Section 194Q Of Income Tax Act: Applicability, TDS Rate, Example, Turnover Limit

Updated on: May 2nd, 2024

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10 min read

The Finance Act 2021 introduced Section 194Q of the Income-tax Act, 1961, which is related to Tax Deducted at Source (TDS) on the purchase of goods and not to the provision of services.

Amendments Under Section 194Q Of Income Tax Act 

  • Under Section 194Q of the Income Tax Act, the deduction of Tax Deducted at Source (TDS) to be made at the earlier of the payment or credit of the amount to the seller. Credit includes when any amount is credited to a 'Suspense account' or any other account that forms part of the books of account of a person who becomes obligated to make the payment.
  • When a seller is a non-resident, Section 194Q of the Income Tax Act does not apply to purchases made from them. This section specifically pertains to transactions involving resident sellers.
  • If the buyer fails to comply with the tax deduction provisions outlined in the Section 194Q amendment, they may be subjected to the disallowance of expenditure. Specifically, the disallowance can amount to up to 30% of the transaction value. Buyers must adhere to the prescribed tax deduction requirements to avoid such consequences.
  • Section 194Q applies to purchases of both revenue and capital goods.
  • The TDS deduction on purchases exceeding Rs 50 lakhs will be 0.1%. However, if the seller does not have a PAN, the deduction will be made at a higher rate of 5%.

Eligibility Criteria For Section 194Q 

This section applies to a buyer in the following cases:

  • A buyer whose turnover or gross receipt or sales in the immediately preceding financial year was more than Rs 10 crores and
  • A buyer is responsible for making payment of a sum to the resident seller and
  • Such deduction is to be done for the purchase of goods of the value/aggregate of the value exceeding Rs 50 lakh

Example For Who Deducts TDS 

For a financial year (FY) that ended on March 31, 2024, a buyer whose turnover was more than Rs 10 crore in that year needs to deduct TDS from their resident seller on the purchase of goods above Rs 50 lakh in the current financial year 2024-25.

Rate Of TDS

Tax is to be deducted at source at the rate of 0.1% on the amount exceeding Rs 50 lakh in a financial year from a seller from whom the buyer has purchased goods worth more than Rs 50 lakh.

Calculation Of TDS

  • Purchase above Rs 50 lakh in a financial year from a seller
  • TDS is to be deducted after a deduction of Rs 50 lakh from the total value of purchases
  • The threshold limit is Rs 50 lakh, which means a seller-wise deduction in every financial year

Example For Calculation Of TDS

Let’s say a buyer purchases goods worth Rs 20 lakh three times each from a seller, meaning he bought total goods of Rs 60 lakh. Now, he has to deduct Rs 50 lakh from the total value of goods purchased. The TDS has to be deducted only on Rs 10 lakh at the rate of 0.1%.

Applicability Of Section 194Q

Section 194Q of the ITA is applicable from July 1, 2021. So, TDS has to be deducted only on purchases after July 1 2021. However, the threshold limit of purchase of Rs 50 lakh has to be taken into account from April 1, 2021.

Example: If a buyer purchases goods worth Rs 80 lakh from a seller, then he has to deduct the first Rs 50 lakh from it as an initial deduction under Section 194Q and then deduct the TDS on the remaining Rs 30 lakh at 0.1%. So, the TDS applicable in this case would be Rs 3,000.

Time Of Deduction Of TDS

The TDS is to be deducted at a time when such an amount is credited to the account of the seller or paid to him, whichever is earlier.

In other words, if you have not paid an advance amount, then you have to deduct this TDS at the time of purchase of goods. However, if you have made an advance payment, then you must deduct TDS immediately.

TDS Deposit Due Date

The TDS is to be deposited on or before the seventh day of the month following the month in which the TDS is deducted. For example, if the deduction month is January, the due date of payment is February 7. 

However, in the case of March, the TDS can be deposited up to April 30.

TDS Return: Form 26Q

For quarters ending June 30, September 30, December 31, and March 31, the due date for filing the TDS return is July 31, October 31, January 31, and May 31, respectively. 

