Section 194Q Of Income Tax Act: Applicability, TDS Rate, Example, Turnover Limit

Section 194Q was, hence, newly introduced in the Income Tax Act through the Finance Act of 2021 and is effective starting July 1, 2021, on a prospective basis. The section requires the buyer to be made liable for deduction of tax at source on the purchase of goods above a certain threshold. The new section is thus introduced with a view of widening the tax base and improving the tracking of transactions within the economy. One needs to understand its applicability, rate of TDS, threshold limit, and illustration. This has to be very pertinent for the businesses in order to stay on the right side of compliance and avoid penalties. This article deals with major areas of Section 194Q, serving as a guide for taxpayers on the subject.

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Table of Content

Applicability of Section 194Q of Income Tax Act

Eligibility Criteria for Section 194Q of Income Tax Act

Rate of TDS under Section 194Q of Income Tax Act

Calculation of TDS under Section 194Q

Timing for TDS Deduction

TDS Deposit Due Dates

Filing TDS Returns: Form 26Q

Exceptions to Section 194Q

Important Considerations for Compliance

Non-furnishing of PAN

Impact on GST

Section 194Q Declaration Format

Most Asked Questions

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Applicability of Section 194Q of Income Tax Act

Section 194Q is applicable from 1 July 2021. However, the threshold limit for purchases starts from 1 April 2021. Hence, any purchase from 1 April 2021 to 31 March 2022 above INR 50 lakh will require TDS deduction post 1 July 2021. Now, suppose a buyer has purchased goods of INR 80 lakh from a seller; in that case, on and after 1 July 2021, the buyer shall deduct TDS on INR 30 lakh being the amount in excess of the threshold provided in Section 194Q for TDS (INR 80 lakh – INR 50 lakh) at 0.1%, which will be INR 3,000.

Eligibility Criteria for Section 194Q of Income Tax Act

For the application of Section 194Q, certain criteria would have to be satisfied on the part of the buyer or purchaser: 

• Turnover or gross receipts of the buyer, in the previous financial year, have to surpass INR 10 crore.

  
  

• Any payment to be made by the buyer to a resident seller for goods exceeding more than INR 50 lakh in aggregate during the financial year. For example, let the turnover of a buyer was INR 12 crores for the FY 2023-24. In this case, he needs to deduct TDS for any purchase exceeding INR 50 lakh from a resident seller in the FY 2024-25.

Rate of TDS under Section 194Q of Income Tax Act

The standard rate for TDS under this section is 0.1% of the value of the purchase above INR 50 lakh in a financial year. If the seller does not provide their Permanent Account Number, the rate goes up to 5%.

Calculation of TDS under Section 194Q

Computation of TDS under Section 194Q would require computation of the threshold limit and the amount on which the TDS is to be levied:

• The threshold limit for deduction of TDS is INR 50 lakh.

  
  

• Only the amount above INR 50 lakh is considered for TDS deduction. 

For example, if any buyer buys goods of INR 60 lakh worth from any seller, the TDS on INR 10 lakh is deducted. It contains INR 60 lakh minus INR 50 lakh at the rate of 0.1%, which shall come to INR 1,000 as TDS.

Timing for TDS Deduction

Under Section 194Q, TDS is to be deducted while crediting the amount in the account of the seller or at the time of making payment, whichever is earlier. In advance payment cases, TDS is immediately deducted. For regular transactions, TDS is deducted at the time of making a purchase.

TDS Deposit Due Dates

TDS under Section 194Q has to be deposited by the seventh day of the next month. If the TDS is deducted in January, then it needs to be deposited by February 7. However, in the case of TDS deducted in March, the deposit due date gets extended till April 30.

Filing TDS Returns: Form 26Q

TDS return filing under Section 194Q is to be filed quarterly, and it has to be furnished in Form 26Q. The due date for filing the same is:

• July 31, for the quarter ending June 30

• October 31, for the quarter ending September 30

• January 31, for the quarter ending December 31

• May 31, for the quarter ending March 3

Exceptions to Section 194Q

If TDS is required to be deducted under any other provision of the Income-tax Act, like Section 194O for e-commerce, then Section 194Q shall not apply. Also, if a transaction attracts TCS under Section 206C(1H), only Section 194Q shall apply and not both.

Important Considerations for Compliance

Compliance of provisions under Section 194Q is required to avoid penalty. In case of non-compliance, such expenditure allowable up to 30% of the transaction value may be disallowed. It is the buyer's responsibility to get correct TDS deducted and deposit on time to avoid the consequences.

Non-furnishing of PAN

In case the seller does not furnish PAN, the rate of TDS under Section 194Q would increase from 0.1% to 5%. This higher rate is more in the nature of an incentive for the seller to furnish their PAN details to buyers.

Impact on GST

When calculating the limit of INR 50 lakh and when calculating the amount of TDS, one should exclude GST. TDS is calculated on the value of goods/services after excluding GST. This underlines that the tax amount is correctly worked out and is seen as quite fair.

Section 194Q Declaration Format

The sellers are mandatorily required to furnish a declaration to the buyers to the effect that they would not collect TCS under Section 206C(1H) since the buyer is deducting TDS under Section 194Q. Normally, this declaration will contain the PAN of the seller and confirmation on compliance.

FAQ

Q1. What is the limit under Section 194Q for TDS?

TDS under Section 194Q is deducted at the rate of 0.1% if the value of goods exceeds INR 50 lakh in a financial year.

Q2. Do both Section 194Q and 206C apply?

If a transaction attracts TDS under Section 194Q and TCS under Section 206C(1H), only Section 194Q will apply.

Q3. What is the TDS rate?

The rate of TDS would be 0.1% of the purchase value exceeding Rs 50 lakh, subject to the seller providing PAN; otherwise it is 5%.

Q4. What if you do not furnish PAN?

If the seller does not furnish the PAN, TDS is deducted at 5% under Section 194Q.

Q5. What is the last date for depositing TDS?

TDS should be deposited by the 7th day of the following month. For March deductions, the due date is April 30.

Q6. Is Section 194Q applicable in the case of import of goods?

No, Section 194Q applies only to purchases from resident sellers, not to imported goods.

Q7. What are the consequences of not deducting or depositing TDS?

Non-deduction or non-deposit of TDS incurs interest and disallowance of 30% of the transaction value as expenditure.