Complete Overview Of Section 194Q of the Income Tax Act

Introduction

The Income Tax Act, 1961, forms the backbone of India’s taxation system, regularly updated to accommodate the evolving economy and address emerging issues. One such addition was Section 194Q, introduced to enhance transparency in business transactions involving the purchase of goods. Effective from July 1, 2021, this section mandates buyers to deduct Tax Deducted at Source (TDS) on the purchase of goods when the transaction value crosses a specified limit.

This provision aims to curb tax evasion and increase tax compliance, primarily targeting large-scale buyers who play a crucial role in the economy’s supply chain. In this article, we will explore Section 194Q in detail, covering its applicability, TDS rates, compliance requirements, and the implications for both buyers and sellers.

What is Section 194Q of the Income Tax Act?

Section 194Q mandates that any buyer of goods must deduct TDS at the prescribed rate if the total value of such purchases exceeds a certain threshold in a financial year. This provision aims to ensure transparency and proper taxation of large-scale transactions, reducing tax evasion in the goods purchasing cycle.

The key objective of Section 194Q is to ensure the government receives its due share of tax on high-value transactions. Since the buyer is generally in a stronger financial position and handles substantial cash flow, this section places the responsibility of TDS deduction on them.

Key Provisions Under Section 194Q:

• TDS Deduction: Buyers must deduct TDS when making payments for goods purchases exceeding Rs. 50 lakh in a financial year.
• Threshold Limit: The buyer’s turnover should be more than Rs. 10 crore in the preceding financial year.
• Tax Rate: TDS is to be deducted at 0.1% of the transaction value.

Applicability of Section 194Q

Section 194Q applies to any resident buyer of goods, subject to the following criteria:

1. Buyer’s Turnover: The buyer’s total turnover or gross receipts must exceed Rs. 10 crore during the preceding financial year.
2. Threshold for TDS Deduction: If the total value of purchases from a single seller exceeds Rs. 50 lakh in a financial year, TDS must be deducted.

Examples to Understand Applicability:

• Example 1: A company with a turnover of Rs. 12 crore in FY 2023-24 purchases goods worth Rs. 60 lakh from a single seller in FY 2024-25. In this case, Section 194Q will apply, and the company must deduct TDS on the transaction value exceeding Rs. 50 lakh.
• Example 2: A small retailer with Rs. 8 crore turnover in FY 2023-24 and purchases goods worth Rs. 40 lakh from a supplier will not fall under Section 194Q, as the turnover does not exceed the required Rs. 10 crore.

Who is Required to Deduct TDS Under Section 194Q?

The buyer is responsible for deducting TDS under Section 194Q if they meet the conditions specified by the Act.

Conditions for TDS Deduction:

1. Buyer Criteria: The buyer must be a resident of India.
2. Turnover Requirement: The buyer’s turnover from the preceding year must exceed Rs. 10 crore.
3. Transaction Threshold: TDS must be deducted on the purchase of goods if the value of purchases from a single seller exceeds Rs. 50 lakh in a financial year.

Example:

• A company, ABC Ltd., with a turnover of Rs. 15 crore, buys Rs. 60 lakh worth of goods from XYZ Pvt. Ltd. in FY 2024-25. Since the company’s turnover is above Rs. 10 crore, and the transaction value exceeds Rs. 50 lakh, ABC Ltd. must deduct TDS at 0.1%.

Threshold Limits for Section 194Q

Buyer’s Turnover:

Section 194Q applies only if the buyer’s turnover exceeds Rs. 10 crore in the preceding financial year. This helps ensure that smaller businesses with lower turnovers are not burdened by the compliance requirements.

Transaction Value:

TDS is applicable if the value of purchases from a single seller exceeds Rs. 50 lakh in a financial year. This threshold ensures that TDS is only deducted on significant transactions and not on small purchases.

TDS Rates Applicable Under Section 194Q

The TDS rate for Section 194Q is:

• 0.1% on the value of goods purchased exceeding Rs. 50 lakh.
• 5% if the seller does not provide a valid PAN.

Example:

• If a buyer purchases goods worth Rs. 60 lakh from a seller and the seller provides a valid PAN, the TDS deduction will be Rs. 60,000 (0.1% of Rs. 60 lakh).
• If the seller fails to provide a valid PAN, the TDS deduction will be Rs. 3,00,000 (5% of Rs. 60 lakh).

Exemptions and Exceptions Under Section 194Q

Section 194Q does not apply in the following cases:

1. Already Taxed Transactions: If the transaction is already subject to tax deduction under other sections like Section 194J or Section 194C, Section 194Q will not apply.
2. Purchases from Non-Residents: Transactions involving non-resident sellers are not covered under this section.
3. Imported Goods: TDS is not applicable on the purchase of imported goods as they are subject to customs duties, not regular GST taxation.

