Section 194Q of the Income Tax Act: TDS on Purchase of Goods
Applicability of Tax Deducted at Source (TDS) u/s 194Q on Purchase of Goods- In the Budget 2021-22, a new section 194Q introduced which will be effected from 1st July 2021.
What is section 194Q:-
A new section 194Q introduced in Budget 2021-22 which is related to payment of certain sum for purchase of goods. As per this section:
Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding Rs. 50 lakhs (fifty lakh Rupees) in any previous year, shall, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 percent of such sum exceeding fifty lakhs rupees as income-tax.
Time of Deduction of TDS under Section 194Q:-
(i) At the time of credit of such sum to the account of the seller; or
(ii) At the time of payment thereof by any mode
Whichever is earlier.
“Buyer” means a person whose total sales, gross receipts or turnover from the business carried on by him exceed Ten Crore Rupees during the financial year immediately preceding the financial year in which the purchase of goods is carried out, not being a person, as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein
Where any sum is credited to any account, whether called “suspense account” or by any other name, in the books of account of the person (Buyer) liable to pay such income, such credit of income shall be deemed to be the credit of such income to the account of the payee (Seller) and the provisions of this section shall apply accordingly.
Exception to TDS Deduction under Section 194Q:-
The provisions of this section shall not apply to a transaction on which:
(a) tax is deductible under any of the provisions of this Act; and
(b) tax is collectible under the provisions of section 206C other than a transaction to which sub-section (1H) of section 206C applies.
TDS Rate under Section 194Q of Income Tax Act, 1961:-
- 0.1% on sum exceeding Rs. 50 lakhs in any previous year
- 5% in case PAN number of Seller is not available (section 206AA).
It implies that if on a transaction a TDS or tax collection at source (TCS) is required to be deducted under any other provision, then it would not be subjected to TDS under this section.
However, there is one exception to this general rule is that if on a transaction TCS is required u/s 206C(1H) as well as TDS under this section, then on that transaction only TDS u/s194Q shall be deducted.
Non-compliance of section 194Q:-
As per section 40a(ia) of Income Tax Act 1961, dis-allowance to the extent of 30% of the value of transaction. It means that if the buyer fails to deduct and deposit TDS as applicable then dis-allowance shall be restricted to 30% of the amount of expenditure on which TDS is not deducted and deposited.
How to ensure compliance of section 194Q:-
In any business, purchase is an ongoing process and it is difficult to keep tab to identify as and when purchase from any vendor is exceeded Rs. 50 lakhs especially in a big organisation. Hence, automisation is the only solution for compliance of section 194Q. Hence, following steps are required to automisation:
- On the basis of previous year, identify the vendors from whom purchases for more than Rs. 50 lakhs have been made in previous year and arrange alteration in the master of these vendor with activation of TDS deduction option in your accounting software.
- Arrange changes in your accounting software so that software can automatically identify and deduct TDS or provide you alert to deduct TDS as and when purchase of any vendor exceed from Rs. 50 lakhs during the current accounting year.
Applicability of section 194Q with Examples:-
Seller’s Turover : Rs. 9 Crores
Buyer’s Turover : Rs. 15 Crores
Receipt or Payment for sale or purchase of Goods in previous year : Rs. 55 lakhs
Taxability:
Buyer’s Turnover is more than Rs. 10 Crores
Taxable amount : Rs. 5 lakhs ( Rs. 55 lakhs-Rs.50 lakhs)
TDS u/s194Q : 0.1% on Rs. 5* lakhs
TCS u/s 206C(1H): not applicable as Seller’s turnover is less than 10 Crores.
Seller’s Turover : Rs. 15 Crores
Buyer’s Turover : Rs. 9 Crores
Receipt or Payment for sale or purchase of Goods in previous year : Rs. 55 lakhs
Taxability:
Buyer’s Turnover is less than Rs. 10 Crores
Seller’s Turover is more than Rs. 10 Crores
Taxable amount : Rs. 5 lakhs ( Rs. 55 lakhs-Rs.50 lakhs)
TDS u/s194Q : Not applicable
TCS u/s 206C(1H): 0.1% on Rs. 5 lakhs**.
Seller’s Turover : Rs. 15 Crores
Buyer’s Turover : Rs. 15 Crores
Receipt or Payment for sale or purchase of Goods in previous year : Rs. 55 lakhs
Taxability:
Buyer’s Turnover is more than Rs. 10 Crores
Seller’s Turover is more than Rs. 10 Crores
Taxable amount : Rs. 5 lakhs ( Rs. 55 lakhs-Rs.50 lakhs)
TDS u/s194Q : 0.1% on Rs. 5 lakhs*
TCS u/s 206C(1H): Not applicable (see exception).
Note:
*in case seller’s PAN number is not available, then the rate of TDS shall be 5%
**in case buyer’s PAN number is not available, then the rate of TDS shall be 1%