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 194Q of Income Tax Act?
Section 194Q of the Income Tax Act, introduced in 2021, mandates Tax Deducted at Source (TDS) by buyers purchasing goods from resident suppliers. A 0.1% TDS rate applies to buyers with annual turnover exceeding ₹10 crore. The TDS requirement kicks in when aggregate purchases from a single supplier surpass ₹50 lakh in a preceding year. This provision aims to capture potential tax evasion and promote transparency in business transaction.
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.
Also Read: Section 80C of Income Tax Act
Eligibility criteria for Section 194Q
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.
Applicability of Section 194Q
Effective July 1, 2021, Section 194Q of the Income Tax Act mandates Tax Deducted at Source (TDS) on purchases exceeding the threshold of Rs. 50 lakh. This threshold is applicable from April 1, 2021. For instance, if a buyer acquires goods worth Rs. 80 lakh, an initial deduction of Rs. 50 lakh is permitted under Section 194Q, followed by TDS on the remaining Rs. 30 lakh at a rate of 0.1%. In this scenario, the applicable TDS would amount to Rs. 3,000.
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]
Also Read: Section 269SS of Income Tax Act
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%.
When should a buyer deduct TDS under Section 194Q?
Under Section 194Q of the Income Tax Act, buyers must deduct Tax Deducted at Source (TDS) when they make payments to sellers exceeding Rs. 50 lakh in a financial year. This provision, effective from 1st July 2021, applies to business transactions involving the purchase of goods. If the buyer’s turnover exceeds Rs. 10 crore in the preceding financial year, they must deduct TDS at a rate of 0.1% on payments to eligible sellers.
The buyer must deduct TDS at the time of crediting the payment to the seller's account or during payment, whichever is earlier. This deduction ensures compliance and enables the government to monitor high-value transactions, ensuring tax accountability.
Comparison Table for TDS Deduction under Section 194Q
Criteria |
Details |
Applicable Buyer Turnover |
Above Rs. 10 crore in the preceding year |
Seller Payment Threshold |
Exceeds Rs. 50 lakh per financial year |
TDS Rate |
0.1% |
Timing of TDS Deduction |
On credit or payment, whichever is earlier |
Exclusions |
Not applicable if TDS is already deducted by the seller under Section 206C (1H) |
This table summarises when TDS under Section 194Q should be applied, providing clarity on the conditions that trigger this deduction.
Section 194Q vs. Section 206C
Section 194Q and Section 206C (1H) of the Income Tax Act govern the deduction and collection of tax at source, but they apply to different parties and circumstances in high-value transactions. Section 194Q, effective from 1st July 2021, mandates that buyers with a turnover exceeding Rs. 10 crore in the previous financial year must deduct TDS at 0.1% on purchases above Rs. 50 lakh from a seller. On the other hand, Section 206C (1H) requires sellers with similar turnover thresholds to collect TCS at 0.1% from buyers on sales exceeding Rs. 50 lakh.
In transactions where both provisions apply, Section 194Q (TDS) takes precedence over Section 206C (1H) (TCS), meaning the buyer will deduct TDS instead of the seller collecting TCS.
Comparison Table for Section 194Q vs Section 206C (1H)
Criteria |
Section 194Q (TDS) |
Section 206C (1H) (TCS) |
Applicable Party |
Buyer |
Seller |
Turnover Threshold |
Buyer’s turnover > Rs. 10 crore |
Seller’s turnover > Rs. 10 crore |
Transaction Threshold |
Purchases above Rs. 50 lakh |
Sales above Rs. 50 lakh |
Rate |
0.1% |
0.1% |
Priority in Dual Application |
TDS takes precedence |
Applied only if TDS is not deducted |
This table highlights the distinctions and priority rules, ensuring clarity for buyers and sellers on when to deduct or collect tax.
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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