Income Tax TDS on Electricity Transactions: A Shift from Section 206C(1H) to 194Q of the Income-tax Act, 1961.
Introduction
This article examines the applicability of Section 194Q of the Income-tax Act, 1961 to the purchase of electricity — a significant development in the Indian tax landscape. With the omission of Section 206C(1H) effective from the financial year 2025–26, the responsibility for tax compliance on high-value transactions involving goods, including electricity, now shifts from the seller to the buyer.
This change is particularly relevant for large industrial consumers, infrastructure companies, and businesses engaged in bulk electricity procurement.
The purpose of this article is to clarify the implications of this transition from the buyer’s perspective and to provide practical guidance for ensuring compliance.
Section 194Q: At a Glance:
Section 194Q, introduced through the Finance Act, 2021, mandates a buyer to deduct TDS on purchases of goods from a resident seller, provided the following conditions are met:
- The buyer’s turnover exceeds ₹10 crores in the preceding financial year.
- Purchases from a particular seller exceed ₹50 lakhs in a financial year.
- TDS Rate: 0.1% (5% if PAN/Aadhaar not furnished).
- Deduction applies on value exceeding ₹50 lakhs.
It is important to note that Section 194Q applies only to the purchase of “goods.” Therefore, a key consideration is whether electricity qualifies as “goods” under the Act.
Can Electricity Be Considered as ‘Goods’ Under the Income-tax Act?
The Income-tax Act does not define “goods.” However, judicial precedents and other legislative references provide clarity:
- Sale of Goods Act, 1930 – Classifies electricity as movable property, thus qualifying as goods.
- GST Law – Treats electricity as goods (though exempt from GST under specific circumstances).
- Supreme Court Ruling – In State of Andhra Pradesh v. NTPC (2002), the Court held that electricity constitutes “goods.”
- Customs Tariff (Heading 2716 00 00) – Explicitly lists electricity as “goods”.
Based on the above, electricity is recognized as “goods,” making it subject to TDS under Section 194Q where the specified thresholds are met.
Transition from 206C(1H) to 194Q: Key Comparisons
| Particulars | Section 194Q (TDS by Buyer) | Section 206C(1H) (TCS by Seller) |
| Nature of Compliance | Tax Deducted at Source | Tax Collected at Source |
| Applicable To | Buyer | Seller |
| Turnover Threshold | ₹10 crore (buyer) | ₹10 crore (seller) |
| Transaction Threshold | ₹50 lakh per seller | ₹50 lakh per buyer |
| Rate | 0.1% (5% if no PAN) | 0.1% (1% if no PAN) |
| Status (FY 2025–26) | Applicable | Omitted |
From 1st April 2025, Section 194Q will be the applicable provision for such transactions. Sellers will no longer be required to collect TCS under Section 206C(1H), which stands omitted.
FAQs for Electricity Buyers
1.Is TDS required on electricity purchases?
Yes. Electricity is classified as goods. If the buyer’s turnover exceeds ₹10 crore and purchases from a particular seller exceed ₹50 lakh annually, TDS under Section 194Q must be deducted.
2. Should TDS be deducted on advance payments to power suppliers?
Yes. If advances exceed the ₹50 lakh threshold, TDS must be deducted at payment or credit, whichever is earlier.
3. Are government electricity suppliers exempt from TDS?
Yes. No TDS is required when payments are made to the:
- Government
- RBI
- Statutory bodies exempt under Section 10 (e.g., CERC, IRDA)
4. What if the buyer fails to deduct TDS?
Non-deduction results in:
- Interest at 1% per month
- Expense disallowance under Section 40(a)(ia)
- Possibility of being treated as an assessee-in-default
Action Points for Buyers
- Identify all electricity suppliers crossing the ₹50 lakh threshold.
- Ensure PAN/Aadhaar details of suppliers are available and verified.
- Configure accounting systems for automatic TDS deduction under 194Q.
Conclusion:
With the withdrawal of Section 206C(1H) from FY 2025–26, Section 194Q becomes the key provision for TDS on high-value purchases, including electricity. While this shift simplifies the compliance framework by removing overlap, it imposes a greater compliance burden on buyers.
Organizations — especially those involved in manufacturing, infrastructure, and bulk power procurement — must reassess their procurement policies and systems to align with the new TDS regime. In the absence of further official guidance, a prudent, well-documented approach is recommended to mitigate compliance risks.
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Disclaimer: The views expressed in this article are those of the author and are intended for informational purposes only. For specific cases, readers are advised to consult with a qualified tax professional.
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