In the history of income tax, it is the first time that TDS is imposed on the purchase of goods. With covering the purchase of goods under this umbrella, many transactions will be attracted by Section 194Q of the Act. Let’s find out more.

Applicability

The section is applicable on the satisfaction of the following conditions

1) In the books of the buyer, the previous financial year total sales, gross receipts, or turnover exceeds Rs 10 cr and

2) The purchases made from single suppliers exceed Rs 50 lakh in the current financial year.

This section has come into effect from 01st July 2021.

TDS letter logo design

Who will deduct TDS and the time of the deduction

The buyer of the goods will deduct TDS at the time of credit or at the time of payment whichever is earlier.

Since the section is applicable from 01st July 2021, a common question may arise while calculating the threshold for Rs 50 lakh. Will the turnover for the period from 01st April 2021 to 30th June 2021 be considered?

The answer to this lies in the provision itself. The provision very well mentions that the purchases from a single seller must exceed Rs 50 lakh in any previous year. From this, we can say that the purchases from a single seller for the period 01st April 2021 to 30th June 2021 will be considered.

Let’s take an example

Mr. Man is involved in a business brick industry. He has a turnover in the FY 2021-21 of Rs 20 crores. This year he purchases the raw material from a supplier in the following manner.

Date of purchase Amount of Purchase
22-04-2021 Rs 6 lakhs
08-05-2021 Rs 8 lakhs
18-07-2021 Rs 10 lakhs
01-08-2021 Rs 12 lakhs
06-10-2021 Rs 15 lakhs
08-02-2022 Rs 8 lakhs

The total purchases from a single supplier during the FY 2021-2022 (01st April 2021 to 31st <arch 2022) exceed Rs 50 Lakhs and the previous year turnover also exceed Rs 10 crore. Hence section 194Q is applicable.

Practically one more common issue faced is that while calculating the threshold limit of RS 50 lakhs, will the amount be inclusive or exclusive of GST?

In this case, the provision clearly states that the purchases for the year shall exceed Rs 50 lakh. The purchases here imply the taxable amount exclusive of GST. Therefore if the taxable amount of purchases from a single supplier is Rs 45 lakh and the GST on it is Rs 8.1 Lakh, Section 194Q is not applicable.

TDS rate and the amount on which it will be deducted

Under Section 194Q the buyer deducts an amount equal to 0.1% of such sum exceeding Rs 50 lakhs in case the supplier of goods provides the buyer with its valid PAN details. In case of no PAN details, the TDS rate is 5%.

Practically it is seen that the buyer gets confused about whether or not to deduct TDS on the GST amount of the purchases. It is evident from the TDS rules, that no TDS is deducted on the GST amount. TDS is only attracted on the taxable amount of the purchase.

Let’s see the accounting entries in the case where section 194Q is attracted

In the books of Buyer

Entry 1 Transaction Type Particulars Debit Amount Credit Amount
At the time of booking purchase transaction Purchase 1,00,000
GST 5,000
To Sundry Creditors 1,04,900
To TDS Payable 100
Entry 2 On payment of the TDS on 7th of the next month TDS Payable 100
To Bank 100

In the books of Seller

Entry 1 Transaction Type Particulars Debit Amount Credit Amount
At the time of booking sale transaction Sundry Debtors 1,05,000
  To Sales 1,00,000
 To GST 5,000
Entry 2 Receipt of Sale proceeds from Debtor Bank A/s 1,04,900
 To Sundry Debtors 1,04,900
Entry 3 Entry of TDS receivable TDS Receivable 100
To Sundry Debtors 100

Issue related to the advance payment

Now, we know that the TDS is not deducted on the GST amount and the GST amount is not considered in the threshold of Rs 50 lakhs. What will be the taxable amount in case of advance payment?

Since the taxability attracts at the time of credit or payment whichever is earlier, advance payment may attract 194Q.

in case of advance payment, the buyer is unknown of the GST component included and thus it is advised that the TDS is deducted on the whole amount of advance payment made.

Issues of purchase return

Certain issues arose when the buyer after deducting TDS has to undergo some purchase returns. For such cases a circular as issues 13/2021 on 30th June 2021. The circular clarified that in such cases where TDS was deducted and later there was a purchase return, then the tax so deducted can be may be adjusted against the next purchase for the same seller.

Cross Application of 194Q and 206C(1H)

In practical field there lies confusion between the applicability of TDS 194Q and TCS 206C(1H) provisons. Both the provisons attracts tax on purchase of goods at the same rate of tax. However, it is be noted that where 194Q is applicable, Section 206C(1H) will not be applicable.

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Disclaimer: This article is written in simple language for easy understanding. You may refer to the relevant Notification, Circular, Rules, and Acts for legal steps. Discrepancies if any may be brought to the notice of the author. Thank you

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Hey, I am a semi-Qualified CA with a handful experience in working fields of accounting, direct and Indirect Tax and auditing. Skilled in Internal Audit Bank Audit, Income Tax matters ad GST Guidance I have completed my articleship of 3 years from a renowned CA firm in Kolkata. Proficient in tech View Full Profile

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3 Comments

  1. ALOK SETH says:

    in case of advance payment, the buyer is unknown of the GST component included and thus it is advised that the TDS is deducted on the whole amount of advance payment made.

    With respect to above line, my question is in case of advance payment, amount is treated as inclusive of GST and therefore we can calculate the same by doing back calculation. So even then should we deduct TDS. What will be the case if we have already made the advance payment.

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