Section 194Q of the Income Tax Act: Applicability and Exemptions

The Income Tax Act 1961 has been periodically updated to include various provisions aimed at improving tax compliance and administration. One such recent addition is Section 194Q, introduced by the Central Board of Direct Taxes (CBDT), which came into effect on July 1, 2021. This section specifically addresses the Tax Deducted at Source (TDS) on the purchase of goods and has significant implications for buyers and sellers within India.

What is Section 194Q of the Income Tax Act?

Section 194Q was introduced to the Income Tax Act, 1961 by the Central Board of Direct Taxes (CBDT) on July 1, 2021. This section mandates Tax Deducted at Source (TDS) on purchasing goods and applies specifically to buyers who acquire goods from Indian sellers.

According to Section 194Q, if a buyer’s purchases exceed ₹50 lakhs in a preceding financial year, they must deduct TDS at the rate of 0.1% on the amount exceeding the threshold. This provision does not apply to purchases from sellers outside India.

Applicability of Section 194Q

Section 194Q of the Income Tax Act mandates the deduction of TDS on purchases made after July 1, 2021. However, when determining the ₹50 lakh threshold, purchases from April 1, 2021, are to be considered.

Rate of TDS Under Section 194Q

Under Section 194Q of the Income Tax Act, when a buyer acquires goods from a seller exceeding ₹50 lakh in a financial year, the buyer must deduct tax at source (TDS) at a rate of 0.1% on the amount exceeding ₹50 lakh.

For instance, if a buyer purchases goods worth ₹70 lakh in a financial year, TDS under Section 194Q would be calculated as follows:

Example to Illustrate Section 194Q

Purchase amount: ₹70,00,000 Threshold amount: ₹50,00,000 Amount subject to TDS: ₹70,00,000 – ₹50,00,000 = ₹20,00,000

TDS Calculation:

0.1% of ₹20,00,000 = ₹20,00,000 × 0.001 = ₹2,000

Therefore, the TDS amount to be deducted is ₹2,000.

Conditions for Section 194Q

Section 194Q applies to buyers under the following conditions:

• The buyer’s turnover, gross receipts, or sales exceed ₹10 crore in the preceding financial year.
• The buyer is responsible for making payments to a resident seller.
• The payment is made for the purchase of goods that cumulatively exceed ₹50 lakh in value during the financial year.

Exceptions to Section 194Q

Here are several instances where Section 194Q does not apply to a transaction:

1. TDS Under Other Provisions: If Tax Deducted at Source (TDS) is required under any other provision of the Income Tax Act on a purchase transaction.
2. Overlap with Section 194O: For transactions subject to TDS under both Section 194Q and Section 194O, TDS will be applied as per Section 194O.
3. Transactions Subject to TCS: If Tax Collected at Source (TCS) is applicable under Section 206C, TDS under Section 194Q will not apply.
4. Non-Resident Sellers: Section 194Q is not applicable if the seller is a non-resident.

However, it’s important to note the exception under Section 206C(1H). This involves TCS collected by the seller on the sale of goods exceeding ₹50 lakhs in the previous financial year. If both Section 194Q and TCS under Section 206C(1H) apply to a transaction, only Section 194Q will apply.

Calculating Purchase Returns under Section 194Q

Regarding purchase returns, TDS is deducted at the time of payment or when the amount is credited to the seller’s account. If a purchase return occurs, the seller will refund the TDS amount deducted from the buyer’s account.

Alternatively, the deducted TDS can be adjusted against the next purchase with the same seller. If the goods are exchanged or replaced, no tax adjustments will occur.

Threshold Limit for TDS Deduction Under Section 194Q

Under Section 194Q, the threshold limit for the deduction of Tax Deducted at Source (TDS) is set at ₹50 lakhs. Various considerations determine this amount. Here’s a clearer understanding:

1. The purchase price threshold does not include Goods and Services Tax (GST).
2. When a buyer makes an advance payment, it is advisable to deduct TDS from the total amount, which includes the GST component. This approach simplifies the process, as calculating the exact GST amount can be challenging.
3. If the seller provides a refund during the transaction, this refund can be utilised to offset the TDS against another purchase transaction.

