Section 194Q: TDS on Purchase of Goods

Section 194Q of the Income Tax Act, 1961, was introduced by the Central Board of Direct Taxes and made effective from July 1, 2021. Under this section, a 0.1% TDS is applicable if the amount exceeds ₹50 Lakhs when a buyer purchases goods beyond the exemption threshold.

The government has framed this law to audit huge amounts of transactions. It helps in tracking and controlling frivolous or fake transactions that were taking place under the name of TDS provisions.

Income tax is only deducted from the buyer’s account. The amount is calculated after taking into consideration the total sales, turnover, and gross receipts. Additionally, Section 194Q doesn't apply to imports from a non-resident supplier.

Under Section 194Q, TDS will be deducted on purchases that have been made after 1st July, 2021. However, the upper limit of purchase of ₹50 Lakhs is to be considered from 1st April, 2021.

Section 194Q applies to sellers in the following cases: 

• When the buyer’s turnover, gross receipt or sales, exceeds ₹10 Crores for the previous financial year 

• When the buyer is liable for making payments to a resident seller 

• When the payment is to be made for purchase of goods whose total values exceeds ₹50 Lakhs

• Payment made for purchase of goods with the value exceeding ₹50 Lakhs 

Here’s an example to help you understand the applicability of Section 194Q. 

Suppose you are a buyer who decides to purchase goods worth ₹25 Lakhs each time and you’ve purchased from the same seller thrice during the financial year. In this case, the threshold of ₹50 Lakhs applies to the total value of goods purchased from the seller throughout the financial year. TDS is applicable on the amount exceeding this threshold.

If the seller hasn't provided their PAN to the buyer, TDS will be deducted at 5% instead of 0.1%. It’s important to remember that without this information, the tax rate that will be implemented in other cases will be 20%. 

However, for Section 194Q, the applicable TDS rate when PAN information is not linked is 5%.

Here are a few instances where Section 194Q is not applicable on a transaction: 

• TDS is to be deducted on a purchase transaction under any other Income Tax Act provision

• Transactions falling under sections 194Q and 194O, where TDS will apply as per Section 194O 

• TCS is to be done under Section 206C, where TDS deduction is not applicable under Section 194Q

• Seller is a non-resident Indian 

However, it’s important to note that there exists an exception under Section 206C(1H). This involves the Tax Collected at Source (TCS) by the seller for sales of goods exceeding ₹50 Lakhs in the preceding financial year. If TDS is applicable on a transaction for goods under both Section 194Q and TCS under Section 206C(1H), only Section 194Q will apply.  

Calculating Purchase Return under Section 194(Q)? 

As far as purchase returns are concerned, tax deductions occur at the time of payment credited to the buyer’s account. In case any of the purchase return takes place, the money deducted as TDS on purchase of goods from the buyer’s account will be refunded by the seller. 

Another option could be that the tax deduction may get adjusted in the next purchase made with the same seller. In case the goods get exchanged or replaced, then no tax adjustments will take place. 

Here are a few amendments made under Section 194Q: 

• TDS is deducted for amounts credited to a 'Suspense account' or other accounts by a person obligated to make the payment

• Non-compliance may lead to a 30% disallowance of expenditure based on the transaction value for the buyer

• Provision u/s 194Q is applicable on purchases of both types of goods i.e., revenue and capital