Section 194Q of the Income Tax Act

Section 194Q of the Income Tax Act, 1961 introduces a mechanism to deduct TDS on the purchase of goods only and not on the provisions of services. This aims to widen the tax base, enhance compliance, and promote transparency in financial transactions.

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What is Section 194Q of the Income Tax Act?

The Government of India introduced section 194Q of the Income Tax Act, 1961 in July 2021. This provision provides for Tax Deduction at Source (TDS) on the purchase of goods exceeding ₹50 lakhs in a previous year.

NOTE:

  • Section 194Q does not apply to purchases from non-resident sellers.

  • This section does not cover the provision for TDS on services.

Who Deducts TDS under Section 194Q?

Under Section 194Q of the Income Tax Act, 1961, the responsibility for deducting Tax Deducted at Source (TDS) falls on the buyer making the purchase of goods, not the seller.

Conditions for Deduction of TDS:

  • Turnover Threshold: The buyer's total sales, gross receipts, or turnover from business in the previous financial year must exceed ₹10 crores.

  • Purchase Threshold: The purchase of goods from a resident seller within the same financial year must exceed ₹50 lakhs.

  • Nature of Goods: The TDS provision applies only to the purchase of specified goods as notified by the government. Currently, this includes items like iron and steel products, cement, coal, etc.

NOTE: If the seller is subject to Tax Collection at Source (TCS) under section 206C(1H) for the same goods, then the buyer's TDS liability under section 194Q takes precedence. In this case, the seller does not need to collect TCS.

Rate of Tax Deducted at Source (TDS)

If you buy goods worth more than ₹50 lakhs from a seller in a financial year, a Tax Deducted at Source (TDS) applies under Section 194Q of the Income Tax Act. The TDS rate is 0.1% of the amount exceeding ₹50 lakhs. 

Example under Section 194Q

  • If you purchase goods in a financial year = ₹60 lakhs

  • Tax Deducted at Source (TDS) under Section 194Q = (₹60,00,000 - ₹50,00,000) × 0.1%

  • TDS = ₹10,00,000 × 0.001 = ₹1,000

Impact of GST on TDS under Section 194Q

If the purchase value (excluding GST) crosses ₹50 lakhs in the previous year, TDS becomes applicable on the entire purchase amount (including GST) in the current year. Therefore,

  • Calculation of Purchase Value of the Good = Excludes GST

  • Calculation of TDS on Purchase Amount = Includes GST

When is TDS Deducted under Section 194Q?

You need to deduct TDS at the time of earlier of these two:

  • When crediting the amount to the seller's account (even in a suspense account).

  • When making the actual payment to the seller, regardless of the mode (cash, cheque, bank transfer, etc.).

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What Happens if PAN is Not Provided?

If the seller does not provide their PAN under Section 194Q, the buyer has to deduct TDS at 5% instead of the usual 0.1%.

Due Date to Deposit TDS

TDS must be deposited by the seventh day of the following month, except for March, where the deadline extends to April 30:

Month of TDS Deduction Due Date for TDS Deposit
January February 7
February March 7
March April 30

Due Date to File TDS Return

The due date to file an income tax return on TDS deducted is mentioned below:

Quarter Ending Due Date for TDS Return
June 30 July 31
September 30 October 31
December 31 January 31
March 31 May 31

In Summary

Section 194Q of the Income Tax Act introduces a mechanism for Tax Deduction at Source (TDS) on purchases above ₹50 lakhs, placing the responsibility on the buyer. The provision aims to enhance tax compliance and transparency in high-value transactions. This impacts both buyers and sellers with revised TDS rates and consequences for non-compliance.

FAQ's

  • What is Section 194Q of TDS?

    Section 194Q of the Income Tax Act, 1961, introduced in July 2021, mandates the deduction of Tax Deducted at Source (TDS) on purchases of goods exceeding ₹50 lakhs from resident sellers.
  • What is section 194H?

    Section 194H of the Income Tax Act, 1961 deals with Tax Deducted at Source (TDS) on commission and brokerage payments. It basically requires certain entities to deduct Tax at source before making payments exceeding a certain threshold for commission or brokerage services rendered by residents.
  • Is 194Q applicable on water?

    The applicability of Section 194Q of TDS on water depends on two factors:
    • The nature of the transaction:

      • Section 194Q applies to the purchase of goods, not services.

      • So, if you are purchasing water as a commodity (e.g., bulk purchase for industrial use), then 194Q could be applicable. 

      • However, if you are paying for water supply as a service (e.g., residential water bill), then it would not fall under 194Q.

    • The buyer's turnover: Even if it's a goods purchase, 194Q only applies to buyers whose total sales, gross receipts, or turnover from business in the previous financial year exceeded ₹10 crore.

  • What is the difference between 194Q and 206C?

    The main differences between Section 194Q and Section 206C(1H) of the Income Tax Act lie in who deducts or collects the Tax and when it is deducted/collected:
    Feature Section 194Q Section 206C(1H)
    Who deducts/collects? Buyer (TDS) Seller (TCS)
    When? Credit/payment of the seller Sale of goods
    Applies to All goods (revenue & capital) > ₹50 lakhs Specific goods > ₹50 lakhs
    Buyer/Seller turnover Buyer > ₹10 crore Seller > ₹10 crore
    Rate 0.1% (or higher if no PAN) 0.1% (or higher if no PAN)
    Exceptions Non-resident sellers, certain govt. agencies Specific categories of goods (e.g., agricultural produce)

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