Amendments under Section 194Q

Here are some changes introduced under Section 194Q:

1. TDS Deduction on Suspense Accounts: Tax Deducted at Source (TDS) must be deducted even if the amount is credited to a ‘Suspense Account’ or any other similar account by the person responsible for making the payment.
2. Consequences of Non-Compliance: Failure to comply with the provisions of Section 194Q can result in a 30% disallowance of the expenditure based on the transaction value for the purchaser.
3. Applicability to Different Types of Purchases: The provisions under Section 194Q apply to the purchase of both revenue goods and capital goods.

Important Points to Consider for Section 194Q of the Income Tax Act

Section 194Q of the Income Tax Act mandates that Tax Deducted at Source (TDS) must be deducted at the time of payment or when the amount is credited to the seller’s account, whichever occurs first. This includes credits made to a ‘Suspense account’ or any similar account maintained in the buyer’s books of accounts.

This section does not apply to transactions involving non-resident sellers; it is specifically meant for transactions with resident sellers.

Non-compliance with the TDS deduction requirements under Section 194Q can lead to the disallowance of up to 30% of the transaction value as an expenditure. Therefore, it is crucial for buyers to adhere to these provisions to avoid penalties.

Section 194Q is applicable to purchases of both revenue and capital goods. For purchases exceeding ₹50 lakhs, TDS will be deducted at 0.1%. However, if the seller does not provide a PAN, the TDS rate increases to 5%.

Non-Furnishing of PAN

If the seller fails to provide a Permanent Account Number (PAN), the TDS rate will be 5%, instead of the usual 0.1%. It’s worth noting that in other cases where PAN is not provided, the tax rate can go up to 20%. Under Section 194Q, the specific TDS rate without PAN is 5%.

Impact on GST

For the calculation of the ₹50 lakhs threshold, the turnover should be considered excluding GST. TDS at the rate of 0.1% should be calculated only on the value of goods/services, excluding GST.\

Understanding the Differences Between Section 194Q and Section 206C

To ensure accurate tax deduction and payment, it’s crucial to understand the distinctions between Section 194Q and Section 206C. Here’s a breakdown of the key details and differences:

Key Specifications

When Should a Buyer Deduct TDS under Section 194Q?

The buyer must deduct TDS when the amount is credited to the seller’s account or when the payment is made in cash, whichever occurs first. If no advance payment is made, TDS is deducted at the time of purchase. If an advance payment is made, TDS must be deducted immediately.

Applicability of Section 194Q

By understanding these differences, buyers and sellers can avoid discrepancies in tax deduction and payment processes.

Section 194Q Declaration Format

On the seller’s letterhead:

To,

[Buyer’s Name & Address]

Sub: Declaration/Information for Deduction of Tax at Source under Section 194Q of the Income Tax Act

Dear Sir/Madam,

This is with reference to your letter dated [_________] requesting our declaration/information regarding the deduction of tax at source under Section 194Q of the Income Tax Act. The following information is provided:

1. As your company is required to deduct tax under Section 194Q of the Act, you may deduct the tax at 0.1% on the sale consideration paid/credited by your company to us on the amount exceeding ₹50 lakhs during the current financial year. We also confirm that we will not undertake any action to collect tax at source under Section 206C(1H) of the Act from 01.07.2021 onwards.
2. The Permanent Account Number (PAN) of our company is [_________]. Additionally, we confirm that we have duly filed our income tax returns for the last three assessment years as detailed below:

[Insert details of income tax returns]

Conclusion

Section 194Q serves as a guideline for buyers making significant purchases from Indian sellers, specifically those exceeding ₹50 lakhs in the previous financial year. The applicable TDS rate on such purchases is 0.1%, provided the PAN details are furnished. Compliance with these requirements is essential to avoid penalties and ensure smooth transactions.

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