Section 194Q Analysis: TDS on Purchase of Goods-Applicability, Threshold, Rate (With 35 FAQ’s)

In the Union Budget 2021-22 Government amazed the Businesses by proposing a new Section 194Q of Income Tax Act on TDS on Purchase of Goods, which is going to impact every Business operation drastically in India. The idea behind introduction of this New Section is to widen the scope of catching the defaulters. This section is going to be implemented with effect from 01-07-2021. This article “Section 194Q TDS on Purchase of Goods -Effective from 01st July 2021 (35 FAQ’s)” will cover the Applicability, Rate, Threshold, TDS Calculations, Exceptions, Need to Bring this Section, who is liable to Deduct, When to Deduct TDS etc.

Table of Contents

Applicability of Section 194Q of Income Tax Act:

Section 194Q of Income Tax Act is Applicable from 01-July-2021.

  1. Any person, being a BUYER
  2. Who is responsible for paying any sum to ANY RESIDENT (hereafter in this section referred to as the seller)
  3. For PURCHASE OF ANY GOODS
  4. Of the VALUE OR AGGREGATE of such value EXCEEDING INR 50 LAKHS IN ANY PREVIOUS YEAR,
  5. Shall, 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,
  6. DEDUCT an amount EQUAL TO 0.1 PER CENT. OF SUCH SUM EXCEEDING FIFTY LAKH RUPEES as income-tax.

CRUX: Buyer, responsible for paying to any resident for the purchase of goods of the value or aggregate of such value in excess of Rs 50 Lakh in any previous year is liable to deduct TDS.

Click here to subscribe Tax updates on WhatsApp- It’s Free

Need to Introduce TDS on Purchase of Goods- Section 194Q in Income Tax Act:

The rationale behind inserting the new TDS Sec.194Q by the Income tax department is to cover up the loophole in newly inserted TCS Section 206C (1H) which came into force from 1st October 2020. Last year government implemented TCS provision for Seller on Receipt of Sales of Goods, more than Rs. 50 Lakhs as sale consideration, during the current financial year. The TCS is payable on the amount of receipt which is greater than 50 Lakhs and received after 1st. Oct. 2020. Other Condition for its applicability was “seller” had it’s  total sales, gross receipts or turnover from the business carried on by him exceed 10 crore rupees during the financial year immediately preceding the financial year in which the sale of goods is carried out.

There were instances where Seller Turnover is less than 10 Crore but his receipt from sales of goods to particular buyer exceeding Rs.50 Lakhs. Therefore, there was no liability of TCS on seller. To handle this situation Government come up with similar type of provision for Purchaser (Buyer) via TDS applicability.

Threshold for Deduction of TDS u/s 194Q of the Income Tax Act, 1961

Tax shall be deducted u/s 194Q by a buyer if the Value or Aggregate of Value of Goods Purchased is EXCEEDING INR 50 Lakhs in any Previous Year.

The tax shall be deducted from the purchases made by a buyer if the following conditions are met:
(a) Goods are purchased from a resident person;
(b) The Value or aggregate of value of Goods Purchased is exceeding Rs. 50 lakhs in any previous year; and
(c) The buyer should not be in the list of persons excluded from the provision for deduction of tax.

Rate at which TDS is to be Deducted u/s 194Q:

The Rate at which the TDS is to be deducted under section 194Q of the Income Tax Act, 1961 is 0.1% of the purchase value exceeding Rs. 50 lakhs. If the seller has NOT furnished his PAN or Aadhaar , the tax shall be deducted at the rate of 5%.

35 FAQ’s on Section 194Q: TDS on Purchase of Goods

FAQ 1: From when Section 194Q TDS on Purchase of Goods Effective?

Section 194Q TDS on Purchase of Goods is effective from 01-07-2021.

FAQ 2: Who is liable to Deduct TDS under Section 194Q?

Tax shall be deducted u/s 194Q by a buyer whose 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.
Thus, the liability to deduct tax under this provision in the financial year 2021-22 shall arise if the turnover of the purchaser was more than Rs. 10 crores in the financial year 2020-21.

FAQ 3: When Tax shall be deduction under this provision?

