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

Section 194Q of the Income-tax Act, 1961, added by the Finance Act, 2021, refers to Tax Deducted at Source (TDS) on goods purchase, not services.

Who is Subject to Section 194Q?

Section 194Q applies to buyers who: 

• Had a turnover, gross receipt, or sales exceeding Rs 10 crore in the previous financial year, and
• Are responsible for making payments to a resident seller, and
• Make payments for goods worth/totaling over Rs 50 lakh

Example

If a buyer had a turnover above Rs 10 crore in FY ending March 31, 2021, they must deduct TDS from their resident seller for goods purchases above Rs 50 lakh in FY 2021-22.

TDS Calculation

• Applies to purchases over Rs 50 lakh in a financial year
• TDS deducted after subtracting Rs 50 lakh from total purchase value
• Threshold limit is Rs 50 lakh for seller-wise deduction each financial year

Example

A buyer makes purchases totalling Rs 60 lakh. After deducting Rs 50 lakh, the remaining Rs 10 lakh is subject to a 0.1% TDS.

Section 194Q Applicability

Section 194Q of the ITA applies from July 1, 2021. TDS is deducted on purchases after this date. The purchase threshold of Rs 50 lakh begins from April 1, 2021.

Example

A buyer purchased goods for Rs 80 lakh. Under Section 194Q, they deduct Rs 50 lakh initially. The remaining Rs 30 lakh has a 0.1% TDS, resulting in a Rs 3,000 TDS. 

GST Role

• Turnover Calculation: Excludes GST
• TDS Calculation at 0.1%: Includes GST

TDS Deduction Timing

TDS must be deducted when the amount is credited to the seller or paid to them, whichever comes first. 

Essentially, if no advance payment is made, TDS should be deducted at purchase. If there is an advance payment, TDS should be deducted immediately.

PAN Non-furnishing Consequences

If a seller doesn't provide a PAN to a buyer, the TDS rate increases from 0.1% to 5%. 

Without a PAN, tax rates in other situations are usually 20%. But, under Section 194Q, it's 5%.

TDS Deposit Due Dates

TDS must be deposited by the 7th day of the month following the deduction month. For March, the due date extends to April 30. 

TDS Return Due Dates: Form 26Q

The due dates for filing TDS return are July 31, October 31, January 31, and May 31 for quarters ending on June 30, September 30, December 31, and March 31, respectively.

Exceptions

Section 194Q doesn't apply if the TDS is to be deducted on a purchase transaction under any other ITA provision. For instance, if a purchase falls under Section 194O and Section 194Q, TDS would follow Section 194O, associated with TDS on e-commerce transactions. 

Yet, an exception exists for Section 206C(1H), where the seller collects tax (TCS) for the sale of goods exceeding Rs 50 lakh in any previous year. 

When a transaction on goods purchase attracts TDS under Section 194Q and tax at source under Section 206C(1H), only Section 194Q applies.

Section 194Q of the Income Tax Act Amendments

• Tax Deducted at Source (TDS) deduction under Section 194Q applies when amounts are credited to certain accounts.
• Under certain transactions, deductions under Section 194Q are mandated despite applicability of Section 206C(1H).
• Section 194Q is not applicable to purchases from non-resident sellers.
• Non-compliance to tax deduction provisions in Section 194Q can lead to disallowance of expenditure.
• Section 194Q applies to purchases of both revenue and capital goods.
• The TDS deduction for purchases over 50 lakhs will be 0.1%, or 5% if the seller does not have a PAN.

Section 194Q Declaration Format

Seller's Letterhead 

To, 

Buyer’s Name & Address 

Sub: Tax Deduction Declaration u/s 194Q of the Act. 

Dear Sir, 

We are writing in response to your request for our tax deduction information u/s 194Q of the Act. Here are the necessary details: 

1. Your company may deduct tax @0.1 % from payments exceeding Rs.50 lacs to us during this financial year u/s 194Q of the Act. We will not collect tax under section 206C(1H) of the Act from 01.07.2021. 

2. Our company's Permanent Account Number is . We have submitted our income returns for 2019-20 and 2020-21. Details are provided below:

Conclusion

Section 194Q, introduced by the Central Board of Direct Taxes and effective from July 01, 2021, provides guidelines for buyers purchasing more than Rs.50 Lakhs from Indian sellers in the last fiscal year. TDS rate on such purchases is 0.