Section 194Q of Income Tax Act: TDS on Goods Purchases

Introduction

Section 194Q of the Income Tax Act, 1961, introduced in the Union Budget 2021, mandates the deduction of Tax Deducted at Source (TDS) by buyers on certain purchases of goods. This section aims to bring more transactions under the tax net, ensuring transparency and compliance. Applicable from July 1, 2021, it has significant implications for businesses engaged in large-scale purchases. This article explains the provisions, applicability, and compliance requirements under Section 194Q.

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Key Provisions of Section 194Q

1. Applicability
   • The provision applies to buyers who are responsible for deducting TDS on certain goods purchases.
   • Buyers with a turnover exceeding ₹10 crores in the previous financial year are required to deduct TDS.
2. Threshold Limit
   • TDS under Section 194Q is applicable only if the value of purchases from a seller exceeds ₹50 lakhs in a financial year.
3. Rate of TDS
   • TDS is to be deducted at 0.1% of the purchase value exceeding ₹50 lakhs.
   • If the seller does not provide a PAN, the TDS rate increases to 5%.
4. Timing of TDS Deduction
   • TDS should be deducted at the time of:
     • Credit to the seller’s account, or
     • Payment, whichever is earlier.
5. Non-Applicability
   • Section 194Q does not apply to:
     • Transactions where TDS is already deducted under another section.
     • Import of goods from outside India.
     • Sellers with a turnover below ₹10 crores.

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Objectives of Section 194Q

• Widening the Tax Base: Ensuring high-value transactions are accounted for under the tax framework.
• Promoting Compliance: Encouraging both buyers and sellers to maintain accurate transaction records.
• Reducing Tax Evasion: Identifying unreported income through a trail of large purchases.

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Detailed Example of TDS Under Section 194Q

Scenario:

• Buyer’s Turnover (FY 2022-23): ₹12 crores.
• Seller’s Turnover: ₹8 crores.
• Purchases from the Seller: ₹70 lakhs in FY 2023-24.

Calculation:

1. Threshold Limit: ₹50 lakhs.
2. Purchase Value Exceeding Threshold: ₹70 lakhs – ₹50 lakhs = ₹20 lakhs.
3. TDS to be Deducted: 0.1% of ₹20 lakhs = ₹2,000.

The buyer must deduct ₹2,000 as TDS and deposit it with the government.

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Buyer’s Responsibilities Under Section 194Q

1. Verify Turnover
   • Ensure the turnover exceeds ₹10 crores in the previous financial year.
2. Track Purchases
   • Maintain detailed records of purchases to monitor the ₹50 lakh threshold for each seller.
3. PAN Verification
   • Verify the seller’s PAN to avoid higher TDS rates.
4. TDS Deduction and Deposit
   • Deduct TDS on time and deposit it with the Income Tax Department using Form 26Q.
5. Issue TDS Certificates
   • Provide the seller with a TDS Certificate (Form 16A).

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Implications for Sellers

1. TDS Credit
   • The TDS deducted under Section 194Q is reflected in the seller’s Form 26AS and can be claimed while filing income tax returns.
2. Increased Compliance
   • Sellers must ensure their PAN is updated with buyers to avoid higher TDS rates.
3. Record-Keeping
   • Maintain accurate records to reconcile TDS deductions during tax filing.

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Comparison Between Section 194Q and Section 206C(1H)

Feature	Section 194Q (TDS)	Section 206C(1H) (TCS)
Applicability	Buyer	Seller
Turnover Threshold	₹10 crores (buyer)	₹10 crores (seller)
Transaction Threshold	Purchases exceeding ₹50 lakhs	Receipts exceeding ₹50 lakhs
Rate	0.1%	0.1%
Effective Date	July 1, 2021	October 1, 2020
Responsible Party	Buyer	Seller

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Challenges and Concerns

1. Double Deduction Confusion
   • Buyers and sellers often face confusion about whether TDS or TCS applies.
2. Administrative Burden
   • Increased compliance requirements for maintaining purchase and deduction records.
3. Higher TDS Rate Without PAN
   • Sellers without PAN face significantly higher TDS rates (5%).
4. Threshold Monitoring
   • Both parties must closely track transactions to ensure compliance with thresholds.

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Role of RTI in Section 194Q-Related Queries

The Right to Information (RTI) Act can help address issues or clarifications related to Section 194Q:

1. TDS Deposit Verification
   • File RTI to confirm if deducted TDS has been deposited with the Income Tax Department.
2. Dispute Resolution
   • Seek clarity on disputes related to mismatches in TDS or compliance.
3. Request for Records
   • Inquire about government notices or discrepancies regarding Section 194Q.
4. Policy Clarifications
   • Use RTI to request detailed guidelines on Section 194Q.

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