Section 194Q TDS Applicability on Purchase of Goods

In this communication we are going to touch base an important change in the tax law that is proposed by recent Budget & going to impact drastically every business operating in India. This is wrt TDS on Purchase Transactions .

It is our endeavor to always keep you updated on latest but important changes that come in to force on all commercial and business laws. In the same direction few important changes wrt TDS on Purchase Transactions is going to be implemented effective 1^st July 2021 as proposed by Honb’le Finance Minister Ms Nirmala Sitharaman in her Budget speech on 1^st Feb,2021. Request you going thru the following paras covering important topic and also simultaneously raising concerns since there is already a provision existing to cover TCS (Tax Collection at Source) on Sales transactions. In case you have some queries wrt same do mail us to enable us getting back to you with requisite inputs.

Tax Deducted at Source (TDS) under section 194-Q  at 0.10% shall be applicable on aggregate Purchases over & above Rs 50 Lacs from a Supplier in India in a financial year.

Salient features of TDS under Section 194Q on Purchase of Goods

• All my friends may note that this is for the very first time in the history of Budget proposals & Income Tax Act in India that Purchase Transactions are proposed to be subject to TDS provisions.

• This new section 194Q is proposed to be applicable from 1^st July 2021, though it seems to be a very small change so far as various TDS provisions of the Income Tax Law are concerned but it carries very vital and important ramifications on allowability of important Purchase transactions are conc.

• As per charging proviso to this section, this is going to be applicable to any person being a buyer responsible for making payment to a resident (Not applicable for Import Purchases from suppliers outside India) for purchase of goods (NA to services) when value or aggregate of purchases from a supplier or payment, whichever is earlier, exceed Rs 50 Lacs during the previous year. The transaction with any supplier with addition of which your aggregate purchase/ payments for purchase from that supplier exceeds Rs 50 lacs, that will be the transaction effective which TDS will have to be deducted @ 0.10% of the Purchase transaction or payment thereof whichever is earlier.

• This section will apply to an assessee whose aggregate Turnover in the immediate previous year exceeded Rs 10 Crore.

• The above provisions will be effective from July 1, 2021.

How TDS under Section 194Q will be calculated?

Below illustration explains how TDS will be calculated if Mr. XYZ purchases goods worth Rs 1 Crore for his business. XYZ might to track purchases from each supplier from very beginning to ascertain that as soon as purchase exceed Rs 50 lacs TDS will be deducted @ 0.10% of the purchase transaction or payment thereof. In above case first 50 Lacs of purchase shall be without TDS and on rest of Rs50 Lacs TDS under section 194-Q will be deducted i.e. Rs 5000. For rest of all the transactions during the year TDS will be deducted from each purchase transaction.

What happens in case provisions of section 194Q are not complied with?

Readers may please go thru the effects of various non compliances connected to this section as mentioned earlier in our write up that ramifications are very vital:

1. If the seller is not having PAN then TDS rate applicable will be 5% of the Purchase transaction/ Payment thereof
2. If the Purchaser fails to deduct TDS as applicable, Section 40A (IA) is going to provide that the value of Purchase transactions on which TDS is not deducted will be subject to 30% disallowance means thereby that even Purchases supported by Bills or GR’s can be disallowed to the extent of 30% of the transaction value if TDS is not deducted.

In the Illustration cited above even if small amount of TDS was required to be deducted i.e. Rs 5000 only but if not deducted, huge disallowance of Rs 15,00,000/- will have to be borne by XYZ (Purchaser)

When TDS is not required to be deducted under section 194Q?

It is provided in the fifth proviso to the section that if TDS is deducted on the transaction under any other section of the Income Tax Act (other than TCS collected under section 206 C (1H) of the Act)  then TDS is not required to be deducted on the transaction. For example if TDS  is deducted on transaction under section 194C then no TDS is required to be deducted under section 194Q but if Seller is required to collect TCS under section 206 (1H) then Purchaser will still be required to deduct TDS under section 194 Q irrespective of TCS collected by Seller.

Readers may carefully note that section 206 C (1H) is currently being followed and 2^nd proviso to the same provides that TCS will not be required to be collected if TDS is applicable on the transaction for deduction on the transaction under any other provision of law. Maximum Assesee have suitably made provisions in their respective Accounting Software’s/ ERP’s to collect TCS in the Invoice itself though the same doesn’t seem to be compliant of provision in case of Advance payments. But consequent to applicability of subject provision effective 1^st July 2021 there will not be a requirement to collect TCS under section 206 C (1H) in case Purchaser (s) is required to deduct TDS under section 194-Q.

Will TDS under Section 194Q be deducted on GST amount also?

Since Purchaser is required to deduct the TDS under section 194-Q on amount of Purchases but while paying to the supplier payment of GST is also required to be made. Though to keep the life simple deducting TDS on Gross amount doesn’t involve non compliance on part of the Purchaser but for Supplier it might involve cash flow reduction so far as GST liability for payment on its sale is concerned. In our opinion, like in other transactions covered under 194C we usually deduct TDS on Basic amount only, here too deduction of TDS be made on net amount only & GST amount is paid in full while making the payment to supplier. Suitable changes to the respective softwares/ ERP’s may be customized to take care of this requirement.

Why section 194-Q was required by Law?

The motive behind Govt. having implemented this section seems to be very clearly bring about a change where few large amount of transactions are being traced without any trail where GST amounts is being misappropriated. Govt. intends to bring all such purchase transactions under some audit trail so that fake or frivolous transactions could be tracked or bring under the trail of TDS provisions and checked in future, if required.

Though it is noticed that with this having been implemented there might be applicability of both the sections on single transaction and will involve complexities of compliances for assessee’s covered by such transactions. Thus it is recommended to implement either of the two provisions i.e. section 206 C (1H) or section 194 Q.

Request my fellow friends to check out the applicability of the provisions properly and take care of the implementation further……