Introduced by the Central Board of Direct Taxes (CBDT) in 2021, Section 194Q of the Income Tax Act addresses Tax Deducted at Source (TDS) on the purchase of goods. This provision mandates that buyers in India must deduct a 0.1% TDS on transactions exceeding Rs 50 lakh.
Section 194Q aims to enhance transparency and tracking of substantial transactions, supplementing existing tax mechanisms without impacting GST.
In this guide, you will gain a comprehensive understanding of Section 194Q of the Income Tax Act.
What is Section 194Q
Introduced in 2021, Section 194Q of the Income Tax Act mandates TDS on certain high-value purchases. This regulation targets buyers with a specific turnover threshold, requiring them to withhold a portion of their payments as TDS.
Its purpose is to enhance the process of tax collection and ensure clear financial transactions. Non-compliance with this section can lead to penalties and the disallowance of related expenses.
Applicability of TDS Under Section 194Q
The TDS deduction under Section 194Q is applicable in the following scenarios:
- Purchase Value: When the combined value of goods bought from the same seller within a financial year surpasses Rs 50 lakh.
- Buyer: This provision is relevant to buyers who make payments to resident sellers for goods. It excludes transactions involving imported goods.
- Buyer’s Turnover: When the buyer’s gross receipts, total sales, or business turnover from the previous financial year exceeds Rs 10 crore.
Suppose you bought some goods worth Rs 90 lakh from a seller. First, you need to subtract the initial Rs 50 lakh threshold under Section 194Q. TDS is then deducted from the remaining Rs 40 lakh at a rate of 0.1%. In this case, the TDS amount would be Rs 4,000.
Eligibility Criteria for Section 194Q
Section 194Q applies to a buyer in the following situations:
- The buyer's turnover, gross receipts, or sales in the previous financial year exceeded Rs 10 crore.
- The buyer is responsible for paying an amount to a resident seller.
- The deduction applies to purchases of goods whose total value exceeds Rs 50 lakh.
Exceptions to TDS Deduction Under Section 194Q
There are certain exceptions to TDS deduction under Section 194Q of the Income Tax Act:
- Conflicting TDS Provisions: If your purchase transaction is subject to TDS under a different section of the Income Tax Act, such as Section 194O for e-commerce transactions, then TDS will be governed by that specific section instead of Section 194Q.
- Threshold Limit: If the total purchase value from a single seller in a financial year is below Rs 50 lakhs, TDS under Section 194Q does not apply.
- Buyer’s Turnover: Section 194Q is relevant only for buyers whose total sales, gross receipts, or turnover from their business in the previous financial year exceeds Rs 10 crore. If your turnover is below this limit, TDS is not applicable under this section.
- TCS Applicability: If the goods purchased are subject to Section 206C (Tax Collected at Source), excluding subsection 1H, the seller handles the tax collection. In such cases, TDS under Section 194Q is not necessary.
Key Points to Note for Section 194Q of the Income Tax Act
The following are some crucial points you must note for Section 194Q of the Income Tax Act:
- 194Q TDS must be deducted at the earliest of either the payment or the credit of the amount to the seller. This includes cases where the amount is credited to a ‘Suspense account’ or similar account in the buyer's books.
- Non-compliance with the TDS requirements under Section 194Q can result in the disallowance of expenses, which may be up to 30% of the transaction value. Adherence to tax deduction norms is crucial to avoid these penalties.
- Section 194Q does not apply to transactions with non-resident sellers. It specifically addresses transactions involving resident sellers.
- This section covers both revenue and capital goods purchases.
- For purchases exceeding Rs 50 lakh, a TDS of 0.1% is deductible. If the seller lacks a PAN, the deduction rate increases to 5%.
Overall, Section 194Q of the Income Tax Act of 1961 plays a vital role in expanding the tax base by including a broader range of transactions under the TDS framework. For individuals engaged in buying or selling goods, understanding this provision is crucial. Ensuring compliance with Section 194Q is essential to avoid legal repercussions and maintain proper tax practices.