TDS applicability on purchase of goods under section 194Q

Firstly, vide Finance Act, 2020, sub-section (1H) was inserted into section 206C of the Income Tax Act. As per section 206C(1H), the seller of the goods receiving the consideration of value exceeding INR 50 Lakhs was required to collect TCS @ 0.1%. The provisions are effective from 1^st October 2020.

Later on the similar lines, vide Finance Act, 2021, provisions of section 194Q relating to deduction of tax at source on payment of a sum for the purchase of goods were inserted. As per section 194Q, the buyer paying for the purchase of any goods of value exceeding INR 50 Lakhs is made liable to deduct TDS @0.1%. Section 194Q is made effective from 1^st July 2021.

In the present article, we are going to briefly deal with the TDS provisions covered under section 194Q of the Income Tax Act.

Applicability of provisions of Section 194Q of the Income Tax Act

The purchaser of the goods satisfying the following conditions is liable to deduct TDS under section 194Q –

1. Purchaser is responsible for paying a sum to any resident seller for the purchase of any goods; and

2. Value/ aggregate value is more than INR 50 Lakhs in the Financial Year; and

3. Total sales/ gross receipts/ turnover of the purchaser is more than INR 10 crores in the immediately preceding Financial Year.

Time of deduction of TDS under section 194Q of Income Tax Act

TDS under section 194Q is deductible within earlier of the following –

• At the time of credit of the sum to the seller; or
• At the time of payment by cash/ cheque/ any other mode.

Rate at which TDS is deductible under section 194Q of Income Tax Act

TDS under section 194Q is deductible @ 0.1% on the value exceeding INR 50 Lakhs in the respective Financial Year.

Notably, in case the PAN of the seller is not available, TDS is deductible at the higher rate of 5%.

Exemption from deduction of TDS under section 194Q

TDS under section 194Q of the Income Tax Act is exempt under the following situations –

1. Value/ aggregate value is less than INR 50 Lakhs in the Financial Year;

2. Total sales/ gross receipts/ turnover of the purchaser is less than INR 10 crores in the immediately preceding Financial Year;

3. Tax is deductible under any other provisions of the Income Tax Act;

4. Tax is collectable under any of the provisions of section 206C of the Income Tax Act [other than section 206C(1H)].

Applicability of TDS provisions u/s. 194Q vis-à-vis TCS provisions u/s 206C(1H)

As seen in the introduction, firstly TCS provisions were made applicable and later on TDS provisions were made applicable on transactions relating purchasing/ selling of goods. Accordingly, both TDS and TCS provisions can get applicable simultaneously on the same transaction.

Circular No. 13 of 2021 dated 30^th June 2021 clarifies the position when both the provision i.e. section 194Q and section 206C(1H) gets applicable simultaneously. The same is explained hereunder –

• When both section 194Q and section 206C(1H) are applicable, the tax is required to be deducted under section 194Q. Accordingly, the said transaction will be out of the purview of provisions of section 206C(1H).
• Once TDS is deducted under section 194Q by the buyer, the seller is not required to collect TCS under section 206C(1H) on the same transaction.
• If TCS is collected by the seller under section 206C(1H) first (before the buyer can collect the TDS). Then, on such a transaction, the buyer is not required to deduct TDS under section 194Q.

In nut-shell, provisions of section 194Q will prevail first. However, both the provisions i.e. section 194Q and section 206C(1H) will not apply simultaneously on the same transaction.

Applicability of TDS provisions u/s. 194Q vis-à-vis TDS provisions u/s 194-O 

Provisions of section 194-O deal with the deduction of TDS on payments of the sum by an e-commerce operator to e-commerce participants. The applicability of provisions of section 194Q and section 194-O is clarified vide Circular No. 13 of 2021 dated 30^th June 2021 which is explained hereunder –

• When the transaction is covered within the purview of both provisions of section 194Q and section 194-O, TDS is to be deducted under provisions of section 194-O and not under the provisions of section 194Q;
• When the e-commerce operator has deducted TDS u/s 194-O on all the transactions (which includes transactions relating to section 194Q), then, the said transaction will not be subjected to TDS u/s 194Q.

Important clarifications with regard to provisions of section 194Q

Some of the doubts, emerging post the implementation of provisions of section 194Q, were clarified by the Central Board of Direct Taxes (CBDT) vide Circular No. 13 of 2021 dated 30^th June 2021 and Circular No. 20 of 2021 dated 25^th November 2021. Important clarifications thereof are highlighted hereunder –

• Provisions of section 194Q will not apply to the following transactions in securities and commodities –
  • Transactions being traded through recognized stock exchanges;
  • Transactions cleared and settled by the recognized clearing operations (which also includes recognized stock exchanges/ recognized clearing operations located in International Financial Service Centre).
• Provisions of section 194Q will not apply to transactions in electricity, renewable energy certificates and energy saving certificates which are traded through registered power exchanges.
• The applicability of provisions of section 194Q with regard to the GST component is explained hereunder –

Particulars	Applicability/ Non-applicability of TDS u/s 194Q
TDS is deducted at the time of credit of the amount in the account of the seller; and Agreement/ contract between buyer and seller indicates GST component separately.	TDS provisions u/s 194Q will not be applicable to the GST component.
When TDS has been deducted on the payment basis (as payment is earlier than credit)	TDS provisions u/s 194Q will apply to the GST component (i.e. TDS is deductible on the whole amount).