The tax shall be deducted from the purchases made by a buyer if the following conditions are met:
(a) Goods are purchased from a resident person;
(b) The Value or aggregate of value of Goods Purchased is exceeding Rs. 50 lakhs in any previous year; and
(c) The buyer should not be in the list of persons excluded from the provision for deduction of tax.

NOTE: The tax shall not be deducted under this provision if the tax is deductible or collectible under any other provision except Section 206C(1H). Thus, if a transaction is subject to TCS under Section 206C(1H), 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).

FAQ 4: What shall be the timing of deduction of tax?

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. The tax shall be deducted even if the sum is credited to the ‘Suspense Account’.

FAQ 5: What is the rate at which tax is to be deducted?

The tax shall be deducted by the buyer of goods at the rate of 0.1% of the purchase value exceeding Rs. 50 lakhs if the seller has NOT furnished his PAN or Aadhaar , the tax shall be deducted at the rate of 5%.

FAQ 6: Is this provision also applicable on Purchase of Capital Goods?

Yes, section 194Q applies to purchase of all goods whether on capital or on revenue account.

FAQ 7: What will be the Consequence of Non-Deduction of TDS?

If TDS is not Deducted u/s 194Q then 30% of the Expense shall be Disallowed u/s 40a(ia).

FAQ 8: Whether the buyer importing goods from outside India required to deduct TDS u/s 194Q?

No, the obligation to deduct tax under this provision arises only when the payment is being made to a resident seller. In case of import, the seller is a non-resident, therefore buyer will not be having any obligation to deduct TDS. However, the TDS would required to be deducted u/s 195.

FAQ 9: Whether TDS is also applicable on Export Transaction?

TDS liability will arise when a payment is being made to a Resident Seller. As in the transaction of export of goods, the seller is a resident but the buyer is a non-resident. Thus, the liability to deduct tax under this provision may arise on the non-resident buyer, which may not be practically possible. Thus, the Central Government may exempt such transactions in view of the powers given by the Explanation to Section 194Q.

FAQ 10: Whether a transaction in securities through stock exchanges shall be subject to TDS under this provision?

Section 206C(1H) provides TCS on the sale of goods. CBDT has, vide Circular No. 17 of 2020, clarified that provisions of Section 206C(1H) 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). Therefore, TDS Shall not be deducted on these transactions.

FAQ 11: Whether TDS to be deducted on the purchase of immovable property by a developer?

Immovable property is not “goods”. Therefore, TDS would not be Deducted u/s 194Q.TDS shall be deductible under section 194-IA if consideration is Rs. 50,00,000 or more.

FAQ 12: Would the provision of section 194Q and provision of section 206C(1H), both be applicable for a transaction of purchase of goods?

Yes, the proposed provisions of section 194Q are similar to the provisions of section 206C(1H) of the Act.
The objective of the Government behind introducing Section 194Q is widening and deepening tax base provisions.
Though, the non-applicability of section 194Q is not extended to the transactions covered under section 206C(1H) of the Act, the second proviso to section 206C(1H) of the Act reads as under:
Provided further that the provisions of this sub-section shall not apply, if the buyer is liable to deduct tax at source under any other provision of this Act on the goods purchased by him from the seller and has deducted such amount.

If a buyer is liable to deduct tax at source under any other provision of the Act on the goods purchased by him and deducts such amount then such transaction will not again suffer collection of tax at source under section 206C(1H) of the Act. Thus, provisions of section 194Q and the provisions of section 206C(1H) are mutually exclusive.

FAQ 13: If the consideration for purchase of goods exceeds INR 50 Lakh, is the TDS required to be made on the entire consideration or only on the consideration that exceeds INR 50 Lakh?

The tax shall be deducted at source on the consideration that exceeds INR 50 lakh as Section 194Q requires the buyer to deduct tax at source on purchase of goods. at 0.1% of the sum exceeding INR 50 lakh in a financial year.
Let us say, in case where the first purchase was made for INR 35 lakh and the second purchase was made for INR 40 lakh, the TDS should be made only on the second purchase and only on the amount of INR 25 lakh (i.e. 35 lakh + 40 lakh – 50 lakh). The threshold of INR 50 lakh shall apply year-wise.

FAQ 14: Whether the threshold for TDS be reckoned for each seller and for the FY 2021-22, should it be from 01-Apr-2021 or 01-Jul-2021?