Exceptions

Section 194Q would not apply in cases where the TDS is to be deducted on the transaction of a purchase under any other provision of the ITA. For example, there may be a case where a purchase transaction comes under Section 194O as well as Section 194Q, then TDS would apply as per Section 194O, which relates to TDS on e-commerce transactions.

However, there is an exception in the case of Section 206C(1H), which provides for the collection of tax (TCS) by a seller for the amount received as consideration for the sale of goods if it is greater than Rs 50 lakh in any previous year.

If any transaction on purchase of goods attracts TDS under Section 194Q as well as tax collected at source under Section 206C(1H), then only Section 194Q shall apply in such a case.

Non-furnishing Of PAN

In cases where a seller fails to furnish a Permanent Account Number (PAN) to a buyer, the TDS will be deducted at the rate of 5% instead of 0.1%.

It is important to note that without PAN information, the rate of tax applicable in other cases is 20%. In the case of Section 194Q, the TDS rate applicable is 5%.

Impact On GST

  • Calculation of turnover excluding GST is to be considered for the calculation of Rs. 50 lakhs.
  • Calculation of TDS at the rate of 0.1% only on the value of the goods/services excluding GST.

Section 194Q Declaration Format

In the letterhead of the seller

To,

Buyer’s Name & Address

Sub: Declaration/information for deduction of tax at source u/s 194Q of the Act.

Dear Sir,

This is with reference to your letter dated_________requiring our declaration/information in regard to the deduction of tax at source u/s 194Q of the Act. The information is being provided hereunder:

1. Since your company is liable to deduct tax u/s 194Q of the Act, you may deduct the tax @0.1 % of sale consideration paid /credited by your company to us on the amount exceeding Rs.50 lacs during the current financial year. We also confirm that we will not take any action to collect tax at source under section 206C(1H) of the Act w.e.f. 01.07.2021. 

2. The Permanent Account Number of our company is. Further, we have duly filed our returns of income for the last 3 assessment years as per the information given here under:

Conclusion

This section serves as a guideline for buyers who make purchases from Indian sellers exceeding Rs.50 Lakhs in the previous financial year. The applicable rate of TDS on such purchases is 0.1% when the PAN card details are provided.

Frequently Asked Questions

What is the TDS limit for 194Q?

TDS under Section 194Q is deducted at 0.1% only when the value of the goods are exceeding Rs 50 lakhs.

Are 194Q and 206C both applicable?

If any transaction on purchase of goods attracts TDS under Section 194Q as well as tax collected at source under Section 206C(1H), then only Section 194Q shall apply in such a case.

At what rate tax is to be deducted?

The buyer of goods shall deduct the tax at the rate of 0.1% of the purchase value exceeding Rs. 50 lakhs if the seller has furnished his PAN or Aadhaar, otherwise, the tax shall be deducted at the rate of 5%.

What happens when you fail to furnish PAN?

In case the seller fails to furnish the PAN details to the buyer, the buyer is liable to deduct TDS at the rate of 5% under section 194Q.

What is the last date for depositing TDS?

As per section 194Q of the Income Tax Act 1961, TDS should be deposited by the 7th day of the succeeding month in which it was deducted.

Is section 194Q applicable in the case of the import of goods?

No, section 194Q is not applicable to imported goods. It applies only when the buyer purchases goods from a resident seller and is liable to pay money to the seller.

What are the consequences of not deducting or depositing TDS?

If the buyer fails to deposit or deduct TDS, he has to pay interest at 1% p.m. from the due date to the day when TDS is actually deducted. If the buyer deducted the TDS but fails to deposit it on time, he has to pay interest at 1.5% p.m. from the TDS deduction date to the date when it is deposited. The consequences of violation of 194Q are very severe, and if a violation occurs, it will hurt.

  • If the buyer fails to deduct TDS of purchase of goods under section 194Q, then 40A (IA) will get attracted. 40A (IA) says that 30% of the Purchase transactions on which TDS is not deducted will get disallowed as an expenditure.
  • It means that 30% will be treated as income. It will be clubbed in the net income as disclosed in the income tax return, and the buyer will be liable to pay tax on that 30% amount.
  • Even Purchases supported by Bills or GRs can be disallowed to the extent of 30% of the transaction value if TDS is not deducted.

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