Sections 194Q and 206C(1H) of the Income-tax Act govern the deduction and collection of tax at source on the purchase and sale of goods, respectively. Section 194Q mandates that a buyer, whose business turnover exceeds ₹10 crores in the preceding financial year, must deduct tax at source (TDS) at 0.1% on payments made to a resident seller when the value of goods purchased exceeds ₹50 lakhs in a financial year. The deduction is to be made at the time of credit or payment, whichever occurs earlier. However, the provisions do not apply when the seller’s income is entirely exempt from tax or when the transaction involves securities or commodities traded through recognized stock exchanges or clearing corporations. In cases where the seller fails to furnish a Permanent Account Number (PAN), the buyer must deduct tax at 5% under Section 206AA. Similarly, where the seller is a non-filer of income tax returns, a higher rate applies as per Section 206AB, though this provision ceases to apply from April 1, 2025. For transactions that fall under both Section 194Q and 194-O, the deduction is to be made under Section 194-O. Additionally, when calculating TDS, GST and other levies are excluded from the taxable amount if separately indicated in the invoice, and specific rules govern treatment of purchase returns.
On the other hand, Section 206C(1H) requires sellers to collect tax at source (TCS) at the rate of 0.1% when the sale consideration from a buyer exceeds ₹50 lakhs during the year, provided the seller’s turnover in the preceding financial year exceeds ₹10 crores. TCS is to be collected at the time of receipt of payment, and higher rates apply when the buyer fails to furnish a PAN (1%) or has not filed income tax returns as per Section 139(1) (up to 5%), with the higher rate prevailing if both non-filing and non-furnishing of PAN occur. No TCS is applicable on export transactions or sales to persons whose income is wholly exempt from tax. When a transaction is covered under both Sections 194Q and 206C(1H), the responsibility to deduct TDS under Section 194Q takes precedence, relieving the seller from TCS obligations under Section 206C(1H). Similarly, if a transaction is also covered under Section 194-O, the e-commerce operator is responsible for TDS, and the seller is exempt from TCS collection on that transaction. Collectively, these provisions ensure proper tax compliance in trade transactions by expanding the TDS and TCS mechanisms to the purchase and sale of goods, thereby enhancing traceability and accountability in business payments.
FAQs on TDS or TCS on sale or purchase of goods
Q1. What is Section 194Q of the Income-tax Act?
Section 194Q of the Income-tax Act deals with the deduction of tax at source (TDS) on the payment of any sum to a resident for the purchase of any goods. The tax shall be deducted at the time of credit or payment, whichever is earlier.
Q2.Who is required to deduct tax at source under section 194Q?
Ans: The buyer, who is responsible to make payment to a resident seller, is required to deduct tax at source under section 194Q if the following conditions are satisfied:
a) He is carrying on a business;
b) He is paying any sum to a resident person for the purchase of any goods;
c) Total sales, gross receipts or turnover from the business exceeds Rs. 10 crores during the financial year immediately preceding the financial year in which such goods are purchased; and
d) Goods are purchased for a value or aggregate of value exceeding Rs. 50 lakhs in any previous year
Q3.What is the threshold limit for the deduction of tax under section 194Q?
Ans: Tax is required to be deducted from the purchase value exceeding Rs. 50 lakhs.
Q4.When is a tax required to be deducted under section 194Q?
Ans: Tax is required to be deducted 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.
Q5.What is the rate of tax deduction under section 194Q?
Ans: The tax is required to be deducted at the rate of 0.1%. This rate shall not be subject to any surcharge or Health & Education Cess.
Q6. Whether the provision of section 194Q apply where the buyer is a non-resident?
Ans: Tax is required to be deducted by a non-resident buyer only if the purchase of goods is effectively connected with the permanent establishment in India.
Q7.Whether the provision of section 194Q applies where a seller is a person whose income is exempted from income tax?
Ans: No tax is required to be deducted where goods are purchased from a seller who as a person is exempt from income tax under the Income-tax Act or any other Act passed by the Parliament.
However, this exemption is not available if only part of the income of the seller is exempt from tax.
Q8.What would be the rate of TDS under section 194Q if seller does not furnish his PAN to the buyer?
Ans:As per section 206AA, if the deductee does not furnish PAN, tax shall be deducted at a rate higher of the following:
- The rate prescribed in the relevant provisions of the act, or
- Rate or rates in force, or
- 5%
Q9.What would be the rate of TDS under section 194Q if seller is a non-filer of the Income-tax return?
Ans: As per section 206AB, if the deductee has not furnished its return of income as per section 139(1) and the due date has expired, tax is required to be deducted at a rate higher of the following:
- Twice the rate prescribed in the relevant provisions of the act, or
- Twice the rates in force, or
- 5%
Note: The provisions of section 206AB not applicable w.e.f. 01-04-2025
Q10.What will be the rate of TDS under section 194Q if the seller is a non-filer of income-tax return and also doesn’t furnish his PAN?
