Understanding TDS: How Section 194Q Affects Your Goods Purchases

Hello Folks!!!

Today, we are going to discuss about  TDS: How Section 194Q Affects Your Goods Purchases

Under the Finance Act of 2020, a new sub-section (1H) was added to section 206C of the Income Tax Act. According to section 206C(1H), sellers of goods receiving consideration exceeding INR 50 Lakhs are obligated to collect TCS at a rate of 0.1%. These provisions came into effect on October 1st, 2020.

Following similar lines, under the Finance Act of 2021, provisions of section 194Q concerning the deduction of tax at source on payments for the purchase of goods were introduced. According to section 194Q, buyers making payments for goods exceeding INR 50 Lakhs in value are required to deduct TDS at a rate of 0.1%. Section 194Q came into effect on July 1st, 2021.

In this article, we will provide a concise overview of the TDS provisions covered under section 194Q of the Income Tax Act.

The applicability of Section 194Q provisions of the Income Tax Act

The buyer of the goods who meets the conditions outlined below is responsible for deducting TDS under section 194Q.

1. The buyer must remit a payment to any resident seller for the acquisition of goods.
2. The value or aggregate value exceeds INR 50 Lakhs within the Financial Year.
3. The purchaser’s total sales, gross receipts, or turnover surpass INR 10 crores in the immediately preceding Financial Year.

---

Time of deduction of TDS under section 194Q of Income Tax Act

TDS under section 194Q must be deducted within the earlier of the following options.

• When the sum is credited to the seller.
• At the time of payment, whether by cash, cheque, or any other mode.

---

The rate at which TDS is to be deducted under section 194Q of the Income Tax Act

TDS under section 194Q is deducted at a rate of 0.1% on the value exceeding INR 50 Lakhs in the respective Financial Year.

Importantly, if the seller’s PAN is unavailable, TDS is deducted at the higher rate of 5%.

---

Exemption from TDS deduction under section 194Q

TDS under section 194Q of the Income Tax Act is exempt in the following scenarios.

1. The value or aggregate value falls below INR 50 Lakhs in the Financial Year;
2. The purchaser’s total sales, gross receipts, or turnover is below INR 10 crores in the immediately preceding Financial Year;
3. Tax is deductible under alternative provisions of the Income Tax Act.
4. Tax is payable under any of the provisions of section 206C of the Income Tax Act [except for section 206C(1H)].

---

Applicability of TDS provisions u/s. 194Q vis-à-vis TCS provisions u/s 206C (1H)

As mentioned in the introduction, initially, TCS provisions were applied, followed by the application of TDS provisions on transactions involving the purchase or sale of goods. Consequently, both TDS and TCS provisions can be simultaneously applicable to the same transaction.

Circular No. 13 of 2021 dated 30th June 2021 clarifies the scenario when both provisions, i.e., section 194Q and section 206C(1H), are applicable simultaneously. This clarification is detailed below.

1. When both section 194Q and section 206C(1H) are applicable, tax must be deducted under section 194Q. Consequently, the transaction falls outside the scope of section 206C(1H).
2. Once TDS is deducted under section 194Q by the buyer, the seller is relieved from collecting TCS under section 206C(1H) for the same transaction.
3. If the seller collects TCS under section 206C(1H) before the buyer can deduct TDS, the buyer is not obligated to deduct TDS under section 194Q for that transaction.

In summary, the provisions of section 194Q take precedence. However, both section 194Q and section 206C(1H) cannot be applied simultaneously to the same transaction.

---

Applicability of TDS provisions u/s. 194Q vis-à-vis TDS provisions u/s 194-O

Section 194-O pertains to TDS deduction on payments made by an e-commerce operator to e-commerce participants. The application of sections 194Q and 194-O is clarified in Circular No. 13 of 2021 dated 30th June 2021, as follows:

1. If a transaction falls under both sections 194Q and 194-O, TDS should be deducted under section 194-O, not section 194Q.
2. If the e-commerce operator has already deducted TDS under section 194-O for all transactions (including those covered by section 194Q), then TDS under section 194Q is not applicable to those transactions.