Yes, the Threshold of INR 50 Lakhs is Seller wise.
Regarding the Cut off date for the purpose of reckoning the threshold of INR 50 lakh, As a prudent measure, it is advisable that the purchase/s made prior to 01st July 2021 during FY 2021-22 shall be included.

Also, where the purchases made prior to 01st July 2021 already exceeded INR 50 lakh, the buyer need not to do TDS on that excess amount while paying or crediting further consideration to the account of the seller on or after 01st July 2021.
We also wish to make a mention that the CBDT vide its Circular No. 17 of 2020 while clarifying issue in case of application of section 206C(1H) of the Act had mentioned that for the purpose of reckoning the threshold, consideration received from 01-Apr-2020 shall be considered.

FAQ 15: Is buyer required to deduct tax at source at the time of payment of consideration as in case of the provision of section 206C(1H) of the Act or at the time of purchase?

The proposed provisions of section 194Q is to a large extent similar to the provisions of section 206C(1H) of the Act. However, the point for collection of TCS under section 206C(1H) of the Act is receipt of consideration whereas TDS under section 194Q is required to be made at the time of payment or credit, whichever is earlier.

Let us say, Mr. Max purchased goods on credit for INR 50 Lakh in the Year 1 and for INR 45 lakh in Year 2. Entire payment for the above two consignments were made in Year 2. In such case, there would not arise any TDS requirement under section 194Q for any of the above years since the purchase made for any of these years do not exceed INR 50 lakh. The threshold of INR 50 lakh is to be reckoned based on the amount of purchase in a year and not the amount of consideration or advance paid in a year.

FAQ 16: In case of multiple units of the same legal entity whether the threshold of turnover would include purchase from different locations/branches?

As per Sub-section (1) of section 194Q, the term buyer refers to a ‘person’ and a branch office is not a separate person but it is a unit of a ‘person’. Therefore, the purchases made from a single seller from different locations/units has to be aggregated to determine the applicability of the provision of this section.

FAQ 17: Whether purchase returns should be adjusted while computing the threshold of INR 50 lakh in a financial year?

The threshold of INR 50 lakh is to be computed considering the consideration paid for ‘purchase’ of goods and thus, if the goods are returned, the value of such goods shall be reduced for arriving at the threshold of INR 50 lakh.

However, such purchase returns ought to have been made on or before the point of tax deduction as the threshold of INR 50 lakh has to be checked at the point of time when liability to deduct at source arises. Any subsequent returns cannot be considered.

FAQ 18: Whether charges, namely, freight, packing etc. are part of the invoice should the same be considered for tax deduction u/s. 194Q?

The section uses the phrase ‘…for purchase of goods..’, which clearly indicates that the payment attributable to purchase of goods alone should be considered under section 194Q. Reimbursements are charged on the invoice on an adhoc basis, say as a % of goods sold, instead of actual charges, then such charges could be considered as part of the value of goods for computing the amount of tax deductible at source under section 194Q.

Caution needs to be exercised on the applicability of TDS under section 194C in respect of freight charges. However, the amount of GST levied as part of the invoice shall not considered for TDS in view of the clarifications from CBDT vide circular no. 23/17 dated 19-07-2017.

FAQ 19: Would there be a multiplicity of TDS under section 194Q on the same transaction?

It is made clear that where tax is deductible under any other provisions of the Act, such transaction will not be covered under the purview of section 194Q.

Thus, duplication of TDS provisions is avoided. However, it is possible that a transaction which was subject matter of TDS earlier in the hands of a buyer may again be subjected to TDS when the goods are resold.

For example, in a case where Bharath Petroleum sells fuel to XYZ fuel station, assuming the threshold conditions are fulfilled, the transaction is subject to TDS under section 194Q. In this case, XYZ fuel station shall deduct tax at source. If Uber cab services for all its cars have fuel filling arrangement with XYZ fuel station, again the same transaction would be subjected to TDS under section 194Q. In this scenario, Uber, being the purchaser will do TDS under section 194Q. Same goods suffering multiplicity of TDS would not be avoidable in the absence of any specific exclusion in the Law. The intention of section 194Q is to widen and deepen the tax base. However, this purpose would get defeated and add more baggage to the already overcrowded compliance culture under Chapter XVII of the Income-tax Act.

