At Suvit, we aim to simplify complex financial regulations so you can focus on growing your business. One such regulation that has created ripples in the financial landscape of India is Section 194Q under the Income-tax Act, 1961, introduced through the Finance Act, 2021.
This section pertains to the deduction of Tax Deducted at Source (TDS) on the purchase of goods, and its impact is something every business should understand.
Whether you're a buyer or a seller, knowing the nuances of Section 194Q is crucial for maintaining compliance and avoiding potential penalties. Let’s walk through what Section 194Q entails and how it affects your business operations.
Applicability of Section 194Q: Who Needs to Pay Attention?
Section 194Q applies to specific buyers, and here’s how you can determine if you fall under its purview:
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Turnover: If your turnover, gross receipt, or sales exceed ₹10 crore in the previous financial year, you are obligated to deduct TDS.
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Transaction Size: TDS is applicable when you pay a resident seller for the purchase of goods exceeding ₹50 lakh in value during a financial year.
Simply put, if you're a buyer who crosses both these thresholds, this section applies to you.
TDS Rate Under Section 194Q
Once your transaction with a seller surpasses the ₹50 lakh mark in a financial year, you are required to deduct TDS at 0.1% on the amount that exceeds ₹50 lakh. For instance, if your total purchases from a seller amount to ₹70 lakh, TDS will apply to ₹20 lakh (₹70 lakh - ₹50 lakh).
How Is TDS Calculated?
Let’s break down the TDS calculation process to clarify things:
- Suppose you buy goods worth ₹70 lakh from a seller in a fiscal year.
- The first ₹50 lakh is exempt from TDS.
- The remaining ₹20 lakh is subject to TDS, which will be 0.1% of ₹20 lakh.
- The TDS deducted from this transaction would be ₹2,000.
This TDS is applicable on a seller-specific basis, meaning you calculate this for each individual seller with whom you do business annually.
When Did Section 194Q Come Into Effect?
Section 194Q became effective from July 1, 2021. However, while the rule kicked in on that date, the ₹50 lakh threshold is calculated from April 1, 2021, making it retroactive for purchases made earlier in the financial year.
GST and TDS: What’s the Deal?
The question of how Goods and Services Tax (GST) interacts with TDS under Section 194Q is an important one. Here’s the lowdown:
- Turnover Calculation: When calculating your turnover to determine whether you fall under Section 194Q, GST is excluded.
- TDS Calculation: However, when you’re calculating the 0.1% TDS, GST is included in the total purchase amount.
This subtle distinction is important, so ensure you're calculating correctly to avoid compliance issues.
When to Deduct TDS?
The timing of the TDS deduction is also crucial. TDS should be deducted either when the payment is made to the seller or when the amount is credited to the seller’s account, whichever occurs earlier. This means if an advance payment is made, TDS must be deducted immediately at the time of that payment, not after receiving the goods.
What If the Seller Doesn't Provide a PAN?
Non-furnishing of a Permanent Account Number (PAN) by the seller changes the dynamics of TDS deduction:
- Without PAN, the TDS rate skyrockets to 5% instead of the usual 0.1%.
- This increased rate encourages compliance from sellers and ensures that buyers have the necessary details to apply the lower rate.
Deadline for Depositing TDS
Once you’ve deducted TDS, you must deposit it with the government by the 7th day of the following month. For deductions made in March, the deadline is extended to April 30. Missing these deadlines can result in penalties, so it's important to stay on top of these timelines.
Filing TDS Returns: Form 26Q
Once TDS is deducted and deposited, the next step is to file your TDS returns. These returns must be filed quarterly using Form 26Q. The deadlines for filing are as follows:
- July 31 for the quarter ending June 30,
- October 31 for the quarter ending September 30,
- January 31 for the quarter ending December 31, and
- May 31 for the quarter ending March 31.
Accurate and timely filing of returns is essential to avoid penalties and ensure compliance.
Exceptions to Section 194Q: When Does It Not Apply?
There are certain exceptions to Section 194Q that are important to note:
- If TDS is already deducted under another section of the Income-tax Act, Section 194Q will not apply.
- When a transaction falls under both Section 194Q and Section 194O, the provisions of Section 194O (which deals with TDS on e-commerce transactions) take precedence.
- If both Section 194Q and Section 206C(1H) (TCS on the sale of goods) apply, only Section 194Q will be enforced, meaning TDS will be deducted, and no TCS will be collected.
Amendments in Section 194Q: What's New?
Several amendments have fine-tuned the application of Section 194Q:
- TDS can now be deducted even if the amount is credited to a Suspense Account in the buyer’s books.
- While non-resident sellers are exempt from Section 194Q, non-compliance by resident buyers can lead to the disallowance of up to 30% of the transaction as expenditure.
- Importantly, Section 194Q applies to purchases of both revenue and capital goods.
Declaration Format for Section 194Q Compliance
To simplify compliance, a standardized declaration format is recommended when interacting with sellers. Here’s what should be included:
- Header: Clearly state the purpose of the declaration as per Section 194Q of the Income-tax Act, 1961.
- Your Details: Include the name, PAN number, and designation of the person making the declaration. If you represent an organization, provide the company name and PAN.
- Turnover Declaration: Specify your turnover for the previous financial year to confirm your requirement to deduct TDS.
- Indemnity Clause (Optional): This clause can protect against consequences from incorrect information provided.
- Date and Signature: Include the date and an official signature to ensure authenticity.
Managing TDS on Purchases with Self-Assurance
Understanding Section 194Q and its impact is essential for Indian businesses engaged in high-value transactions. The section introduces a streamlined way of ensuring tax compliance on large purchases, but it also requires careful monitoring to ensure you're deducting TDS correctly and on time. At Suvit, we believe staying updated on tax regulations is important for the success of any business. Whether you’re dealing with TDS on purchases or managing other aspects of your financial compliance, keeping these key rules in mind will help you avoid penalties and maintain smooth operations. Make sure to consult with a tax professional to handle the complexities of tax compliance, ensuring you never miss a deadline or deduction.
