The financial landscape in India witnessed a significant shift with the introduction of Section 194Q under the Income-tax Act, 1961, through the Finance Act, 2021. This particular section focuses on Tax Deducted at Source (TDS) on the purchase of goods, excluding services. In this blog, we will delve into the intricacies of Section 194Q, covering key aspects that buyers and sellers need to be aware of.
1. Applicability of Section 194Q
Section 194Q applies to buyers meeting the following criteria:
- Turnover or gross receipt or sales exceeding Rs 10 crore in the previous financial year.
- Responsible for payment to a resident seller for the purchase of goods exceeding Rs 50 lakh in value.
2. TDS Rate
When a seller is paid more than Rs 50 lakh for goods, TDS is deducted at a rate of 0.1% of the total amount that exceeds Rs 50 lakh in a financial year.
3. TDS Calculation Process
When procuring goods exceeding Rs 50 lakh from a seller in a fiscal year, the buyer is required to withhold TDS. This deduction, applied after subtracting Rs 50 lakh from the total purchase value, emphasizes a seller-specific threshold, ensuring TDS compliance for each seller annually.
4. Implementation of Section 194Q Date and Threshold
Effective from July 1, 2021, Section 194Q applies to purchases made after this date. However, the Rs 50 lakh threshold is considered from April 1, 2021.
5. Interaction with GST
Turnover is calculated excluding GST, while TDS is computed at 0.1%, including GST.
6. When to Implement a TDS Reduction
TDS is deducted when the amount is credited to the seller or paid, whichever is earlier. If an advance payment is made, TDS should be deducted immediately.
7. PAN Non-furnishing Consequences
- In case the seller fails to furnish a PAN, TDS is deducted at 5%, instead of 0.1%.
- Without PAN, the applicable tax rate in other cases is 20%.
- Regarding Section 194Q, the applicable TDS rate is 5%.
8. TDS Deposit Deadline
TDS is to be deposited by the 7th day of the month following the deduction month. For March, the deadline extends to April 30.
9. TDS Return Filing: Form 26Q
Filing deadlines for TDS returns are July 31, October 31, January 31, and May 31 for quarters ending June 30, September 30, December 31, and March 31, respectively.
10. Exceptions to Section 194Q
Section 194Q does not apply when TDS is already deducted under another provision of the Income-tax Act (ITA) for a purchase transaction. However, if a purchase falls under both Section 194O and Section 194Q, the TDS rules of Section 194O will take precedence. An exception is made for Section 206C(1H), where the seller collects tax (TCS) for sales exceeding Rs 50 lakh in a previous year. In cases where both Section 194Q and Section 206C(1H) are applicable, only Section 194Q will be enforced.
11. Amendments in Section 194Q
- TDS under Section 194Q is triggered when an amount is credited to a 'Suspense account' or a relevant account in the books of a person obligated to make the payment.
- Deductions are applicable in scenarios involving such transactions under both Section 206C(1H) and Section 194Q. However, specifically for these situations, Section 194Q mandates the deduction.
- Non-resident sellers are exempt from Section 194Q, which specifically pertains to transactions with resident sellers.
- Non-compliance by the buyer with Section 194Q's tax deduction provisions may lead to the disallowance of expenditure, potentially up to 30% of the transaction value.
- Section 194Q applies to purchases of both revenue and capital goods.
- The TDS deduction rate on purchases exceeding Rs 50 lakhs is 0.1%, but if the seller lacks a PAN, the deduction rate is higher at 5%.
12. Section 194Q Declaration Format
A standardized format for the declaration is recommended, specifying the buyer-seller relationship, TDS rate, and PAN information.
Basic parts:
- Header: Declare the purpose in simple terms following the Income Tax Act of 1961 Section 194Q.
- Your Details: Include your name, PAN number, and designation (if applicable). If representing an organization, mention the company name and PAN.
- Turnover Declaration: Indicate the turnover for the previous fiscal year. Verify whether you are required to deduct TDS under Section 194Q if your income exceeds ₹10 crore.
- Indemnity Clause (Optional): You may include an indemnity clause offering to cover any consequences arising from incorrect information provided in the declaration.
- Date and Signature: To ensure authenticity, include the date and your official signature.