Ans: In this case, the tax shall be deducted at the rates specified under section 206AA or section 206AB, whichever is higher.
Note: The provisions of section 206AB not applicable w.e.f. 01-04-2025.
Q11. How to deduct tax at source if a a transaction falls under Section 194Q as well as Section 194-O?
Ans:If a transaction is covered both under Section 194-O and Section 194Q, the tax is required to be deducted under Section 194-O and not under Section 194Q.
Q12.Whether the provision of section 194Q is applied where a transaction is carried through recognised stock exchanges?
The provisions of Section 194Q shall not be applicable in relation to transactions in securities (and commodities) which are traded through recognised stock exchanges or cleared and settled by the recognised clearing corporation, including recognised stock exchanges or recognised clearing corporations located in International Financial Service Centre (IFSC).
Q12.What is the treatment of GST and other state levies & taxes while deducting tax under section 194Q?
(a) Where tax is deductible at the time of credit
Tax under section 194Q shall be deducted on the amount credited without including GST & other non-GST levies such as VAT, Sales Tax, Excise Duty, CST, etc. if the following conditions are satisfied:
i. Tax is deducted at the time of credit of the amount in the account of the seller; and
ii. The component of GST and non-GST levies comprised in the amount payable to the seller is indicated separately as per the terms of the agreement or contract between the buyer and the seller.
(b) Where tax is deductible at the time of payment
If the tax is deducted on a payment basis because the payment is earlier than the credit, the tax would be deducted on the whole amount as it is not possible to identify the payment with the GST component or non-GST levies component to be invoiced in future.
Q13.What is the treatment of purchase returns while deducting tax under section 194Q?
Where the seller has refunded the money against the purchase return, the tax deducted may be adjusted against the next purchase against the same seller.
However, where the purchase return is replaced by the goods, no adjustment is required.
Q14.What is Section 206C(1H) of the Income-tax Act?
Ans: Section 206C(1H) of the Income-tax Act deals with collection of tax at source (TCS) from buyer on sale of goods if the aggregate value of such sale consideration received in any previous year exceeds Rs. 50 lakh.
Q15.Who is responsible for collecting tax under section 206C(1H)?
Ans: The tax shall be collected by the seller who receives any amount as consideration exceeding Rs. 50 lakh for the sale of any goods, only if his total sales, gross receipts, or turnover from the business exceeds Rs. 10 crores during the financial year immediately preceding the financial year in which such goods are sold.
Q16.What is the rate at which tax is collectible under section 206C(1H)?
Ans: The tax shall be collected at the rate of 0.1%. This rate shall not be subject to any surcharge or Health & Education Cess.
Q17.What is the threshold limit for the collection of tax under section 206C(1H)?
Ans: Tax is required to be collected with the sale consideration received in excess of Rs. 50 lakhs during the year.
Q18.When is a tax required to be collected under section 206C(1H)?
Ans: Tax is required to be collected at the time of receipt of such sum from the buyer.
Q19.What is the consequence if the buyer does not furnish his PAN to the seller?
As per section 206CC, if the buyer does not furnish PAN to seller, tax shall be collected at a rate higher of the following:
- At twice the rate prescribed in Section 206C(1H) of the act, or
- 1%
Q21.What will be the rate of TCS under section 206C(1H) if buyer is a non-filer of income-tax return?
Ans: As per section 206CCA, if the buyer has not furnished its return of income as per section 139(1) and the due date has expired, tax is required to be collected at a rate higher of the following:
- Twice the rate prescribed in the relevant provisions of the act, or
- 5%
Q22.What will be the rate of TCS if both Section 206CC and Section 206CCA are applicable?
Ans:If the buyer has neither furnished his PAN to the seller nor furnished his return of income for the previous year whose due date as per section 139(1) has expired, the tax shall be collected at the rates specified under section 206CC or section 206CCA, whichever is higher.
Q23. How to deal with a transaction which is covered both under section 194Q as well as section 206C(1H)?
Ans:If a transaction is subject to TDS under Section 194Q, the buyer shall have the first obligation to deduct the tax. If he does so, the seller will not have any obligation to collect the tax under Section 206C(1H).
Q24.How to deal with a transaction which is covered both under section 194-O as well as section 206C(1H)?
If a transaction is covered both within the purview of Section 194-O as well as Section 206C(1H), tax is required to be deducted under Section 194-O. Once the e-commerce operator has deducted the tax on a transaction, the seller is not required to collect the tax under Section 206C(1H) on the same transaction.
Q25.Whether tax is collectible under section 206C(1H) if goods are exported out of India?
Ans:No tax is to be collected under section 206C(1H) in respect of goods that are exported out of India.
Q26.Whether TCS provision of section 206C(1H) applies if buyer is a person whose income is exempted from income tax?
Ans: No tax is required to be collected where goods are sold to a buyer who as a person is exempt from income tax under the Income-tax Act or any other Act passed by the Parliament.
However, this exemption is not available if only part of the income of the buyer is exempt from tax.
(Republished with amendments)
