Section 194Q: TDS Applicability On Goods Purchased

TDS (Tax Deducted at Source) is not any tax but instead a mode of tax collection. If simply put, it is a ‘pay as you earn’ scheme of tax collection. It is likely that you must’ve heard about it. Now, what if you're told there is a new provision in TDS? This is where sec194Q comes into play. This new provision in TDS requires the deduction in the purchase of goods, too, according to the Finance Act 2021, which also introduced another change. It demands a higher TDS rate for non-filers of IT returns when considering their previous two financial years from 1st July 2021 onwards. So, before understanding or adopting any new section, we need to go through the definitions and explanations given by the 194Q. As this article unfolds and falls to its conclusion, we shall be learning about 194Q to its core. So catch up on these new developments in TDS as we move further.

Did you know? It is the first time in history the tax is levied on the procurement of products because of the 194Q nature of the payment.

What are Sections 194Q and 206C?

As the Finance Act 2021 introduced the 194Q TDS, which applies to purchasing goods, we find that 194Q holds quite similar to 206C (1H) in certain aspects. While there are several differences too, on the other side.

These provisions have the same condition: they require a turnover of more than ₹10 crores. Secondly, both rates are affixed to 0.1% if the amount exceeds the threshold limit of ₹50 lakhs and are not applicable where tax is deducted under some other Act.

However, this is where the similarities disappear, and we see quite a lot of points that differ:

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Role of Buyer and Seller 

There are two parties involved in this subsection: the buyer and the seller. A "buyer" is a person whose turnover from business exceeds ₹10 crores during the full year immediately preceding the financial year in which the goods were bought. A buyer is indeed a person purchasing the goods and is responsible for 194Q TDS payment. 

On the other hand, a seller is a person dealing in the business of selling any goods. A buyer is further responsible for paying any sum to any seller (being a resident) for the purchase of goods (including capital goods), where the value exceeds the amount of ₹50 lakhs in any previous year, and also shall deduct 194Q TDS rate of 0.1%.

Conditions for 194Q

• Section 194Q applies only to the buyers whose turnovers or gross receipts from business exceed ₹10 crores during the financial year immediately preceding the financial year in which goods are purchased.
• Under the provisions of the 194Q, tax shall be deducted only from a buyer who is a resident of India.
• 194Q TDS payments are mandatory for residents for which the provision is applicable.

• 194Q TDS rate is set to 0.1% of the value/aggregate value of the goods. Also, keep in mind that this rate shall increase to 5% if the seller does not hold a PAN in India.
• The liability to deduct tax would arise at the time of credit/payments (whichever is earlier).
• This section is provided for purchasing goods only, not services.
• Tax to be deducted at the earliest of the following dates: time of credit of such value to the seller's account or time of payment.
• This provision is not applicable in cases where:

• Tax is deductible under any other provisions of this Act.
• Tax is deductible under any provisions of section 206C except 206C (1H).
• Several transactions like salary, premature withdrawal of employees' provident fund, winnings from any lottery or crossword puzzles or card games, winnings from any horse races, and income from investment in a securitisation trust are excluded.

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High Rate of TDS

Deduction of TDS shall be at a rate higher than the average rate (i.e., 0.1% for purchases exceeding ₹ 50 lakhs) for those who have failed to file their ITRs. People who ought to be included in the list of non-filers are

• The ones who have not paid ITRs for the previous two financial years before the FY in which tax is to be deducted.
• The due date for the ITR payment has expired.

Purpose of 194Q TDS

The intent of the government behind the introduction of this provision is to establish the trail of high-value transactions for the purchase of goods, including capital goods. The amendments under this provision have increased the compliance burden for the taxpayer as it impacts the most basic transactions of purchase and sale of goods. Also, it was introduced by the government to include those transactions for purchasing and selling goods left uncovered in the other remaining subsections of TDS. It also helped the government by the enforcement of the provision for the collection of Income Tax Returns without any delay of payment from the non-filers.

194Q TDS Applicability on E-commerce or E-auctioneer

Earlier, there was no deduction on payments made by e-commerce participants; however, with  TDS 194Q, e-auctioneers are required to pay the tax. Therefore, section 194Q will widen the TDS base along with 194Q by bringing e-commerce participants under the tax.

TDS on Pensions of Senior Citizens

Senior citizens aged 75 years or above are provided conditional relief on TDS. Based on these conditions, relaxations given to senior citizens are:

• Senior citizens should be ‘residents’ of the nation in the previous year.
• They receive pension income in the bank account maintained with the specified bank.
• The senior citizen has no other income except interest income received or receivable from any account maintained in the same specified bank in which they receive the pension income.
• Such individuals have furnished a declaration to the specified bank containing such particulars in such form and verified in such manner as may be prescribed.
• The bank is a ‘specified bank’ as notified by the Central Government.

