Section 194Q – TDS on Purchase Transaction under Income Tax Act, 1961
As we have already known the Finance Bill, 2021 has introduced a new Section 194Q under Chapter XVII- B of the Income Tax Act, 1961 and will applicable from 01st July, 2021
Scope of Section 194Q
Any person, being a buyer who is responsible for paying any sum to any seller for the purchase of any goods of the value or aggregate of such value exceeding Rs.50 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 %. of such sum exceeding Rs. 50 lakh rupees as income tax. section 194Q applies to the purchase of all goods whether on capital goods or on revenue and section 194Q is applicable to the assesses whose aggregate Turnover in the immediate previous year exceeds Rs. 10 Crore.
Rate of TDS under Section 194Q?
- 0.1% on sum exceeding Rs. 50 lakhs in any previous year.
- 5% in case PAN number of Seller is not available (section 206AA).
Time of Deduction of TDS under section 194Q?
- 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.
Note:-Where any sum referred to in this section is credited to any account, whether called “suspense account” or by any other name, in the books of account of the person 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 and the provisions of this section shall apply accordingly.
Law before Section 194Q?
Before discussing section 194Q in detail, one question that comes to our mind “Why government need to insert Section 194Q?”
Before 194Q government has already implemented a TCS provision for Seller {section 206C(1H)} that is if any seller has Receipt of Sales of Goods, more than Rs. 50 Lakhs as sale consideration, during the current financial year. The TCS is payable on the amount of receipt which is greater than 50 Lakhs and received after 1st. Oct. 2020. The rate of TCS is 0.1%. Another Condition for its applicability was “seller” which means a person whose total sales, gross receipts, or turnover from the business carried on by him exceed 10 crore rupees during the financial year immediately preceding the financial year in which the sale of goods is carried out.
Further, section 206C(1H) applies only when the Seller has a total turnover of more than Rs. 10 Crore during the previous year, but what if the Seller has a turnover of less than Rs. 10 Crore during the previous financial year and his receipt from sales of goods to particular buyer exceeding Rs.50 Lakhs.? Therefore, to curb this Situation new Section 194Q has been inserted, which is applicable to Purchaser (Buyer) via TDS applicability.
Who is not covered under Section 194Q?
The provisions of this section shall not apply on following situation:-
- Section 194Q is not applicable to services.
- This section is applicable only if the purchase of goods from a resident person;
- Section 194Q is not applied to the assesses whose aggregate Turnover in the immediate previous year does not exceed Rs. 10 Crore.
- Section 194Q is also not applicable when your T.O. is more than Rs. 10 Crore but your payment to a particulars seller is less than Rs. 50 Lakh during the period.
- if TDS is deducted on the transaction under any other section of the Income-tax Act.
- if TCS under the provisions of section 206C other than a transaction to which sub-section (1H) of section 206C applies.
Example:- If TDS is deducted on the transaction under section 194C then no TDS is required to be deducted under section 194Q but if the seller is required to collect TCS under section 206(c)(1H) the purchaser will still be required to deduct TDS under section 194Q irrespective of TCS collected by Seller.
Losses for non compliance of section 194Q?
If the purchaser fails to deduct TDS as applicable, then section 40a(ia) of The Income-tax act,1961 is going to disallow 30% of the value of the Purchase transaction on which TDS is not deducted. even purchase supported by bills or GR’s can be disallowed to the extent of 30% of the transaction value if TDS is not deducted.
For Example:- If you make a payment of Rs. 60 Lakh during the year then TDS is required to deduct is Rs. 1000 (10 lakh* 0.1%) this small amount of TDS is required to deduct, but if not deducted huge disallowance of Rs.18 Lakh (60 lakh*30%) is under Income Tax Act,1961.
Examples of Section 194Q, How TDS will be calculated?
Illustration1:-
If Buyers Turnover in Previous year is Rs. 11 Crore and sellers Turnover is Rs. 8 Crore and during the year purchases made by Buyers is Rs. 55 lakh.
- TDS Liability:- In the above situation Buyer’s Turnover is more than Rs. 10 Crores and sellers T.O. is less than Rs. 10 Crore, then TDS u/s 194Q is applicable on buyer and TDS is required to deduct is Rs. 500 (0.1% on Rs. 5 lakhs) further, TCS u/s 206C(1H) is not applicable as Seller’s turnover is less than 10 Crores.
Illustration 2:-
If Buyers Turnover in Previous year is Rs. 8 Crore and sellers Turnover is Rs. 11 Crore and during the year purchases made by Buyers is Rs. 55 lakh.
- TCS Liability:- In the above situation Buyer’s Turnover is Less than Rs. 10 Crores and sellers turnover are more than Rs. 10 crore then TDS u/s 194Q is not applicable on buyer and TCS u/s 206C(1H) is applicable on Seller’s as turnover is more than 10 Crores.
Illustration 3:-
If Buyers Turnover in Previous year is Rs. 11 Crore and sellers Turnover is Rs. 11 Crore and during the year purchases made by Buyers is Rs. 55 lakh.
- TDS Liability:- In the above situation Buyer’s Turnover is more than Rs. 10 Crores and sellers turnover are also more than Rs. 10 crores, then in that situation TDS u/s 194Q is applicable on the buyer because
Second Proviso to Section 206C(1H) provides that if the buyer is liable to deduct tax under any other provision on the goods purchased by him from the seller and has deducted such amount, no tax shall be collected on the same transaction. Section 194Q(5) provides that no tax is required to be deducted by a person under this provision if tax is deductible under any other provision or tax is collectable under section 206C [other than a transaction on which tax is collectable under Section 206C(1H)].
in that situations, there is no clarity of which section is applicable we can make the assumptions Section 206C(1H) excludes a transaction on which tax is actually deducted under any other provision (which will cover Section 194Q as well), but Section 194Q(5) does not create a similar exception for a transaction on which tax is collectible under Section 206C(1H). Thus, we can say that the buyer shall have the primary and foremost obligation to deduct the tax and no tax shall be collected on such transaction under Section 206C(1H). However, if the buyer makes a default, the liability to collect the tax gets shifted to the seller.
GST amount be considered for calculating TDS or TCS?
As per Circular No. 17 of 2020 issued by CBDT, no GST adjustments should be made for calculating TDS or TCS, because the collection is made with reference to receipt of the amount of sale consideration, no adjustment on account of indirect taxes including GST is required to be made for the collection of tax under this provision. Therefore 194Q is applicable on purchase value including GST.
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