A detailed analysis of Section 194Q and a comparative study with Section 206C(1H) of the Income Tax Act, 1961

The Finance Act 2021, has widened the scope of the TDS Chapter in the Income Tax Act, 1961 by introducing a new section namely 194Q dealing with TDS on Purchase of Goods w.e.f. 1st July 2021. This new TDS provision is just a replica of section 206C(1H) of the Income Tax Act, 1961 introduced by the Government with effect from 1st October, 2020. The only basic difference between these two sections is that the responsibility of deduction of tax will lie upon the Buyer whereas the responsibility of collecting tax will lie upon the Seller.

Extract of Section 194Q

[Deduction of tax at source on payment of certain sum for purchase of goods.

194Q. (1) Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, shall, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 per cent of such sum exceeding fifty lakh rupees as income-tax.

Explanation. —For the purposes of this sub-section, “buyer” means a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the purchase of goods is carried out, not being a person, as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.

(2) Where any sum referred to in sub-section (1) is credited to any account, whether called “suspense account” or by any other name, in the books of account of the person liable to pay such income, such credit of income shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(3) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.

(4) Every guideline issued by the Board under sub-section (3) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and the person liable to deduct tax.

(5) The provisions of this section shall not apply to a transaction on which—

(a) tax is deductible under any of the provisions of this Act; and

(b) tax is collectible under the provisions of section 206C other than a transaction to which sub-section (1H) of section 206C applies.]

Based on the above reading it can be concluded that:

Applicability of Section 194Q

√ Section 194Q does not make any distinction between Capital Goods and other goods and therefore, it shall apply in case of Purchase of Capital Goods too.

√ Section 194Q will be effective from 1st July, 2021.

Condition for Deductor: –

√ Provisions of Section 194Q imposes primary liability on the Buyer to deduct tax

√ Applicable on a buyer only if his sales in Last year exceed Rs. 10 Crore

√ Goods are purchased for a value or aggregate of value exceeding Rs. 50 lakhs in any previous year. In the Financial Year 2021-2022, the Value of Goods purchased during 1st April to 30th June shall therefore, be taken into consideration for calculating Rs. 50 lakhs purchase limit. However, tax is deductible only on Purchase effected on or after 1st July, 2021.

√ The buyer purchases goods from a resident person.

√ TDS shall be deducted on Date of Credit or Date of Payment whichever is earlier.

Rate of TDS for Section 194Q

If PAN of the Seller is Available If PAN of the Seller is not available
0.1% 5%

TDS shall not be deducted for the payment or Credit made before 01.07.2021.

Situations where Section 194Q is not to be applied

1. Where TDS need to be deducted under any other section under the Income Tax Act then Section 194Q shall not be applied and that other section will prevail.

Illustration: Suppose in case of Works Contract, TDS is required to be deducted u/s 194C and side by side conditions of section 194Q also fulfils, then, TDS shall be deducted u/s 194C and not under section 194Q.

2. Where TCS charged by the Seller u/s 206C other than section 206C(1H)

Illustration: Suppose we purchased a motor vehicle for Rs. 70 Lac and TCS charged by the Dealer u/s 206C(1F), then no TDS shall be deducted u/s 194Q.

Applicability of Section 206(1H) or Section 194Q w.e.f 1st July, 2021

Buyer’s Turnover in FY 20-21 Seller’s Turnover in FY 20-21 Transaction Value (Total from 01.04.2021 to date) Applicability
8Cr 12Cr Rs. 57 Lakhs 206C(1H)
16 Cr 9 Cr Rs. 60 Lakhs 194Q
14 Cr 15 Cr Rs. 70 Lakhs 194Q (Note)
8 Cr 6 Cr Rs. 58 Lakhs None of the Sections are applicable because neither the seller nor the buyer’s Turnover in FY 20-21 exceeded Rs. 10 Crore
13 Cr 18 Cr Rs. 45 Lakhs None of the Sections are applicable because Rs. 50 lakhs threshold was not crossed. (Note)

Note1: If as per the provisions of both the sections, Seller is liable to Collect TCS u/s 206C(1H) and the buyer is also required to deduct TDS u/s 194Q on the same goods, in such situation question arises that whether Seller will collect TCS or buyer will deduct TDS?

In this regard, the second proviso to Section 206C(1H) shall be referred which can be reiterated as below:

“ 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 provision of this Act on the goods purchased by him from the seller and has deducted such amount. “

Therefore, from the second proviso to Section 206C(1H) it can be inferred that if both buyer is liable to deduct TDS u/s 194Q, then the seller shall not charge TCS on the same transaction. However, the matter is not actually that simple. A practical hardship may be seen that a seller who is liable to collect TCS u/s 206C(1H) will now have to confirm that whether the buyer is liable to deduct TDS u/s 194Q or not, and if he is so liable then whether the buyer actually deducted TDS or not and has paid the same before the exchequer.

There are many issues which may generate from this litigation prone second proviso to Section 206C(1H). Suppose, it may happen that the buyer though liable to deduct the TDS but not deducted, then, whether the seller will be deemed to be defaulter u/s 206C(1H) for the default made by the buyer. Further, in such a case, whether seller is liable to charge TCS under section 206C(1H). All these issues shall be clarified by CBDT to avoid future litigations.

Note2: The method of calculation of threshold limit of Rs. 50 lakhs are different in section 206C(1H) and in section 194Q. Section 206C(1H) is collection based and therefore, collection more than Rs. 50 lakhs during a method from a customer required to be tracked and accordingly TCS shall be charged and paid. However, like other TDS provisions, Section 194Q also will get triggered if Amount of Credit or Amount of Advance Collection, whichever is earlier, exceeds Rs. 50 lakhs during any period.

Views and opinions from the readers are highly appreciated.

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  1. Gurjot Singh says:

    Hi there, 194Q(5) says that if TDS is deducted under any other section “and” Tax is collected under section 206C except 206C(1H), then 194Q will not apply. That means if both TDS and TCS are getting deducted, only then 194Q will not apply.

    Circular 13 and 22 also provide clarification regarding 194-O, 194Q and 206C(1H) only, but no clarification is provided for 206C(1),(1C) or (1F).

    But what if I purchase a car worth 60L ?
    Assuming I fulfill turnover applicability, Even If my Tax is getting collected u/s 206C(1F), shouldn’t I also deduct tax under 194Q?

  2. Annu Agarwal says:

    Dear Sir
    Is the limit of 50lakhs under section 194Q is to be calculated for 01.04.2021-30.06.2021 or it is for any previous year be it 2020-2021 or 2019-2020 .
    For eg:A buyer made a purchase agregating to Rs 60lakh from A Ltd(a supplier) in year 2020-2021.The same buyer has purchased goods aggregating to Rs 40 lakh from the same supplier for the period 01.04.2021-30.06.2021,does the buyer need to deduct tds or not?.

  3. Bineeta Jain says:

    The govt has added in the exception “other than section 206C(1H)”. If we invoke the second proviso to Section 206C(1H), then this exception is of no use?

    1. CA Raghav Khandelwal says:

      Due to second proviso, 194Q becomes applicable. And if such exception would not have been created 194Q would not be applicable.

      In short, due to the proviso 194Q is overriding 206C(1H) which otherwise would have been overridden by 206C(1H).

  4. Vinod kumar jain says:

    Second proviso to section 206C(1H) is clear as it puts obligation on purchasers . Words used is “liable “ not to be confused with actual deduction or payment to exchequer. Hence it case though liable but not acted than seller , acting on belief for compliance by buyer, should not be held as assessee in default

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