FAQ 20 : Will TDS under section 194Q be deducted on GST amount also?

GST levied as part of the invoice shall not considered for TDS in view of the clarifications from CBDT vide circular no. 23/17 dated 19-07-2017.

FAQ 21: Whether TDS is required to be deducted on the transaction in electricity?

Section194Q provides for the deduction of tax on the payment made for the purchase of goods. The Apex Court in the case of State of Andhra Pradesh v. National Thermal Power Corporation (NTPC) (2002) 5 SCC 203, held that electricity is a movable property though it is not tangible. It is ‘goods’. Thus, it may be concluded that the tax should be deducted from the payment made in respect of the transaction in electricity.
A transaction in electricity can be undertaken either by way of direct purchase from the company engaged in generation of electricity or through power exchanges. The CBDT has clarified vide Circular No. 17 of 2020 that the transaction in electricity, renewable energy certificates and energy-saving certificates traded through power exchanges registered under Regulation 21 of the CERC shall be out of the scope of TCS under the provision of Section 206C(1H).

FAQ 22: Whether TDS should be deducted on the purchase of software?

The Supreme Court in its landmark decision of Tata Consultancy Services v. State of A.P [2004] 141 Taxman 132 (SC) held that Canned software (off the shelf computer software) are ‘goods’. Therefore, purchase of Canned software (off the shelf computer software) is purchase of ‘goods’ and will be liable to TDS under section 194Q even if buyer-entity capitalizes the same in its books. Purchase of customised or tailor-made software may be “services” and liable to TDS under section 194J or section 194-O.

FAQ 23: Whether TDS is liable to be deducted on purchase of Jewellery not connected with business?

Tax is required to be deducted by a buyer carrying on business whose 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. Jewellery, being a movable property, is covered within the term goods. There is no specific exclusion under Section194Q for deduction of TDS on purchase of jewellery. There is no condition that the purchases should be connected with the business only. Thus, if a person is falling within the definition of the buyer, tax is required to be deducted even if such purchase is not connected with the business carried on by him.
Thus, the tax shall be deductible on purchase of jewellery if other conditions are also fulfilled.

FAQ 24: Whether additional, allied and out-of-pocket expenses form part of the purchase value of goods?

Where these expenses are reflected in the purchase invoice itself, it should form part of purchase value and TDS will be deductible on the same. If they are charged through a separate invoice and on actuals basis, it should not form part of purchase value for deduction of TDS and for computing the Rs. 50,00,000 threshold limit.

FAQ 25: Whether TDS has to be deducted on advance payment made to the seller?

Subject of TDS liability is “sum for purchase of goods” and not “sum for goods purchased”. The latter expression would mean payment for completed purchases of goods where purchases is completed by delivery of goods by the seller. Advance payment is clearly sum for “purchase of goods” as purpose of payment is to purchase goods and adjust the advance against amount payable for such purchase. Therefore, advance for payment of goods will also attract TDS.

FAQ 26: Whether the amount advanced as a loan to the seller shall come within the ambit of this provision?

Loan advanced by buyers is not a payment towards the purchase of goods. Hence, there is no requirement to deduct TDS on loan advanced by the buyer. However, if at any future date, such loan amount is settled against purchased value, the liability to deduct TDS shall arise. The tax shall be deducted on the date on which parties agreed to adjust the loan amount against the outstanding liability.

FAQ 27: Whether tax to be deducted on the purchase of goods by one branch from another?

The TDS under this section is required to be deducted by any person, being a buyer, responsible for making payment to the seller for the purchase of goods. Thus, the existence of two distinct parties as ‘seller’ and ‘buyer’ is a pre-requisite to construe a transaction as a purchase. The condition of purchase is not fulfilled in the context of branch transfer. Therefore, the provisions of this section shall not apply in the case of branch transfers.

FAQ 28: What shall be the treatment of debit note for computation of TDS?

As the tax has to be computed on the purchase value, the adjustment made to the ledger of the seller by issuing the debit note will not have an impact on the tax to be deducted. The position would remain the same if, after the deduction of tax, the seller repays some consideration to the buyer. In such a situation, the amount of purchase value shall not be reduced with the amount so refunded or the debit note so adjusted for calculation of TDS.