• Applicability of provisions of section 194Q with regard to purchase return is explained hereunder –
  • TDS already deducted u/s 194Q, in case of purchase return, can be adjusted against the same seller in the next purchase, if the following conditions are satisfied –
    • Tax is already deducted u/s 194Q;
    • Purchase return happened after deduction of tax;
    • The money is refunded by the seller.

Notably, the above adjustment is not to be done when the seller has replaced the goods as against the purchase return. In absence of such adjustment, the TDS deduction u/s 194Q with respect to replaced goods will be treated as completed.

• Provisions of section 194Q of the Income Tax Act will not apply in the case of a non-resident when the purchase of goods from the seller (resident in India) is not effectively connected with the permanent establishment of such non-resident purchaser.
• Provisions of section 194Q will not apply to the purchase of goods from the seller who as a person is exempt from income tax under the Act. However, importantly, provisions of section 194Q will be applicable in case only part of the income of the seller is exempt.
• Provisions of section 194Q will be applicable in case of advance payment made to the seller by the buyer.
• Provisions of section 194Q will not apply to the buyer in the year of its incorporation as total sales/ gross receipt/ turnover of the buyer will be NIL in the immediately preceding Financial Year.
• The purchaser will be liable to deduct TDS under section 194Q in the cases, wherein, the exemption is provided under the provisions section 206C(1A) of the Income Tax Act.
• TDS provisions under section 194Q are duly applicable to Public Sector Undertaking or corporations that are established under the Central or State Act or any other body/ authority/ entity.

Frequently Asked Questions (FAQs) on TDS applicability on purchase of goods under section 194Q

Some of the relevant Frequently Asked Questions relating to provisions of section 194Q of the Income Tax Act are briefed hereunder –

Q.1 What is Section 194Q in TDS?

Ans. As per provisions of section 194Q of the Income Tax Act, the purchaser of the goods paying any sum to the resident seller having value/ aggregate value exceeding INR 50 Lakhs is liable to deduct TDS @0.1%.

Q.2 How is TDS 194Q calculated?

Ans. TDS is to be calculated @0.1% on the value exceeding INR 50 Lakhs in the relevant Financial Year.

Q.3 Who is eligible for 194Q?

Ans. The purchaser having gross receipts/ total sales/ turnover more than INR 10 crores in the preceding Financial Year is liable to deduct TDS under section 194Q.

Q.4 On which amount 194Q is applicable?

Ans. Provisions of section 194Q are applicable on value/ aggregate value exceeding INR 50 Lakhs.

Q.5 How to calculate 50 Lakhs for 194Q?

Ans. Suppose, Mr. A purchases goods worth INR 35 Lakhs from Mr. B during the entire Financial Year and goods worth INR 90 Lakhs from Mr. C during the entire Financial Year.

Then, TDS u/s 194Q will not be applicable on goods purchased from Mr. B, but, TDS u/s 194Q will be applicable on the value of 40 Lakhs (INR 90 Lakhs – INR 50 Lakhs) on goods purchased from Mr. C.

Q.6 Who exempted from 194Q?

Ans. Following situations are exempted from 194Q –

a. Total sales/ gross receipts/ turnover of the purchaser is less than INR 10 crores in the immediately preceding Financial Year;

b. The aggregate value of purchases from the seller is less than INR 50 Lakhs in the Financial Year;

c. Tax is deductible under any other provisions of the Income Tax Act;

d. Tax is collectable under any of the provisions of section 206C [other than section 206C(1H)].

Q.7 Is TDS applicable on GST?

Ans. TDS is applicable on GST component when –

• TDS u/s. 194Q is deducted on a payment basis (i.e. payment is received prior to credit) or
• TDS u/s. 194Q is deducted on a credit basis but the GST component is not reflected separately in the contract.

Q.8 What happens if TDS is not deduced under 194Q?

Ans. If the purchaser fails to deduct TDS under section 194Q of the Income Tax Act. Then, as per provisions of section 40(a)(ia) of the Income Tax Act, 30% of the value on which TDS is not deducted will get disallowed.

Q.9 Is TDS 0.75% or 1%?

Ans. TDS under section 194Q of the Income Tax Act is deductible @0.1%.