This article is written by Upasana Sarkar, a student at Jogesh Chandra Chaudhuri Law College. This article aims to provide an understanding of Section 194Q of the Income Tax Act, 1961. It provides a detailed analysis of TDS on the purchase of goods.

This article has been published by Sneha Mahawar.​​ 

Introduction 

Income tax means the tax that the government imposes on the income of a person. The word ‘person’ means both a natural person as well as a juridical person. It means the tax levied by the government on the income generated by individuals and corporations within the jurisdiction. Section 194Q of the Income Tax Act, 1961, was introduced in the Finance Act, 2021. It became operative on 1st July, 2021. This Section is related to Tax Deducted at Source (TDS) on the purchase of goods. It is not applicable to import purchases that take place from a supplier residing outside India.

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Section 194Q Income Tax Act 

Section 194Q of the Income Tax Act, 1962, was introduced by the Central Board of Direct Taxes (CBDT). The Central Board of Direct Taxes issued a set of guidelines that is related to this section on Tax Deducted at Source (TDS) and Tax Collected at Source (TCS). On 25th November, 2021, the Board issued a notification that became effective from 1st July, 2021. The aim of this Section is to delegate TDS on the purchase of goods where the amount exceeds fifty lakh rupees in the current financial year and ten crore rupees in the preceding financial year. This Section is somewhat similar to Section 206(1H) of the Income Tax Act, 1961. Section 206(1H) was introduced to impose a liability on the seller to collect tax from the buyer, whereas Section 194Q was introduced to impose a liability on the buyer to deduct tax while paying the seller. The rate of TDS is 0.1%, which is very low.

Definition of ‘Buyer’ as per Section 194Q

As per sub-section (1) of Section 194Q, ‘buyer’ means a person whose total sales, turnover, or gross receipts exceed ten crore from his business during the financial year immediately preceding the previous year (PPY) in which the purchase of goods has taken place. Those persons are liable to deduct tax at source and credit it to the account of the seller at the time of sale or payment, whichever takes place earlier.

As per sub-section (2) of Section 194Q, the buyer is responsible for crediting the amount referred to in sub-section (1) to any of the seller’s accounts, including the suspense account. It is to be noted that buyers must deduct tax for an amount that is payable to Indian resident sellers only and not to sellers who are from outside the country.

To whom does Section 194Q Income Tax Act apply to

This Section is applicable to a buyer in the following cases:

  • A buyer whose turnover or sales or gross receipt is more than ten crores in the immediately preceding financial year, and
  • The buyer is responsible to the resident seller for making payment of a particular amount, and
  • The payment is to be done for purchasing the goods when their value exceeds fifty lakh rupees.

Applicability of Section 194Q Income Tax Act

Applicability of TDS under Section 194Q Income Tax Act

Under Section 194Q of the Income Tax Act, TDS is applicable only for those payments that are made to contractors and subcontractors for work contract purposes. The person liable for making the payment should acquire a Permanent Account Number (PAN) from the contractor or sub-contractor and present the same to the tax authorities. He should also file a quarterly TDS return and deposit the TDS amount with the government. It should be done within 7 days of the end of the quarter.

Applicability of Section 194Q and Section 206C(1A) Income Tax Act

Section 194Q is applicable to goods that are exempted under Section 206C(1A)

  • Section 206C(1A) of the Income Tax Act exempts tax collection for some specific goods such as coal, scrap, and iron ore, provided the buyer issues a declaration that the goods are to be used for the manufacturing and production of articles or things.
  • Sub-section (1H) of Section 206C of the Income Tax Act makes provision for the collection of tax on the sale of all goods other than those mentioned in sub-section (1A) of Section 206C.
  • Under Section 194Q, tax will be applicable on the purchase of goods that are otherwise exempt under Section 206C(1A).

Section 194Q is applicable to corporations or public sector undertakings and specific government departments 

  • Under Section 194Q of the Income Tax Act, tax are to be deducted by a government department provided – 
    • Such government department is conducting a business or commercial activity, and
    • Its overall sale or turnover or gross receipt from such business or commercial activity exceeds ten crores during the preceding financial year.
  • Under Section 194Q of the Income Tax Act, a state government or central government will not be deemed as a seller for the purposes of deduction of TDS.
  • Under Section 194Q of the Income Tax Act, all public sector undertakings or corporations will be required to deduct TDS.

Effect of non-compliance with Section 194Q Income Tax Act

Non-compliance with or violation of Section 194Q will result in penalties and fines. Where a person who is responsible to make a payment fails to deduct TDS or fails to deposit the TDS with the government within a particular time period, he may be liable to pay interest equal to the amount of TDS that he has not deducted or deposited. In extreme scenarios, he may have to face prosecution.

Outcomes of violations of Section 194Q are very serious. The consequences are as follows-

  • In case a buyer fails to deduct TDS on the purchase of goods under Section 194Q, Section 40a(ia) will get attracted. This Section states that 30% of any purchase transactions on which TDS is not deducted, will get disallowed as an expenditure.
  • The aforesaid section means that 30% will be treated as the income of the buyer. It will be combined with the net income as disclosed in the income tax return and he will be liable to pay tax on that 30% sum.
  • The bills which support the purchases can be disallowed to the extent of 30% of the transaction value, if the TDS is not deducted. 

It is very important for contractors and subcontractors to keep proper records of the payments they receive. The TDS should be deducted to make sure that they can claim the credit for the TDS on their income tax returns. They should keep a proper update of the TDS statement and reconcile the TDS amount with the amount credited to their account to make sure that the TDS has been deposited with the government. The government has implemented various policies to enhance the enforcement of the provisions relating to TDS in recent years. It will also reduce tax evasion. The implementation of electronic TDS statements and the linking of PANs (Permanent Account Numbers) with Aadhaar have made it easier for the government to track TDS compliance and find out which individuals and corporations are evading taxes.

