).
• However, if a transaction is covered by both sections, Section 194Q will take precedence. This means if the buyer is liable to deduct TDS under Section 194Q, the seller will not be required to collect TCS under Section 206C(1H) for that transaction.

Conclusion

Section 194Q represents a significant expansion of the TDS regime, bringing high-value purchase of goods transactions under its purview. It places a direct responsibility on large buyers to deduct tax at source, contributing to the government's efforts to enhance revenue collection and financial oversight. Businesses falling under its ambit must ensure robust internal processes to track purchases, verify seller PAN details, and comply with deduction and deposit timelines to avoid penalties and disallowances. Understanding its interplay with other provisions like Section 206C(1H) is also critical for seamless tax compliance.