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Section 194Q of Income Tax Act: All You Need to Know!

Updated: Dec 17, 2023


Section 194Q of Income Tax Act: All You Need to Know!
Section 194Q of Income Tax Act: All You Need to Know!

Are you a seller or buyer in India? If so, you might have come across the term ‘Section 194Q.’ This latest tax provision is causing a stir in the business world. It is designed to simplify tax deduction at source for certain transactions.

 

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Moreover, ever since its implementation, the 194Q TDS section has been a topic of both debate and appreciation.

This article will unravel the mysteries of Section 194Q so that you can be confident in your understanding of this new tax provision.


TDS Section 194Q: A Brief


On July 1, 2021, under the Income Tax Act, the Central Board of Direct Taxes introduced Section 194Q. It provides the framework for buyers purchasing goods from sellers in India that exceed INR 50 Lakhs and with a 0.1% TDS rate.


The income tax is deducted based on the buyer’s total sales, gross receipts, and turnover. The main idea behind implementing this section 194Q TDS is to track the huge amount of transactions without leveraging the GST amount.


This section helps in monitoring and detecting any fraud or fake transactions.


Section 194q


Section 194Q TDS Applicability


The section 194Q applies to:

  • A buyer whose annual turnover exceeds INR 10 crores for the previous financial year

  • Moreover, if the value of the purchased goods surpasses INR 50 Lakhs in the preceding year

  • The buyer has to make the payment to the resident seller

For instance, if you are a buyer who decides to purchase goods worth INR 25 lakhs from the same seller thrice in a row during the financial year, your seller has the power to deduct INR 50 lakhs from the total amount of the goods purchased, that means the TDS is now equal to 0.1% of INR 25 lakhs.


Time of TDS Deduction


Under Section 194Q of the Income Tax Act, the amount of TDS is to be deducted at the time of credit of the sum to the account of the supplier or during the payment, whichever is done earlier.


It means that if the payment is made by cheque, cash, draft, or any other means, TDS is to be deducted during the time of the payment. If, however, the payment is made by credit to the seller’s account, then TDS is deducted at the time of credit.


It is crucial to take note that if the sum is sent to the supplier’s account, but payment is made at a later date, TDS is required to be deducted during credit even if the payment is not made at that time. Similarly, if the payment is made during credit, the TDS is deducted at the same time.


Moreover, it is necessary to comply with the time of TDS deduction to avoid any penalties or interest charges.


Section 194Q TDS Deduction Rate


TDS under section 194Q is deducted at a rate of 0.1% if the value of the goods exceeds INR 50 lakhs in the ongoing financial year. However, if the PAN of the seller is not in handy, then the rate of TDS deduction goes up to 5%.


It is important to note that the Rs. The 50 lakhs threshold limit applies on a cumulative basis for the fiscal year, which means that all payments made to the same seller or service provider during the fiscal year will be aggregated to determine whether the threshold has been exceeded.


Exceptions For Section 194Q TDS


TDS deduction under the section 194Q has the following exceptions:

  • Under Section 194Q of the Income Tax Act, if a purchase transaction is covered under any other provision of the Act for TDS deduction, such as Section 194O for e-commerce transactions, then the TDS would apply as per that specific section instead of Section 194Q. There is an exception to this regulation under Section 206C(1H), which deals with the seller collecting tax (TCS) for the sale of goods if the consideration value exceeds Rs 50 lakh in any prior year.

  • If a purchase transaction is covered by both Section 194Q and Section 206C(1H) for TDS and TCS deduction, only Section 194Q will apply.

  • It should be noted that the applicability of TDS and TCS should be established based on the specific rules of the Income Tax Act, and it is recommended that you consult a tax expert to ensure compliance.


Role of GST


TDS under GST is required to be deducted at the rate of 2% on payments made to taxable goods and/or service suppliers by specific specified individuals under GST. This page covers all you need to know about TDS under GST, including the TDS rate, deduction limit, application, documents to be submitted, relevant interest and penalties, and more.

One way to collect tax is through TDS, which is based on different percentages of the amount the receiver owes for goods or services. The government gets money from the taxes that are paid. Section 51 of the CGST Act, along with CGST Rule 66, contains the provision for TDS under GST.