Exemptions on TDS under Section 194Q Income Tax Act

Some of the exemptions are provided where the buyer is not responsible for deducting tax at source for purchasing goods from a seller.

  1. A buyer who is non-resident – A buyer who is not a resident of India is not required to deduct TDS if the goods or products purchased by him are not effectively connected with the permanent establishment of the country.
  2. The year in which the business is incorporated – A business is not required to deduct any TDS in the year in which it is incorporated as stated in this Section.
  3. Goods purchased from a person whose income is exempted – When goods are bought from a person who is exempt from income tax under this Act, the seller is not required to deduct TDS. This exemption is applicable only when the seller’s full income is exempt and not a part of it. 
  4. Deductible under any other provisions of this Act – In cases, where the income is taxable under any other provisions of the Income Tax Act, 1961, the income will not be taxable under Section 194Q.
  5. When the tax is collected under Section 206C – In cases where the tax is collected under Section 206C other than a transaction to which Section 206C(1H) applies, shall be exempted from TDS under Section 194Q.
  6. Tax deducted at source for government agencies – As long as a government department is not engaged in a commercial or business activity, it is not considered a ‘buyer’ under this Section. So no TDS will be deducted if any purchases are made by such agencies, whether State or Central. Any departments of PSU or a corporation formed under a State or Central Act is not required to deduct TDS under this section.
  7. Transactions in which both Section 194Q and Section 194-O apply – When both Section 194Q and Section 194-O are applicable on a particular transaction, the TDS must be deducted under Section 194-O. The buyer will be relieved of his liability as the responsibility of deducting the tax will rest with the e-commerce platform provider. But if the e-commerce platform provider fails to deduct the TDS, then it will be the buyer’s responsibility to do so.
  8. Where transactions are carried out through exchanges –  When a recognised stock exchange or a clearing corporation in the International Financial Service Centre (IFSC) purchases securities or commodities or conducts transactions, it will be exempt from TDS on the purchase of goods. This provision further exempts the deduction of TDS on transactions involving electricity, renewable energy certificates, and energy-saving certificates transferred through power exchanges registered in compliance with Regulation 21 of the CERC.

Threshold limit of TDS transaction

The TDS is applicable on purchases of goods where the total amount of the transaction is more than fifty lakh rupees in the calendar year. The following elements need to be taken into account while computing the fifty lakh rupees limit:

  • While purchasing, the amount will be taken without including the GST part.
  • If the amount is paid in advance, then the tax has to be deducted from the whole sum, including GST. Otherwise, it will be difficult to identify the GST component from the purchase amount.
  • In the event that money is refunded by the seller at the time of the transaction on the purchase of goods, TDS may be adjusted against any other purchase made afterwards from the same seller.
  • If the seller replaces the purchase return with any goods, then no adjustment will be needed in the future. As it has already been done with the goods, they have been replaced.

Dates and deposit rate of TDS

The dates on which the TDS is required to be deposited under Section 194Q of the Income Tax Act, 1961, are as follows –

  • TDS must always be deposited on or before the 7th day of the month succeeding the month in which the TDS it is deducted.
  • TDS must be submitted on or before the 30th April of the next financial year.

TDS shall be deducted by the buyer of goods on the transaction amount at a rate of 0.1% if it exceeds fifty lakh rupees. In cases where the seller fails to provide his PAN to the buyer or deductor, TDS shall be deducted at a higher rate, i.e., at the rate of 5%.

TDS certificate

It is the responsibility of the deductor of tax to issue a TDS Certificate to the deductee in Form 16A for a tax deduction. The deductor can download the form from the TRACES, which he will give to the deductee.

Conclusion

Section 194Q of the Income Tax Act, 1961, is a very important provision that facilitates the tax policy. This Section makes sure that the tax is collected on the sum of money earned by the contractors and sub-contractors. This Section made the deduction of TDS easier for the buyer before the payment is made to the seller. Though this Section is applicable to the residents of India only, individuals, as well as corporations, should be aware of the requirements of this provision to avoid penalties and fines. The buyer is responsible for deducting tax and filing a quarterly return in Form 26Q. The contractors and subcontractors should properly keep the TDS statements to claim credit for them in their income tax returns.

Frequently asked questions (FAQs)

Whether Section 194Q excluded payments made before its introduction?

All buyers who made payments before the introduction of this section are not liable to pay TDS. The Finance Act, 2021, introduced Section 194Q, which came into force on 1st July, 2021.

Whether Section 194Q applies to the purchase of capital goods?

Section 194Q of the Income Tax Act is applicable to the purchase of all goods, whether on a capital or revenue account.

What are the consequences faced by the buyer if TDS is not deducted or deposited?

In case the buyer who is liable to deduct TDS on the purchase of goods fails to do so, he will be liable to pay interest at the rate of 1% per month from the date when tax is required to be deducted till the date when the tax is deducted.

In case the buyer deducts TDS on the transaction amount but has not deposited the same with the government, he will be responsible for paying interest at the rate of 1.5% per month from the date of deduction until the date of deposit of the TDS.

What shall be construed as a purchase of goods in the absence of any definition of ‘goods’?

The word ‘goods’ is not described in the Income Tax Act, 1961. The expression ‘goods’ has a broad meaning. This term ‘goods’ is defined in the Sales of Goods Act, 1930, and the Central Goods and Service Tax Act, 2017.

Whether an adjustment is needed in respect of purchase returns while deducting TDS under this Section?

The adjustment is not needed if the seller replaces the purchase return with goods in the matter of those purchases on which tax was deducted under Section 194Q of the Act that have been completed with goods replaced. 

References 

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