Section 194Q of the Income Tax Act, 1961, is a relatively new provision that was introduced to deal with Tax Deducted at Source (TDS) on the purchase of goods. This provision was inserted by the Finance Act, 2021, and it mandates that any person who is responsible for purchasing goods from a resident seller must deduct TDS at a prescribed rate on the purchase value of the goods. This provision was brought into force as part of the government’s efforts to widen the tax base and ensure that income from various sources, including the purchase of goods, is properly taxed.
Table of Contents:
- Introduction to Section 194Q
- Understanding TDS Under Section 194Q
- Who Is Liable to Deduct TDS Under Section 194Q?
- TDS Rates Under Section 194Q
- Exemptions and Exceptions Under Section 194Q
- TDS on Purchase of Goods: Practical Scenarios
- How is TDS Calculated Under Section 194Q?
- Due Date for Deposit of TDS Under Section 194Q
- Filing of TDS Returns: Forms and Procedure
- Penalties for Non-Compliance Under Section 194Q
- 194Q and Its Impact on Businesses
- Practical Examples of Section 194Q
- Frequently Asked Questions (FAQs)
- Conclusion
- References
1. Introduction to Section 194Q
Section 194Q, which was introduced by the Finance Act of 2021, brought about a significant change in the landscape of TDS. It mandates that a buyer must deduct TDS on the purchase of goods if the value of such purchases exceeds a specific threshold. Prior to the introduction of Section 194Q, TDS provisions mainly applied to payments related to income like salary, interest, dividends, etc. However, the introduction of this section focuses on creating a more robust mechanism to track business transactions that involve the purchase of goods.
Key Features of Section 194Q:
- TDS is applicable on the purchase of goods.
- It is applicable to purchases made by a buyer whose turnover exceeds ₹10 crores in the preceding financial year.
- The TDS rate is 0.1% of the purchase value exceeding ₹50 lakh.
Section 194Q aims to ensure that businesses are paying the appropriate amount of tax on goods purchased and that transactions involving the purchase of goods are recorded and taxed properly.
2. Understanding TDS Under Section 194Q
TDS (Tax Deducted at Source) is a system where the tax is deducted by the payer (buyer, in the case of Section 194Q) from the payment made to the payee (seller) and is deposited with the government. The concept of TDS was introduced to ensure that the income tax is collected at the source itself.
Under Section 194Q, the TDS is deducted when a business purchases goods from a seller. This provision mandates that the buyer must deduct tax if the value of the goods purchased exceeds ₹50 lakh in a financial year. The provision is aimed at improving tax compliance and bringing more business transactions into the formal tax structure.
Key Points to Remember About TDS Under Section 194Q:
- TDS is deducted at the time of payment or credit, whichever is earlier.
- It applies to both, individuals as well as businesses, provided the turnover of the buyer exceeds ₹10 crores in the preceding financial year.
- The buyer is responsible for deducting the tax from the payment made to the seller.
3. Who Is Liable to Deduct TDS Under Section 194Q?
Under Section 194Q, the following entities are required to deduct TDS on the purchase of goods:
- Buyer: The buyer is defined as any person or entity who purchases goods from a resident seller. The buyer could be an individual, company, partnership firm, LLP, etc. Importantly, this provision is applicable only to those buyers whose turnover exceeds ₹10 crores in the preceding financial year.
- Threshold Limit: The TDS provisions under Section 194Q only apply to transactions where the aggregate value of purchases from a single seller exceeds ₹50 lakh during the financial year.
Therefore, buyers meeting these criteria are required to deduct tax on the value of the goods purchased that exceeds ₹50 lakh, and remit the tax to the government.
4. TDS Rates Under Section 194Q
The TDS rate under Section 194Q is 0.1% of the purchase value exceeding ₹50 lakh. The deduction is made on the total value of the purchase exceeding the threshold of ₹50 lakh during a financial year.
- TDS Rate: 0.1% of the purchase value exceeding ₹50 lakh.
It is important to note that the TDS rate applies to the purchase value, and not to the entire amount of the goods purchased. The buyer is required to deduct TDS only on the value of the goods that exceeds ₹50 lakh in a financial year.
5. Exemptions and Exceptions Under Section 194Q
While Section 194Q mandates the deduction of TDS on the purchase of goods, there are certain exemptions and exceptions that apply under the provision:
- No TDS on Purchases Below ₹50 Lakh: TDS under Section 194Q is applicable only when the aggregate value of purchases exceeds ₹50 lakh in a financial year. If the value of goods purchased is below ₹50 lakh, no TDS is required to be deducted.
- Exemptions for Specific Goods: Certain goods may be exempted from the application of TDS, as per government regulations and notifications.
- Transactions between Related Parties: Transactions between related parties may not attract TDS under Section 194Q if the buyer and seller are connected in such a way that the transaction is considered non-taxable.
6. TDS on Purchase of Goods: Practical Scenarios
Let us take a closer look at practical scenarios where TDS under Section 194Q would apply:
Scenario 1: Purchase of Goods by a Business with Turnover Exceeding ₹10 Crores
- Buyer: A manufacturing company with a turnover of ₹15 crores.
- Seller: A wholesaler of raw materials.
- Transaction Value: ₹60 lakh for the purchase of raw materials in a financial year.
Since the buyer’s turnover exceeds ₹10 crores and the value of the purchase exceeds ₹50 lakh, TDS at 0.1% would be deducted on ₹10 lakh (the amount exceeding ₹50 lakh). The TDS amount would be ₹1,000 (0.1% of ₹10 lakh), which must be deposited with the government.
