In an effort to enhance tax compliance and transparency in high-value transactions, the Indian government introduced Section 194Q into the Income Tax Act, effective from July 1, 2021. This provision mandates that certain buyers deduct Tax Deducted at Source (TDS) when purchasing goods exceeding a specified threshold. Understanding the nuances of Section 194Q is crucial for businesses to ensure compliance and avoid potential penalties.
What is Section 194Q?
Section 194Q requires a buyer to deduct TDS at the rate of 0.1% on the purchase of goods from a resident seller if the aggregate value exceeds ₹50 lakh in a financial year. This deduction aims to capture tax at the source on substantial transactions, thereby broadening the tax base.
Applicability Criteria
For Section 194Q to apply, the following conditions must be met:
- Buyer’s Turnover: The buyer’s total sales, gross receipts, or turnover from the business should have exceeded ₹10 crore in the preceding financial year.
- Transaction Value: The aggregate value of goods purchased from a single resident seller during the financial year exceeds ₹50 lakh.
- Nature of Goods: The provision applies exclusively to the purchase of goods and does not extend to services.
It’s important to note that Section 194Q does not apply to import transactions or purchases from non-resident sellers.
TDS Rate and Calculation
The TDS rate under Section 194Q is set at 0.1% of the purchase value exceeding ₹50 lakh. However, if the seller fails to furnish their Permanent Account Number (PAN), the TDS rate increases to 5%.
Example Calculation:
- Total Purchase Value: ₹60 lakh
- Threshold Exemption: ₹50 lakh
- Amount Subject to TDS: ₹10 lakh (i.e., ₹60 lakh – ₹50 lakh)
- TDS Deduction: 0.1% of ₹10 lakh = ₹1,000
Timing of TDS Deduction
The buyer is required to deduct TDS at the time of crediting the amount to the seller’s account or at the time of payment, whichever occurs earlier.
Compliance and Due Dates
The deducted TDS must be deposited with the government by the 7th of the subsequent month in which the deduction was made. For instance, if TDS is deducted in April, it should be deposited by May 7.
Non-compliance with Section 194Q can lead to disallowance of the expenditure related to the purchase, resulting in additional tax liabilities. Therefore, timely deduction and deposition of TDS are imperative.
Interaction with Other Tax Provisions
Section 194Q coexists with Section 206C(1H), which pertains to Tax Collected at Source (TCS) by sellers on sales exceeding ₹50 lakh. In transactions where both provisions could apply, TDS under Section 194Q takes precedence, and the seller is not required to collect TCS under Section 206C(1H).
Practical Implications for Businesses
Businesses should undertake the following measures to ensure compliance:
- Vendor Assessment: Regularly review and monitor transactions to identify vendors from whom purchases may exceed the ₹50 lakh threshold.
- System Integration: Update accounting and ERP systems to automate TDS deduction and ensure accurate record-keeping.
- Documentation: Maintain comprehensive records of all transactions, TDS deductions, and communications with vendors regarding TDS compliance.
- Training and Awareness: Educate finance and procurement teams about the provisions of Section 194Q to ensure organization-wide compliance.
By proactively addressing these areas, businesses can mitigate risks associated with non-compliance and contribute to a more transparent tax environment.
Navigating the complexities of tax provisions like Section 194Q requires diligence and proactive compliance strategies. By understanding and implementing the requirements outlined above, businesses can ensure seamless operations and avoid potential pitfalls associated with high-value goods purchases.
At Manoj Prem & Associates, we specialize in providing expert guidance on tax compliance and financial management. Our team is dedicated to assisting businesses in navigating complex tax regulations and ensuring adherence to provisions like Section 194Q. For personalized consultation and support, reach out to us:
Manoj Prem & Associates
Contact Number: +91-9873736779
Email: info@manojpremassociates.com
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