Section 194Q Applies to Who?

In the following circumstances, a buyer is subject to this section:

A buyer whose turnover, gross receipts, or sales in the immediately preceding fiscal year exceeded Rs 10 crore is responsible for paying a sum to the resident seller, and such payment is to be made for the purchase of goods worth more than Rs 50 lakh.


Example:

For the fiscal year (FY) that concluded on March 31, 2021, a buyer with a turnover of more than Rs 10 crore in that year must deduct TDS from their resident seller on purchases of commodities exceeding Rs 50 lakh in the current fiscal year 2021-22.


Section 194Q Declaration Format


The format for a Section 194Q declaration serves as a crucial document informing a seller whether you, the buyer, are liable to deduct Tax Deducted at Source (TDS) on purchases exceeding ₹50 lakh in a financial year. While a specific template isn't prescribed, adhering to key elements ensures clarity and prevents complications.

Essential elements:

  • Header: Clearly state the purpose as a declaration under Section 194Q of the Income Tax Act, 1961.

  • Your Details: Mention your name, PAN number, and designation (if applicable). If representing an organization, provide the company name and PAN.

  • Turnover Declaration: Specify your turnover for the preceding financial year. If exceeding ₹10 crore, confirm your liability to deduct TDS under Section 194Q.

  • Indemnity Clause (Optional): You may offer to indemnify the seller for any consequences arising from incorrect information provided in the declaration.

  • Date and Signature: Include the date and your authorized signature for authenticity.


Calculation of TDS


TDS (Tax Deducted at Source) is applied when yearly purchases from a single supplier surpass Rs 50 lakh. When the entire purchase value exceeds Rs 50 lakh, the deduction is computed. In specifically, TDS is subtracted from the total amount of purchases made from a certain vendor throughout the fiscal year by Rs 50 lakh. As a seller-specific benchmark, this Rs 50 lakh threshold restriction makes sure that TDS is applied to any excess money beyond this set level for each particular seller. This procedure emphasizes a methodical approach to managing TDS responsibilities in the context of substantial transactions with a certain vendor within a financial year, with the goal of simplifying the deduction process and facilitating compliance with tax requirements.


Example

Let us say that a buyer purchases items from a single vendor three times for a total of Rs 15 lakh. In this case, the TDS requirement becomes due when the total purchase amount exceeds Rs 30 lakh (after each transaction being subtracted by Rs 15 lakh). Only the excess amount, or Rs 15 lakh, computed at the required rate of 0.1%, is subject to TDS. By ensuring that TDS is prudently applied to the excess over the designated level, this method promotes accurate and compliant financial transactions between the seller and the buyer.


When to deduct TDS


The time of crediting the cash to the seller or making a payment, whichever happens first, will determine when TDS (Tax Deducted at Source) is deducted. When making a purchase, TDS must be taken out if there isn't an advance payment. This suggests that the deduction happens at the time of purchasing the items if there has been no prepayment. On the other hand, as soon as an advance payment is made, a TDS deduction is required. In practice, this implies that in order to maintain compliance with tax laws, TDS must be withheld right away from financial transactions, including an advance payment. This methodology functions as a means of enforcing punctual and precise TDS deduction according to the particularities of the transaction and enabling compliance with regulatory mandates in the domain of financial transactions.


TDS Return: Form 26Q


Within the deadlines specified for each quarter of the fiscal year, the TDS return—more precisely, Form 26Q—must be submitted. The following are the deadlines for filing: May 31 for the quarter ending March 31, July 31 for the quarter ending June 30, October 31 for the quarter ending September 30, and January 31 for the quarter ending December 31. These deadlines represent the important dates by which taxpayers must send in their TDS returns to the appropriate authorities. Following these deadlines is crucial to guaranteeing correct and timely reporting of taxes withheld at the source, which supports efficient tax administration and regulatory compliance. By keeping financial activities transparent and simplifying the reporting procedure, this methodical approach eventually promotes an efficient and responsible tax ecology.


