Section 194Q - TDS on Purchase

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Section 194Q is a provision introduced in the Income Tax Act, 1961, by the Finance Act, 2021. It deals with Tax Deducted at Source (TDS) on purchase of goods by certain persons.

This provision is aimed at widening the tax base and improving tax compliance by ensuring that TDS is deducted on certain transactions related to purchases of goods.

Here’s an overview of Section 194Q:

Applicability:

Section 194Q is applicable to a buyer who is responsible for paying any sum to any resident seller for the purchase of goods, if the total sales, gross receipts, or turnover from the business carried on by the buyer exceeds Rs. 10 crores during the financial year immediately preceding the financial year in which the purchase of goods is carried out.

Key Points:

The buyer is required to deduct TDS at the rate of 0.1% of the purchase consideration exceeding Rs. 50 lakhs.
The TDS is to be deducted at the time of credit of such sum to the account of the seller or at the time of payment, whichever is earlier.
TDS is not required to be deducted if the seller is already subject to TDS under any other provision of the Income Tax Act. In such cases, the buyer should obtain a declaration from the seller.
The seller can claim a credit for the TDS amount deducted against their tax liability.
The TDS deducted under Section 194Q needs to be deposited to the government and the TDS Return in Form 26QD must be filed.
Exemptions and exceptions may apply to specific transactions, and taxpayers are advised to refer to the actual text of the section and related notifications for complete details.

Let’s delve deeper into the provisions of Section 194Q of the Income Tax Act, 1961:

Applicability Criteria:

Section 194Q applies to a buyer who satisfies the following criteria:

The buyer must be a resident in India.
The buyer should be responsible for paying any sum to any resident seller for the purchase of goods.
The buyer’s total sales, gross receipts, or turnover from the business carried on by them should exceed Rs. 10 crores during the financial year immediately preceding the financial year in which the purchase of goods is carried out.

TDS Rate and Threshold:

If the above criteria are met, the buyer is required to deduct Tax Deducted at Source (TDS) at the rate of 0.1% of the purchase consideration exceeding Rs. 50 lakhs.

This means TDS should be deducted on the amount that exceeds Rs. 50 lakhs in a single purchase transaction.

Timing of TDS Deduction:

The TDS should be deducted at the earlier of the following dates:

The date on which the sum is credited to the account of the seller, or
The date on which the payment is made to the seller.

This means that if the sum is credited to the seller’s account or the payment is made before the threshold of Rs. 50 lakhs is crossed, then TDS is not applicable.

Declaration by Seller:

If the seller is already subject to TDS under any other provision of the Income Tax Act, they can provide a declaration in writing to the buyer that TDS should not be deducted on the goods sold to the buyer. The buyer must keep this declaration on record.

Impact on the Seller:

The seller can claim a credit for the TDS amount deducted against their tax liability. The TDS amount can be viewed as an advance tax payment by the seller.

TDS Payment and Return:

The TDS amount deducted should be deposited to the government by the buyer, and a TDS Return in Form 26QD should be filed.

Exemptions and Exceptions:

Certain transactions are exempt from the applicability of Section 194Q. These include transactions where TDS is required to be deducted under other sections like Section 192 (TDS on salary), Section 194A (TDS on interest), etc.

Here are a couple of examples to help you understand Section 194Q better:

Example 1:

Company X is a manufacturing company with an annual turnover of Rs. 15 crores. They purchase raw materials from various suppliers. During the financial year, Company X purchases raw materials worth Rs. 75 lakhs from Supplier A, a resident seller.

In this case:

Buyer: Company X
Seller: Supplier A
Purchase Consideration: Rs. 75 lakhs

Since the annual turnover of Company X exceeds Rs. 10 crores, and the purchase consideration from Supplier A exceeds Rs. 50 lakhs, Company X is required to deduct TDS under Section 194Q. The TDS amount will be calculated as 0.1% of Rs. 25 lakhs (Rs. 75 lakhs – Rs. 50 lakhs) i.e., Rs. 25,000.

Company X should deduct Rs. 25,000 as TDS and remit this amount to the government. They also need to file a TDS Return in Form 26QD.

Example 2:

Retailer Y has an annual turnover of Rs. 8 crores. They purchase goods worth Rs. 40 lakhs from Supplier B during the financial year.

In this case:

Buyer: Retailer Y
Seller: Supplier B
Purchase Consideration: Rs. 40 lakhs

Since the annual turnover of Retailer Y is below Rs. 10 crores, Section 194Q is not applicable, even though the purchase consideration exceeds Rs. 50 lakhs. TDS is not required to be deducted in this case.