How to Comply with Section 194Q Provisions

Here’s a step-by-step guide for compliance with Section 194Q:

1. Track Purchases: Ensure all purchases from sellers are tracked, particularly when transactions exceed Rs. 50 lakh in a financial year.
2. Verify PAN Details: Make sure the seller provides a valid PAN to avoid a higher TDS deduction of 5%.
3. Deduct TDS: Deduct 0.1% of the total purchase value exceeding Rs. 50 lakh.
4. Deposit TDS: Remit the deducted TDS amount to the government within the prescribed time.
5. File Quarterly TDS Returns: Report the deducted TDS in Form 26Q on a quarterly basis.

Penalties for Non-Compliance with Section 194Q

Failure to comply with Section 194Q can result in significant penalties, including:

1. Disallowed Expense: Under Section 40(a)(ia), if TDS is not deducted or deposited, 30% of the purchase expense may be disallowed.
2. Interest Penalty: Interest at 1% per month will be levied for non-deduction and 1.5% per month for non-payment of TDS.
3. Penalty for Non-Deduction: A penalty equal to the TDS amount not deducted or paid may be imposed.

Impact of Section 194Q on Buyers and Sellers

For Buyers:

• Increased Compliance: Buyers will have to monitor transactions and ensure timely TDS deduction.
• Risk of Penalties: Failure to comply may result in financial penalties and legal trouble.

For Sellers:

• Reduced Cash Flow: TDS deducted at the time of payment will reduce the immediate cash flow for sellers.
• Reconciliation: Sellers will need to reconcile TDS deductions in their income tax filings.

Common Mistakes to Avoid in Section 194Q Compliance

The following are typical mistakes to avoid when complying with Section 194Q:

1. Ignoring Transaction Thresholds: Ensure that TDS is deducted only when the Rs. 50 lakh threshold is crossed.
2. Failing to Obtain PAN: Buyers must ensure the seller provides a valid PAN to avoid higher TDS rates.
3. Incorrect TDS Filing: Ensure accurate reporting of TDS deductions in quarterly returns.
4. Non-Deposit of TDS: Ensure timely deposit of the deducted TDS with the government to avoid penalties.

Conclusion

Section 194Q is a vital provision aimed at improving tax compliance in high-value transactions between buyers and sellers. By requiring buyers to deduct TDS on certain purchases, the government hopes to curb tax evasion and enhance revenue generation.

To ensure smooth compliance, businesses must track their purchases, verify PAN details, and follow the prescribed TDS procedures. Non-compliance can result in severe penalties, so staying informed is essential for businesses, both large and small.

For businesses looking to navigate the complexities of Section 194Q and other tax regulations, Registerkaro provides expert guidance. Contact us today to streamline your tax compliance and avoid any penalties.
Email: support@registerkaro.in
Call: +918447746183

Frequently Asked Questions (FAQs)

1. Does Section 194Q apply to services?
   
   • No, Section 194Q applies only to the purchase of goods, not services.
     
2. What happens if both Section 194Q and Section 206C(1H) are applicable?
   
   • In case of overlapping provisions, Section 194Q takes precedence, and TDS should be deducted accordingly by the buyer.
     
3. Is TDS under Section 194Q applicable to GST amounts?
   
   • No, TDS is deducted only on the value of goods, excluding GST.
     
4. Are advance payments subject to TDS under Section 194Q?
   
   • Yes, TDS is applicable on advance payments if the total value of goods exceeds Rs. 50 lakh.
     
5. Can non-resident buyers be liable under Section 194Q?
   
   • No, Section 194Q applies only to resident buyers.
     
6. Is there any exemption for buyers under Section 194Q?
   
   • Exemptions exist for purchases made from non-residents or imported goods.
     
7. How is the TDS deducted under Section 194Q?
   
   • TDS is deducted at 0.1% of the purchase value exceeding Rs. 50 lakh.
     
8. Can a seller challenge the TDS deduction under Section 194Q?
   
   • Sellers may reconcile TDS deductions in their income tax filings, but they cannot directly challenge the deduction.
     
9. What happens if a buyer does not deduct TDS?
   
   • Failure to deduct TDS can result in penalties and disallowance of the purchase expenses under Section 40(a)(ia).
     
10. What is the deadline for depositing TDS deducted under Section 194Q?
    
    • TDS must be deposited by the 7th of the following month in which the TDS was deducted.