Understanding Section 194Q of Income Tax: A Simple Guide for Businesses
To ensure tax collection at the source of income, the government introduced Section 194Q in the Finance Act, 2021. This section mandates TDS on the purchase of goods and has been effective since July 1, 2021. Understanding Section 194Q is essential for businesses to avoid penalties and ensure compliance.
In this blog, we’ll break down Section 194Q in simple terms, covering its purpose, applicability, and how it impacts businesses.
What is Section 194Q?
Section 194Q mandates the deduction of Tax Deducted at Source (TDS) on payments made for the purchase of goods. It was introduced to ensure that the government receives tax revenue at the time of the transaction itself, rather than waiting until the seller files their income tax return.
This section applies to buyers who purchase goods worth more than Rs.50 lakhs in a financial year. The buyer is required to deduct [email protected]% at the time of crediting the payment to the seller’s account or at the time of payment, whichever is earlier.
Thus, section 194Q of the Income Tax Act, 1961 requires a buyer to deduct TDS at 0.1% when purchasing goods from a seller, provided certain conditions are met.
Applicability of Section 194Q
A buyer must deduct TDS under Section 194Q if:
- The buyer’s total turnover or gross receipts exceeded Rs.10 crores in the previous financial year and
- The total purchases from a single seller exceed Rs.50 lakhs in a financial year.
- The transaction involves the purchase of goods (not services).
Responsibility for TDS Deduction Under Section 194Q?
The responsibility of deducting TDS lies with the buyer of the goods. If you are a business with a turnover exceeding Rs.10 crore and you purchase goods worth more than ₹50 lakh from a single seller in a financial year, you must comply with Section 194Q.
TDS Rate Under Section 194Q
- 0.1% on the purchase value exceeding Rs.50 lakhs.
- 5% if the seller does not have a PAN.
When Should TDS Be Deducted?
TDS must be deducted at the time of crediting the amount to the seller’s account or making the payment, whichever is earlier.
How Does Section 194Q Impact Businesses?
For Buyers:
- Buyers must ensure they have the seller’s PAN to deduct TDS at the lower rate of 0.1%.
- They need to maintain accurate records of purchases and TDS deductions.
- Non-compliance can lead to penalties and disallowance of expenses.
For Sellers:
- Sellers must provide their PAN to avoid higher TDS deductions.
- They should reconcile their accounts to ensure the correct TDS has been deducted by the buyer.
Practical Example of Section 194Q
Let’s say Bizindigo Technologies Pvt Ltd (with a turnover of Rs.12 crore in FY 2022-23)) purchases goods worth Rs.60 lakh from Supplier XYZ Pvt Ltd in the financial year 2023-24. Here’s how Section 194Q applies:
Since the purchase exceeds Rs.50 lakh, Bizindigo must deduct TDS.
If Supplier XYZ Pvt Ltd provides their PAN, Bizindigo will deducts TDS at 0.1% on the amount exceeding ₹50 lakh, i.e., ₹10 lakh.
TDS = 0.1% of ₹10 lakh = ₹1,000.
If Supplier XYZ Pvt Ltd does not provide their PAN, TDS will be deducted at 5% on ₹10 lakh = ₹50,000.
Exceptions to Section 194Q
TDS under Section 194Q is not applicable if:
- The seller is required to deduct TDS under any other section.
- TCS (Tax Collected at Source) is already applicable under Section 206C(1H).
Compliance and Due Dates
- TDS Payment: By the 7th of the following month.
- TDS Return Filing: Quarterly (Form 26Q).
- TDS Certificate: Issue Form 16A to the seller.
Penalties for Non-Compliance
- Interest: 1% per month for late deduction, 1.5% for late payment.
- Disallowance of Expense: 30% of the purchase amount can be disallowed as an expense.
Conclusion
Section 194Q is an important provision in the Income Tax Act that aims to improve tax compliance and transparency in business transactions. By understanding its applicability, TDS rates, and compliance requirements, businesses can avoid penalties and ensure smooth operations.
If you’re a buyer with a turnover exceeding Rs.10 crore, it’s essential to implement robust systems for TDS deduction under Section 194Q. For sellers, providing accurate PAN details and reconciling TDS deductions is equally important.
Businesses must stay compliant by deducting TDS on time and filing returns correctly. Proper record-keeping and tax planning can help avoid penalties and ensure smooth operations.
Need more clarity? Consult a tax expert today!