---

Key clarifications regarding the provisions of section 194Q

Certain uncertainties arising after the implementation of section 194Q provisions were addressed by the Central Board of Direct Taxes (CBDT) through Circular No. 13 of 2021 dated 30th June 2021 and Circular No. 20 of 2021 dated 25th November 2021. Key clarifications from these circulars are outlined below.

Section 194Q does not extend to the following transactions involving securities and commodities:

• Transactions conducted via recognized stock exchanges;
•  Transactions cleared and settled by recognized clearing operations, including those in International Financial Service Centers;
•  Transactions involving electricity, renewable energy certificates, and energy-saving certificates traded through registered power exchanges.

The application of section 194Q concerning the GST component is elucidated below.

Particulars	Applicability/ Non-applicability of TDS u/s 194Q
TDS is deducted when the amount is credited to the seller’s account; and  The agreement/contract between the buyer and seller indicates the GST component separately.	TDS provisions under section 194Q do not apply to the GST component.
When TDS has been deducted on a payment basis (as payment is earlier than credit).	TDS provisions under section 194Q will be applicable to the GST component (meaning TDS is deductible on the entire amount).

 

The application of section 194Q provisions concerning purchase returns is explained below:

•  TDS already deducted under section 194Q can be offset against the same seller in the subsequent purchase, provided the following conditions are met:
•  The deduction of tax pursuant to section 194Q has already been completed.
•  The purchase return occurred after the tax deduction.
•  The seller refunds the money.

It’s important to note that this adjustment is not applicable when the seller replaces the goods instead of accepting the purchase return. Without such adjustment, the TDS deduction under section 194Q for the replaced goods will be considered complete.

•  Section 194Q of the Income Tax Act does not apply to non-residents when the purchase of goods from an Indian resident seller is not effectively connected with the non-resident purchaser’s permanent establishment.
• Section 194Q does not apply when purchasing goods from a seller exempt from income tax under the Act. However, it applies if only part of the seller’s income is exempt.
• Section 194Q applies when advance payment is made to the seller by the buyer.
• Section 194Q does not apply to the buyer in the year of its incorporation when the total sales/gross receipts/turnover of the buyer are NIL in the immediately preceding Financial Year.
• The purchaser must deduct TDS under section 194Q in cases where exemptions are provided under section 206C(1A) of the Income Tax Act.
•  TDS provisions under section 194Q are applicable to Public Sector Undertakings or corporations established under the Central or State Act, or any other body/authority/entity. You, can Outsource TDS Return Filing Services.

---

Frequently Asked Questions (FAQs) on the applicability of TDS on the purchase of goods under section 194Q:

Here are some pertinent FAQs regarding the provisions of section 194Q of the Income Tax Act:

Q.1  How is TDS 194Q calculated?

• TDS is calculated at a rate of 0.1% on the value exceeding INR 50 Lakhs in the relevant Financial Year.

Q.2 What is Section 194Q in TDS?

• Section 194Q of the Income Tax Act mandates the deduction of TDS at a rate of 0.1% by the purchaser of goods when paying any sum to a resident seller, provided the value or aggregate value exceeds INR 50 Lakhs.

Q.3 Who is eligible for 194Q?

• The purchaser with gross receipts, total sales, or turnover exceeding INR 10 crores in the preceding Financial Year is required to deduct TDS under section 194Q.

Q.4 On which amount is 194Q applicable?

• Section 194Q applies to the value or aggregate value exceeding INR 50 Lakhs.

Q.5 Is TDS applicable on GST?

• TDS is applicable on the GST component under the following circumstances: TDS under section 194Q is deducted on a payment basis (i.e., payment is received before credit), or TDS under section 194Q is deducted on a credit basis but the GST component is not separately reflected in the contract.

For any queries, mail us at – Office@ANBCA.com