Exceptions


When TDS is mandated for the purchase transaction under another ITA provision, Section 194Q of the Income Tax Act (ITA) does not apply. For example, the TDS is controlled by Section 194O, which deals with e-commerce transactions, if a purchase transaction is covered by both Section 194O and Section 194Q. Section 206C(1H), which requires a seller to collect tax at source (TCS) when the consideration for the sale of goods exceeds Rs 50 lakh in a financial year, is an exception to this rule. Where a purchase transaction is the source of both Section 194Q and Section 206C(1H) TDS liabilities, Section 194Q takes priority. Through the specification of the hierarchy of relevant regulations in situations involving dual tax effects on the acquisition of goods, this sophisticated approach guarantees clarity in tax duties.


TDS Deposit Due Date


The organization deducting the TDS, known as the deductor, is responsible for paying the appropriate TDS to the government on or before the due date. With a few exceptions, the due date for TDS payments is always the 7th of the following month.

For example, if an organization wishes to pay TDS for the month of July, the TDS payment due date will be August 7th. One significant exception is the month of March, for which TDS payments may be submitted until April 30th.

For government assessments that pay TDS without a challan, the TDS payment must be made on the same day as the original transaction.


Non-furnishing of PAN


In instances where a purchaser seeks the Permanent Account Number (PAN) of a vendor but fails to get it, the Tax Deducted at Source (TDS) will be retained at a rate of 5% instead of the standard 0.1%.

It is essential to consider that in the absence of PAN information, the applicable tax rate in all alternative scenarios amounts to 20%. The applicable tax rate for Tax Deducted at Source (TDS) is 5% for the transaction outlined in Section 194Q.


Amendments Under Section 194Q of the Income Tax Act


Any funds that are allocated to a "suspense account" or any other account that is included in the financial records of an individual who becomes obligated to make a payment are liable to be subjected to a Tax Deducted at Source (TDS) deduction as per Section 194(Q) of the Income Tax Act.

Deductions for all transactions are permitted under Section 206C(1H) and Section 194Q. In instances of this kind, the presumption is susceptible to the imposition of culpability under Section 194Q.

The requirements outlined in Section 194(Q) do not apply to purchases made from non-resident vendors.

The buyer is obligated to disallow expenditures up to a maximum of 30% of the transaction value in cases where they fail to adhere to the regulations governing tax deductions as outlined in the amended Section 194(Q). 


For Example:

Scenario: Suppose ABC Inc. acquires apparatus from XYZ Corp at a cost of ₹1,00,000. As stated under the revised Section 194(Q), ABC, Inc. can claim specific expenditures linked with this transaction from the tax regulations. Yet, they did not adhere to the regulations strictly. Hence, they must prohibit the expenses of not more than thirty percent of transactions’ worth.


In this case:

Transaction Value: ₹100,000

Maximum Allowable Disallowed Expenditure: 30% of ₹100,000 = ₹30,000


In addition, ABC Inc. has spent on shipping charges of product transportation, installations, and even maintaining expenses that they usually would use to get tax reduction. The amount of allowed deduction towards expenses is capped at ₹30,000 despite the fact that the actual total expenditure might be in excess of this figure because of deficiencies in adhering to the rules.


Therefore, on the whole, the purchaser (ABC Inc) should not limit its tax-deductible claims to more than 30% of the transactional value under section 194(Q) as amended.


Conclusion

Under the Income Tax Act of 1961, Section 194Q TDS is an essential provision that works towards widening the tax base by bringing in more transactions under the TDS net. Being a responsible citizen and especially for someone who is involved in selling or purchasing goods, knowledge about 194Q is imperative. However, it is also necessary to ensure compliance with the provisions of Section 194Q to avoid any legal actions. Understanding the applicability and exemptions of Section 194Q can help businesses and individuals navigate their tax obligations effectively.


FAQs

Q1. Is section 194Q applicable to imports as well?

No, section 194Q does not apply to imports. It is liable only when a buyer is required to pay an amount to a resident seller.

Q2. How is the 194Q TDS calculation done?

If the total value of the amount credited to the seller exceeds INR 50 lakhs in the particular financial year, then TDS is calculated at the rate of 0.1%.


Q3. What is the due date for submitting the TDS under Section 194Q?

The TDS calculated under section 194Q must be submitted on or before the 7th day of the month. In the case of March, the TDS depositing can be done up to April 30.