FAQ 29: If the seller has multiple units, whether purchases made from different units need to be aggregated?

Where tax is required to be deducted at source, the deductee is required to furnish his PAN or Aadhaar number to the deductor failing which the tax is required to be deducted at higher rates. If the PAN or Aadhaar number is available, the threshold limit of Rs. 50 lakhs shall be computed in respect of each PAN or Aadhaar number. In other words, if different units of the seller are under the same PAN or Aadhaar number, the amount paid or payable to all such units shall be aggregated to compute the limit of Rs. 50 Lakhs.

FAQ 30: Can a seller apply for the certificate for lower deduction of TDS?

An assessee can apply to the Assessing Officer to issue a certificate for deduction of tax at lower rates. Such certificate shall be issued if existing and estimated tax liability of assessee justifies deduction of tax at a lower rate. Further, certain assessees have an option to file a declaration for nil deduction of tax.
However, the Finance Act, 2021 has not made any consequential amendments to section 197/section 197A to extend the benefit to apply for a certificate for deduction of tax at lower rates or to file declaration for nil deduction in respect of transactions covered under Section194Q. Hence, the seller does not have the option to approach the Assessing Officer to issue a certificate for a lower tax deduction or to file declaration for nil deduction in respect of transactions covered under section194Q. In fact, Section 206C(1H) also does not allow the buyer to apply for the lower or nil TCS certificate.

FAQ 31: Will TDS under section 194Q apply to redemption of preference shares by a company?

Preference shares are movable property and goods.
Therefore, if redemption proceeds to any preference shareholder exceeds Rs. 50,00,000 limit, TDS under section 194Q would apply as it amounts to purchase of goods.

FAQ 32: Is section 194Q applicable to barter exchange of goods?

It appears so in view of the words “payment thereof in any mode” used in section 194Q

FAQ 33: Will section 194Q apply to loan of material?

It so happens, for example, Builder A takes building material on loan from Builder B. Builder A commits to replace to Builder B the quantity taken when his own stocks arrive. This is loan of material. Section 194Q applies to purchase of goods and not loan of material.

FAQ 34: How does a loan of material differ from barter?

In barter, it is not exactly the same item in same quantity that is given back. In loan of material same quantity of same material taken is given back.

FAQ 35: Can a seller apply for the certificate for lower deduction of TDS?

An assessee can apply to the Assessing Officer to issue a certificate for deduction of tax at lower rates.

But ,the Finance Bill, 2021, has not proposed to extend the benefit to apply for a certificate for deduction of tax at lower rates or to file declaration for nil deduction in respect of transactions covered under Section 194Q TDS on purchase of goods.
Hence, the assessee does not have the option to approach the assessing officer to issue a certificate for a lower tax deduction or to file declaration for nil deduction in respect of transactions covered under section 194Q. In fact, Section 206C(1H) also does not allow the buyer to apply for the lower or nil TCS certificate.

Click here to subscribe Tax updates on WhatsApp- It’s Free

Hope this Article on Section 194Q of Income Tax Act, 1961 TDS on Purchase of Goods could be able to cover all the possible queries an assessee may face practically.

Recommended Read: All About Section 206C(1H)- TCS on Sale of Goods

Author Profile

3ccf47d2376b405be62f41db85a15a14?s=100&d=mm&r=g
CA Shiwali Shukla
Shiwali Shukla is a member of ICAI since 2018 & She has excelled in Chartered Accountancy & follows an innovative & talented approach towards work, She is also an Ex- Employee of Ernst & Young. She is having the Expertise in the filed of Direct Taxation, Indirect Taxation, Company Law matters & Finance. She is also having more than 3 years of Experience in the same field. & more than 3 years if Experience in the field of Direct as well as Indirect Taxation..

1 thought on “Section 194Q Analysis: TDS on Purchase of Goods-Applicability, Threshold, Rate (With 35 FAQ’s)”

  1. They should just take a fixed % of our sales and do the calculations by themselves on how much to allot to which head. it is going to be impossible for the masses to follow such laws as we are not so much literate and the CAs already have too much on their hands and also bank account by jacking up their charges.

    Reply

Leave a Comment