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GST and 194Q TDS Applicability

By the amendments, it is provided if, in case, the GST component is indicated separately in the invoice and tax is deducted at the time of credit from the seller's account, then tax is to be removed under Section 194Q of the Act on the amount credited without including such GST. A threshold limit of ₹10 crores shall be exclusive of GST, and ₹50 lakhs shall be inclusive of GST.

TDS and the Central/State Government

An issue has been raised in cases where any government department will be considered a 'seller' for tax deduction under Section 194Q of the Act. Thus, Section 194Q clarifies that the Central Government or State Government shall not be considered 'sellers' and no tax is to be deducted by the buyer when any department of the Central Government or State Government sells goods. In connection with this, it is further made clear that everyone else must abide by the rules of Section 194Q. That tax must be withheld following those rules, including public sector undertakings, corporations created under the Central or State Act, and other similar bodies, authorities, or entities.

Removing Difficulties Related to 194Q

If any difficulty arises in giving effect to the provisions of this section, the CBDT (Central Board of Direct Taxes) may issue guidelines with removing the difficulty with the previous approval of the Central Government. Every guideline issued by the Board as above shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and the person liable to deduct tax. So, If the government states that there are practical difficulties in implementing the Tax Deduction at Source (TDS) contained in section 194C of the Act, then, to remove such difficulties, the following are mandated:

• Transactions in securities and commodities are traded through recognised stock exchanges or by the recognised clearing corporation, which is located in the Service Center.
• Transactions in electricity, renewable energy certificates, and energy saving are initiated and traded through power exchanges as registered as per the CERC.

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Understanding Threshold Limits

TDS shall be deducted for purchases above ₹50 lakhs, and the investments made up to 30.06.2021 shall be considered while deciding the threshold. Therefore, the 194Q TDS will not be deducted if the initial purchase after 30.06.2021 and is less than the threshold amount. For example, as mentioned in the table below, if the transactions made by the buyer before 30.06.2021 is less than the threshold value. Then TDS will not be deducted from the payments (i.e.,₹35,00,000 here).

And if it falls above the threshold amount, then the TDS will be deducted on payments from 30.06.2021 onwards. For example, as mentioned in the table below, if the transactions made by the buyer before 30.06.2021 are more than the threshold value. Then, 194Q TDS will not be deducted from the payments (i.e.,₹50,00,000 here).

Conclusions From The CBDT Regulations On 194Q TDS

Here is an example of how the provision under this section is enforced:

Guidelines as mentioned by CBDT:

• Any transaction that occurred before the mentioned date won't be considered under this provision.
• Purchases made between 1 April and 30 June should be taken to determine the threshold.
• 194Q TDS is not to be deducted on the GST amount indicated separately in the purchase invoice.
• Sec 194Q should not be applied to purchases debited or paid before 1.7.2021.
• In the case of Purchase Returns, the excess deducted TDS amount will be adjusted against the next purchase from the same seller.
• The threshold turnover limit of the buyer's turnover above ₹10 crores in the immediately preceding financial year shall include only business turnover and not non-business receipts.
• The interplay between TDS by an e-commerce operator under Section 194Q, TDS on purchase of goods under Section 194Q and TCS on sale of goods under section 206C(1H).
• TDS provisions u/s 194Q are not applicable in the case of buyers who are NRIs.
• Section 194Q is not applicable if the seller is exempt from the payment of Income Tax.
• Sec 194Q is not applicable in the case of the purchase of shares and securities and electricity.

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Conclusion:

So, in the conclusion of it all, as per 194Q, the buyer whose turnover or gross receipts or total sales exceeds ₹10 crores in a financial year immediately preceding the relevant financial year shall be liable to deduct tax at a rate of 0.1% on the value exceeding ₹50 lakhs at the time of making payment to the seller or credit of such importance to the seller's account; whichever is possible earlier. Additionally, the value of ₹50 lakhs has been taken into account as a threshold value for that financial year. If the seller doesn't provide any PAN/aadhar, then the 194Q TDS rate shall be 5%. Provision of this section shall be applied when value is credited in the books of the person liable to pay the matter or in any account called 'suspense account' or by another name. Provisions of Section 194Q shall apply to the transactions in the case of potential overlap between Sec 194Q and Section 206C (1H).

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