Q4. Is GST applicable on TDS?

No, GST (Goods and Services Tax) is not applicable on TDS (Tax Deducted at Source) because TDS is a form of income tax deducted by a person or entity while making payments to another party. In contrast, GST is a value-added tax levied on the supply of goods and services.


Q5. Who is eligible under Section 194Q for TDS deduction?

If a purchaser's gross receipts, total sales, or turnover in the previous financial year were over INR 10 crores, they are obligated to deduct TDS (Tax Deducted at Source) under section 194Q.


Q6. What are the consequences of not deducting or depositing the TDS?

Employers and individuals who fail to deduct TDS may incur interest and fines from the income tax authorities. Non-deductible payments, other than salary, are not deducted if they are made without withholding tax or are withheld but not remitted to the Central Government. Withholding tax amounts are subject to a 30% non-deductibility penalty. Individuals who are required to deduct TDS but do not deposit will be charged interest at a rate of one percent each month or part of a month. If an assessee fails to deduct or deposit TDS, they may suffer a penalty equivalent to the amount of TDS not deducted or deposited. If the assessee fails to pay the tax demand, they may face up to 7 years in jail.


Q7. Which cases do not require the application of Section 194Q?

The applicability of Section 194Q does not extend to government entities and transactions conducted through recognized stock exchanges. Moreover, it should be noted that transactions pertaining to electricity and renewable energy are excluded from the deduction of Tax Deducted at Source (TDS).


Section 194Q does not have applicability in instances where the deduction of Tax Deducted at Source (TDS) is required for a purchase transaction under any other section of the Income Tax Act (ITA). In some instances, it is possible for a purchasing transaction to fall under the purview of both Section 194O and Section 194Q. In such cases, the applicable Tax Deducted at Source (TDS) would be determined in accordance with Section 194Q, which specifically pertains to TDS on eCommerce transactions.


Q8. What Happens if You Fail to Comply with Section 194Q of the Income Tax Act?

Non-compliance with the conditions and requirements stipulated in Section 194Q of the Income Tax Act may result in the imposition of substantial fines and repercussions. The following are the consequences of failing to comply with Section 194Q:


A penalty is incurred under Section 40A (IA) if the buyer fails to deduct TDS. According to the stipulations outlined in this particular section, in the event that the purchaser neglects to deduct Tax Deducted at Source (TDS), a portion equivalent to 30% of the overall purchases for which TDS has not been deducted would be deemed ineligible for expenditure deduction.


As a result, this portion of 30% will be considered your earnings and will be subject to taxation. A portion equivalent to 30% of the total purchases will be aggregated with your net income and subjected to taxation in conjunction with your total income.


Q9. How to Calculate the Threshold Limit for Section 194Q?       

The minimum threshold for the deduction of Tax Deducted at Source (TDS) under section 194Q is INR 50 lakhs. Nevertheless, the determination of this quantity incorporates certain components. Let us have a comprehensive understanding -


  • During the computation of the threshold limit, the purchase price is considered exclusive of the Goods and Services Tax (GST).

  • In the event that the purchaser provides an upfront payment, it is advisable to deduct Tax Deducted at Source (TDS) from the whole sum, including the Goods and Services Tax (GST) component, due to the inherent challenge of discerning the specific GST portion.

  • In the event that the seller provides a refund during the transaction, it is possible to subsequently offset the Tax Deducted at Source (TDS) against a separate purchase transaction.

  • In the event that the seller replaces the products that have been returned by the customer, it is not possible to thereafter make any adjustments to the Tax Deducted at Source (TDS).


Q10. Why was Section 194Q Required by Law?

The motivation for the government to implement this part is quite clear: to bring about a shift in which a few substantial sums of transactions are tracked without any trail where GST payments are misused. The government plans to audit all such purchase transactions so that fraudulent or frivolous purchases may be traced or brought under the trail of TDS regulations and examined in the future, if necessary.

However, it is noted that if this is adopted, both sections may be applicable to a single transaction, resulting in the complexity of compliance for assessments covered by such transactions. As a result, it is suggested that either section 206C(1H) or section 194Q be implemented.




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