Section 194Q of the Income Tax Act: A Comprehensive Guide

Understanding Section 194Q

What is Section 194Q?

When discussing TDS, it is usually seen as a concept related to salary and perquisites deduction. However, the applicability and the rule also extend to a company’s purchase of goods in a certain context under Sec 194Q. 

Section 194Q of the Income Tax Act was introduced through the Finance Act 2021 to regulate high-value transactions. It requires buyers to deduct TDS (Tax Deducted at Source) on purchases of goods if their turnover or gross receipts exceed ₹10 crore in the previous financial year. The provision applies to purchase amounts in excess of ₹50 lakh in a financial year.

Purpose and Applicability of Section 194Q

The purpose of Section 194Q is to track and bring high-value purchase transactions under the tax net. The provision applies to:

• Businesses with turnover/gross receipts exceeding ₹10 crore in the previous financial year, regardless of whether they opt for the new or old tax regime.
• Transactions where the aggregate value of goods a seller purchases exceeds ₹50 lakh in a financial year.

The provision also broadens the scope of TDS collection, expands the tax base, and ensures tax compliance on purchasing goods. It aims to address the tax gap by compelling buyers to report transactions and maintain proper records. This helps curb tax evasion by making businesses more transparent in their dealings. 

Applicability of TDS Under Section 194Q

Eligibility Criteria

Specific Examples of Who Deducts TDS

• Large Corporations and Businesses:

Companies engaged in wholesale or retail business, such as FMCG distributors or electronic goods retailers, must deduct TDS under Section 194Q on purchases exceeding ₹50 lakh.

• Government Agencies:

Public sector undertakings or government entities making bulk purchases must also comply with the TDS deduction in this section.

• Importers and Exporters:

While Section 194Q does not apply to imports, businesses involved in domestic sales exceeding ₹50 lakh to a single seller must deduct TDS.

Businesses Falling Under Section 194Q

• Businesses like large retailers, wholesalers, and manufacturers whose procurement exceeds ₹50 lakh will need to comply with Section 194Q.
• Companies involved in the import/export of goods will also be subject to this provision.

Exceptions to TDS Deduction

TDS under Section 194Q is not applicable in the following situations:

1. Import of Goods:

Purchases of goods from non-resident sellers are not subject to TDS under Section 194Q.

2. Transactions Covered by Other Sections:

If TDS is already deducted under another section, such as Section 194O (for e-commerce transactions), then Section 194Q will not apply.

3. Transactions Covered Under Section 206C(1H):

Before FY 2025-26, if TDS under Section 194Q and TCS under Section 206C(1H) applied, TDS under Section 194Q would take priority. However, from FY 2025-26, TCS under Section 206C(1H) no longer applies to goods purchases. This change removes the overlap, so only TDS under Section 194Q will apply now.

This update will make it easier for businesses and taxpayers during ITR filing, as they only need to focus on the TDS deducted under Section 194Q. Nevertheless, while filing your ITR, ensure the correct TDS details are included. If you’re unfamiliar with how to file an ITR online, taking time to verify the information can help avoid issues.

4. Personal Purchases:

TDS under Section 194Q does not apply to personal purchases or transactions unrelated to business or profession.

Threshold Limit Calculation

The deduction threshold is ₹50 lakh. It means that TDS is applicable only when the total purchases from a seller exceed ₹50 lakh in a financial year. Purchases below this threshold are exempt from TDS under Section 194Q.

TDS Rate and Calculation

TDS Rates

Under Section 194Q, the TDS rate is set at 0.1% of the purchase value exceeding ₹50 lakh. The rate may differ depending on the nature of the seller (for example, if the seller is a resident or non-resident).

• For a resident seller: 0.1% on purchases above ₹50 lakh.
• For a non-resident seller, the applicable TDS rate may differ according to other relevant sections (section 195 of the Income Tax Act).

Calculation of TDS with Examples

For instance, say a company purchases goods worth ₹60 lakh from a seller in a year, TDS will be deducted on the ₹10 lakh exceeding the ₹50 lakh threshold. So, the deductible TDS will be 0.1% of ₹10 lakh, which is ₹10,000.

Time of TDS Deduction and Deposit

Due Dates for TDS Deposit

The TDS deducted under Section 194Q must be deposited by the 7th of the following month in which the deduction was made. For example, if TDS is deducted in April, it must be deposited by 7th May.

TDS Return: Form 26Q

The TDS deducted under Section 194Q is reported in Form 26Q. This is a quarterly return and must be filed by the 31st of the month following the end of each quarter. So the filing for Q1 (April to June) will be done by 31st July, and so on. 

Impact of GST on Section 194Q

GST has specific implications on how TDS under Section 194Q is calculated. When determining whether the ₹50 lakh threshold is met, the turnover or gross receipts should be calculated excluding the GST component. This means only the value of goods is considered for the threshold limit. 

So, TDS under Section 194Q will be deducted at 0.1% on the purchase value, excluding GST. For instance, if a buyer purchases goods worth ₹60 lakh, where the GST component is ₹10 lakh, the calculation will be as follows:

• Purchase Value: ₹60 lakh
• GST Component: ₹10 lakh
• Value for TDS Calculation: ₹50 lakh (₹60 lakh – ₹10 lakh)

Since the purchase value after excluding GST is ₹50 lakh, no TDS will be deducted as the threshold has not been exceeded. Had it exceeded ₹50 lakh, TDS would apply on the excess amount.

Penalties and Consequences of Non-Compliance

Failure to deduct TDS under Section 194Q or deposit it with the government can lead to:

• Under Section 234E, a late filing fee of ₹200 per day is levied for delayed TDS return filing, capped at the TDS/TCS amount deductible or collectible.
• Failure to file or inaccurate filing of TDS returns attracts a penalty under Section 271H, ranging from ₹10,000 to ₹1,00,000.
• If TDS is not deducted, interest at 1% per month is charged on the unpaid amount until the deduction is made.
• If TDS is deducted but not deposited, interest at 1.5% per month is charged on the unpaid amount until it is deposited.
• The deductor is treated as an assessee-in-default if TDS is not deducted or deposited as required.

Exemptions and Important Considerations

• Non-applicability for payments less than ₹50 lakh: No TDS deduction is required on purchases below ₹50 lakh.
• Harmonization with other sections: Businesses must ensure they are not double-taxed by considering provisions of other relevant sections, like 195 (for non-resident transactions).

Conclusion

Section 194Q significantly impacts businesses involved in high-value transactions, making it a crucial compliance requirement. While traditionally seen as a tax regulation for businesses, it also draws the attention of investors and shares advisory services, as non-compliance can affect a company’s financials and tax liability.Additionally, understanding the distinction between TCS vs TDS is important in Section 194Q, especially with the removal of TCS (Tax Collected at Source) under Section 206C(1H) for goods purchases, streamlining the process for businesses.

FAQs on Section 194Q