Scenario 2: Purchase of Goods by a Small Business with Turnover Below ₹10 Crores
- Buyer: A retail store with a turnover of ₹8 crores.
- Seller: A supplier of goods.
- Transaction Value: ₹55 lakh for the purchase of goods in a financial year.
In this case, even though the purchase exceeds ₹50 lakh, since the turnover of the buyer is below ₹10 crores, the buyer is not required to deduct TDS under Section 194Q.
7. How is TDS Calculated Under Section 194Q?
The calculation of TDS under Section 194Q is straightforward:
- Step 1: Identify the total purchase value from the seller during the financial year.
- Step 2: Subtract ₹50 lakh from the total purchase value to determine the excess amount on which TDS should be calculated.
- Step 3: Apply the TDS rate of 0.1% to the excess amount and deduct the calculated TDS.
For example, if the total purchase value is ₹60 lakh, the TDS will be calculated on ₹10 lakh (₹60 lakh – ₹50 lakh), leading to a deduction of ₹1,000.
8. Due Date for Deposit of TDS Under Section 194Q
The TDS under Section 194Q must be deposited by the buyer with the government on or before the following due dates:
- Quarterly Payment: The due date for depositing TDS is the same as the due date for quarterly tax payments.
- Late Payment: If TDS is not deposited on time, the buyer will be subject to interest and penalties as per the Income Tax Act.
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9. Filing of TDS Returns: Forms and Procedure
After deducting and depositing the TDS under Section 194Q, the buyer must file TDS returns using Form 26Q. The buyer must submit details of TDS deductions in the form, including the amount deducted, the PAN of the seller, and other relevant details. The filing of returns should be done on a quarterly basis.
10. Penalties for Non-Compliance Under Section 194Q
If the buyer fails to deduct TDS under Section 194Q, or fails to deposit the TDS with the government, they may be subject to penalties, which may include:
- Interest: The buyer may be required to pay interest on the TDS amount for the period of delay.
- Penalty for Non-Deduction: A penalty may be imposed if TDS is not deducted or deposited as per the provisions of Section 194Q.
11. 194Q and Its Impact on Businesses
The introduction of Section 194Q brings significant changes to the tax landscape for businesses, especially those involved in the large-scale purchase of goods. This provision ensures that more transactions are brought under the formal tax net, improving tax compliance and collection. However, businesses will need to be diligent about calculating and deducting the correct amount of TDS, as well as ensuring timely deposit and filing of returns.
12. Practical Examples of Section 194Q
Example 1: Large Manufacturing Business
- Buyer: A company with a turnover of ₹50 crores.
- Seller: A supplier of raw materials.
- Purchase Value: ₹80 lakh.
Since the purchase value exceeds ₹50 lakh, the buyer is required to deduct TDS on the excess ₹30 lakh, at the rate of 0.1%. The TDS deducted will be ₹3,000.
Example 2: Small Business with No TDS Obligation
- Buyer: A retail business with a turnover of ₹8 crores.
- Seller: A supplier of goods.
- Purchase Value: ₹60 lakh.
In this case, even though the purchase value exceeds ₹50 lakh, the buyer is not liable to deduct TDS as the turnover is below ₹10 crores.
13. Frequently Asked Questions (FAQs)
- What is Section 194Q?
Section 194Q mandates that TDS must be deducted by the buyer on the purchase of goods when the purchase value exceeds ₹50 lakh. - Who is liable to deduct TDS under Section 194Q?
Buyers whose turnover exceeds ₹10 crores in the previous financial year are liable to deduct TDS on purchases of goods exceeding ₹50 lakh. - What is the TDS rate under Section 194Q?
The TDS rate under Section 194Q is 0.1% on the purchase value exceeding ₹50 lakh. - What is the threshold for TDS under Section 194Q?
The threshold for TDS deduction is ₹50 lakh in a financial year. - What happens if TDS is not deducted under Section 194Q?
The buyer may face penalties and interest for failure to deduct or deposit TDS as required. - Is TDS applicable on all purchases of goods?
TDS is applicable only when the value of goods purchased exceeds ₹50 lakh in a financial year. - How do I calculate TDS under Section 194Q?
TDS is calculated on the value of purchases exceeding ₹50 lakh at a rate of 0.1%. - Do I need to file TDS returns?
Yes, the buyer must file TDS returns using Form 26Q. - Is TDS applicable to transactions between related parties?
Transactions between related parties may be exempt from TDS, depending on the specific circumstances. - What penalties are imposed for non-compliance with Section 194Q?
Non-compliance may result in penalties and interest on the delayed TDS amount.
14. Conclusion
Section 194Q is a critical provision under the Income Tax Act, 1961, aimed at improving tax compliance on the purchase of goods. This provision places the responsibility of deducting TDS on the buyer of goods, provided the transaction value exceeds ₹50 lakh and the buyer’s turnover is above ₹10 crores. By ensuring that businesses deduct TDS, Section 194Q contributes to broadening the tax base and promoting greater transparency in business transactions.
It is essential for businesses and individuals to understand the intricacies of this section, including its applicability, rates, exemptions, and compliance requirements, to avoid penalties and interest due to non-compliance.
15. References
- Income Tax Act, 1961: https://www.incometaxindia.gov.in/pages/tax-information-services.aspx
- ClearTax Overview on Section 194Q: https://cleartax.in/s/an-overview-on-section-194q-of-the-income-tax-act-1961-ita
- IndiaFilings on Section 194Q: https://www.indiafilings.com/learn/section-194q-tds/
Also Read: Understanding Section 185 of the Motor Vehicle Act: A Detailed Insight