An Overview of Section 194Q of the Income-tax Act

What is Section 194Q of Income Tax Act?

Section 194Q of the Income Tax Act, 1961, was introduced on July 1, 2021, by the Central Board of Direct Taxes. This section deals with the tax deducted at Source on the purchase of goods. It is predominantly a buyer-specific section that specifies the TDS provisions for buyers who purchase goods from Indian sellers.

Under section 194Q, buyers having purchases exceeding 50 lakhs in a previous year will have to deduct tax at source at the rate of 0.1%. However, the same is not applicable to purchases made from a seller outside India.

Let’s take an example -
Mr. A., located in Delhi, bought goods worth 60 lakhs from Mr. B in Rajasthan in the previous year. Since the purchases exceed the threshold of INR 50 lakhs, the TDS will be calculated on (60 lakhs - 50 lakhs), i.e., 10 lakhs @ 0.1%.

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Who does Section 194Q of the Income Tax Act apply to?

Section 194Q is applicable to buyers making purchases in India in the following cases -

• Any buyer with a total turnover, gross receipts, or sales exceeding 10 crores in the previous financial year.
• The buyer purchases goods from an Indian seller and make payment to a resident Indian seller.
• The payment made should be for the purchase of goods exceeding the aggregate value of 50 lakhs.
• The introduction of section 194Q helps the government to trace the huge amount of transactions without compliance with various tax provisions and to identify the cases of under-disclosure of income.

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What is the role of GST in Section 194Q?

GST (Goods and Services Tax) has a specific role in Section 194Q of the Income Tax Act. GST is excluded from calculating the total turnover of a financial year. However, when calculating the TDS (Tax Deducted at Source) to be paid under Section 194Q, GST is included at a rate of 0.1%.

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When to deduct TDS?

You must deduct the TDS when you either credit the seller's account or pay him in cash, whichever comes first. I.e., if you have not given any money in advance, you must withhold the TDS when buying the goods. But if you have already given some money in advance, you must withhold the TDS immediately.

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Non-furnishing of PAN

If a seller does not furnish a Permanent Account Number (PAN) to the buyer, deductible tax at source (TDS) would be at 5% instead of 0.1%.

**Without PAN, the applicable tax rate in other cases is 20%. For Section 194Q, the TDS rate is 5%.**

TDS Return: Form 26Q

The due dates for filing a TDS return are July 31, October 31, January 31, and May 31, respectively, for a quarter ending 30th June, 30th September, 31st December, and 31st March.

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What Happens If You Fail to Comply With Section 194Q of the Income Tax Act?

If you fail to comply with the provisions and requirements of section 194Q of the Income Tax Act, it might attract severe penalties and consequences. Given below are the penalties for non-compliance on section 194Q -

• If the buyer does not deduct TDS, it attracts a penalty under section 40A (IA). As per this section, if the buyer fails to deduct TDS, 30% of the total purchases on which TDS has not been deducted will be disallowed as an expense.
• Consequently, this 30% will be treated as your income and will be liable to tax. 30% of the total purchases will be clubbed into your net income and taxed along with your total income.

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Exemptions Available Under Section 194Q of the Income Tax Act

Even though the buyers must deduct tax at source, here are a few cases in which the buyer is exempt from deducting any TDS.

• If the buyer does not primarily reside in India and the goods purchased are not directly connected with India, the buyer does not have to deduct TDS.
• The buyer does not need to deduct TDS in the year of incorporation. For example, if your company has been incorporated in the current financial year, you are not required to deduct TDS.
• If the buyer purchases products from a seller whose income is exempt from tax, then the buyer does not have to deduct TDS.
• If the tax is deducted under section 206C, excep31str transactions on which 206C(1H) is applicable, Such transactions shall not be taxable under section 194Q.
• Any purchases made by the central or state government institutions are not required to deduct TDS.
• If any transaction attracts both section 194Q and section 194O, tax shall be deducted under section 194O by the e-commerce platform provider. However, if the e-commerce platform fails to deduct the TDS, the buyer is responsible for the same.
• If a stock exchange purchases goods or commodities, it is exempted from deducting TDS. Transactions involving renewable energy and electricity are also exempted from deducting TDS.

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How to Calculate the Threshold Limit for Section 194Q?

The basic threshold for deduction of TDS under section 194Q is INR 50 lakhs. However, the calculation of this amount includes certain elements. Let us understand -

• While calculating the threshold limit, the purchase amount will be taken without including the GST.
• If the buyer makes an advance payment, then TDS should be deducted from the whole amount, including GST, as it is difficult to distinguish the GST component.
• If the seller returns the money at the time of the transaction, then TDS can be adjusted later against another purchase transaction.
• If the seller replaces the goods returned by the buyer, no TDS adjustment can be made later.

Now that you know all about section 194Q, it's time to go ahead and file your ITR. Tax2win provides both online ITR filing assistance and a CA-assisted ITR filing service. Get a CA now!

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