Analysis of Section 194Q – Deduction of TDS on Purchases

Finance Act 2020 had introduced s. 206C(1H) by virtue of which tax is required to be collected at source by a seller. This section was made applicable w.e.f 1st October 2020.
Subsequently, with an intent to further widen the tax base, the Finance Act 2021 has introduced new section 194Q effective 1st July 2021.

Provisions of s. 194Q: 

  1. 194Q is applicable to those buyers, whose total sales, gross receipts or turnover from the business carried on by him exceed INR 10 crores in the financial year (‘FY’) immediately preceding the financial year in which the purchase of goods is made.
  2. Tax is to be deducted at source on purchase of goods from a seller who is a resident in India. The rate of tax is 1% of such sum exceeding INR 50 lacs in the financial year.
  3. If the seller does not have a PAN, tax at a higher rate of 5% is required to be deducted.
  4. Liability to deduct tax arises at the time of credit or payment whichever is earlier and would include any sum credited to any account, whether called by the name ‘suspense account’ or any other name.
  5. 194Q is applicable only incase of purchase of goods. Therefore, the limit of INR 50 lacs for a FY needs to be considered only with regard to purchase of goods.
  6. 194Q does not apply to a transaction where:
  • Tax is deductible under any of the provisions of this Act; and
  • Tax is collectible under the provisions of s. 206C other than a transaction to which s. 206C(1H) applies.

Illustration on applicability of s. 194Q

Seller

Purchases made before 1st July 2021

Purchases made after 1st July 2021

Amount on which s. 194Q shall apply

A

INR 50 lacs

INR 20 Lacs

INR 20 lacs

B

INR 20 lacs

INR 50 lacs

INR 20 lacs

C

INR 30 lacs

D

INR 40 lacs

INR 30 lacs

INR 20 lacs

E

INR 45 lacs

F

INR 70 lacs

G

INR 70 lacs

INR 20 lacs

Interplay between 194Q and 206C(1H) of the Income Tax Act 1961

With the introduction of s. 194Q, there are two sections which deal on the same transaction of sale/purchase above INR 50 lacs from a party whose turnover, sales or gross receipts in the previous FY exceed INR 10 crores :

  1. TDS under s. 194Q : Deduction of TDS at 0.10% on purchases made in excess of INR 50 lacs;
  2. TDS under s. 206C(1H) : Collection of TCS at 0.10% on sales made in excess of INR 50 lacs.

In order eliminate the overlapping of the provisions of s. 194Q and s. 206C(1H), exclusions have been provided for in s. 194Q :

  • tax is deductible under any of the provisions of this Act; and
  • tax is collectible under the provisions of s. 206C other than a transaction to which s. 206C(1H) applies.

Thus, s. 194Q shall be applicable when –  tax is deductible under any of the provisions of the Act and tax is collectable under provisions of s. 206C other than s. 206C(1H) i.e provisions under s. 194Q shall continue to apply to those transactions to which s. 206C(1H) is also applicable.

However, here it is pertinent to draw attention to the second proviso of s. 206C(1H) which states as under :
Provided further that the provisions of this sub section shall not apply, if the buyer is liable to deduct tax at source under any other provisions of this Act on the goods purchased by him from the seller and has deducted such amount”.

Therefore, from the reading of the aforesaid proviso, it becomes explicitly clear that if provisions of s. 194Q become applicable, TCS is not required to be collected under s. 206C(1H). However, if the buyer is liable to deduct TDS under s. 194Q and fails to do so, in that case tax is required to be collected under s. 206C(1H).

Here, it is also pertinent to note that if the turnover of the seller exceeds INR 10 crores in the previous FY and the turnover of buyer does not exceed INR 10 cores in the previous FY (i.e the provisions of s, 194Q are not applicable to the buyer), the seller is responsible to collect taxes by virtue of s. 206C(1H).

Illustration on applicability of s. 194Q vis – a – vis 206C(1H)

Situation

Turnover of Seller in previous FY

Turnover of Buyer in previous FY

Which provision applicable?

A

INR 50 crores

INR 9 crores

206C(1H)

B

INR 9 crores

INR 50 crores

194Q

C

INR 50 crores

INR 50 crores

s. 194Q is applicable. However, if buyer fails to deduct TDS under s. 194Q, the seller is required to collect tax under s. 206C(1H)

Comparative Analysis of s. 194Q and s. 206C(1H)

Particulars

194Q

206C(1H)

Purpose

Tax deducted

Tax collected

Applicable to

Buyer of Goods

Seller of Goods

Effective from

1st July 2021

1st October 2020

When applicable

When the turnover, sales or gross receipts of the buyer exceed INR 10 crores in the previous FY

When the turnover, sales or gross receipts of the seller exceed INR 10 crores in the previous FY

Threshold limit per FY

INR 50 lacs

INR 50 lacs

Rate of TDS (PAN Available)

0.1%

0.1%

Rate of TDS (PAN Not Available)

5%

1%

Time of Applicability

Payment or credit, whichever is earlier

At the time of receipt of consideration (including receipt of advance)

Date of Deposit

TDS to be deposited with the government by the 7th day of the subsequent month

TCS to be deposited with the government by the 7th day of the subsequent month

Points to Note:
  1. TDS is required to be deducted at the rate of 0.1% incase under s. 194Q for purchases made in excess of INR 50 lacs if the seller has furnished his PAN. However, in the absence of PAN, TDS shall be deducted at a higher rate of 5%. However, here it is to be noted that s. 206AB has also been inserted w.e.f 1st July 2021 vide Finance Act 2021. TDS rate of 0.1% are applicable only if provisions of s. 206AB are satisfied.
  2. 206AB of the Income Tax Act 1961

The Finance Act 2021 has introduced s. 206AB wherein a payer is required to deduct TDS at a higher rate, if the recipient has not filed his return of income for two assessment years prior to the year in which TDS is required to be deducted. Also, the time limit specified under s. 139(1) should be elapsed. TDS rate shall be higher of –

  • Twice the rate specified in the relevant provisions of the Income Tax Aact; or
  • Twice the rates in force; or
  • Rate of five percent.

Therefore, when the seller fails to furnish his return of income for two previous assessment years, buyer shall deduct TDS at rates specified under s. 206AB.

  1. A buyer is responsible to deduct tax under s. 194Q of the Income Tax Act 1961 only when the payments are made in respect of purchases made from a resident seller. If the seller is a non – resident, no obligation to deduct TDS arises.
  2. The Income Tax Act 1961 does define ‘goods’. However, under the Sale of Goods Act, 1930 goods are every kind of movable property including stocks & shares, crops, grass and other things attached to land but excludes actionable claims and money.
  3. TDS under s. 194Q is required to be deducted in respect of purchases made in respect of any kind of ‘goods’. Accordingly, the buyer is required to deduct TDS in respect of purchases made of ‘capital goods’ as well.
  4. Currently, s. 194Q is applicable only incase sale of goods and services are presently out of it’s ambit. Therefore, the threshold limit of INR 50 lacs for each financial year is to be considered only with reference to goods purchased.