In the Budget 2021-22, a new section 194Q introduced which will be effected from 1 July2021.

Section 194Q is related to payment of certain sum for purchase of goods. As per this section, any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding Rs. 50 lakhs (fifty lakh Rupees) in any previous year, shall, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 percent of such sum exceeding fifty lakhs’ rupees as income-tax.

In short, conditions to be satisfied for applicability of this section are:-

(i) Goods must be purchase from a resident.

(ii) Goods are purchased for a value or aggregate of value exceeding Rs. 50 lakhs in any previous year.

(iii) The turnover of the purchaser shall be more than INR 10 crores in the preceding Financial year. (i.e. to check the applicability of provisions of Section 194Q for FY 2021-22, turnover for the purchaser during FY 2020-21 shall be more than INR 10 Crores.

(iv) TDS has not been deducted under any other provisions of the Income Tax Act 1961.

Time of Deduction of TDS under Section 194Q

(i) At the time of credit of such sum to the account of the seller; or

(ii) At the time of payment thereof by any mode

Whichever is earlier.

Exception to TDS Deduction under Section 194Q:

The provisions of this section shall not apply to a transaction on which:

(a) tax is deductible under any of the provisions of this Act; and

(b) tax is collectible under the provisions of section 206C other than a transaction to which sub-section (1H) of section 206C applies.

It implies that if on a transaction a TDS or tax collection at source (TCS) is required to be deducted under any other provision, then it would not be subjected to TDS under this section. However, there is one exception to this general rule is that if on a transaction TCS is required under sub-section (1H) of section 206C as well as TDS under this section, then on that transaction only TDS u/s194Q shall be deducted.

TDS Rate under Section 194Q of Income Tax Act, 1961

i. 0.1% on sum exceeding Rs. 50 lakhs in any previous year

ii. 5% in case PAN number of Seller is not available (section 206AA).

Non-compliance of section 194Q

As per section 40a(ia) of Income Tax Act 1961, dis-allowance to the extent of 30% of the value of transaction. It means that if the buyer fails to deduct and deposit TDS as applicable then dis-allowance shall be restricted to 30% of the amount of expenditure on which TDS is not deducted and deposited.

Applicability of section 194Q with Examples:

Example 1:

Seller’s Turnover: Rs. 9 Crores

Buyer’s Turnover: Rs. 15 Crores

Receipt or Payment for sale or purchase of Goods in previous year: Rs. 55 lakhs

Taxability:

Buyer’s Turnover is more than Rs. 10 Crores

Taxable amount: Rs. 5 lakhs (Rs. 55 lakhs-Rs.50 lakhs)

TDS u/s194Q: 0.1% on Rs. 5* lakhs

TCS u/s 206C(1H): not applicable as Seller’s turnover is less than 10 Crores.

Example 2:

Seller’s Turnover: Rs. 15 Crores

Buyer’s Turnover: Rs. 9 Crores

Receipt or Payment for sale or purchase of Goods in previous year: Rs. 55 lakhs

Taxability:

Buyer’s Turnover is less than Rs. 10 Crores

Seller’s Turnover is more than Rs. 10 Crores

Taxable amount: Rs. 5 lakhs (Rs. 55 lakhs-Rs.50 lakhs)

TDS u/s194Q: Not applicable

TCS u/s 206C(1H): 0.1% on Rs. 5 lakhs**.

Example 3:

Seller’s Turnover: Rs. 15 Crores

Buyer’s Turnover: Rs. 15 Crores

Receipt or Payment for sale or purchase of Goods in previous year: Rs. 55 lakhs

Taxability:

Buyer’s Turnover is more than Rs. 10 Crores

Seller’s Turnover is more than Rs. 10 Crores

Taxable amount: Rs. 5 lakhs (Rs. 55 lakhs-Rs.50 lakhs)

TDS u/s194Q: 0.1% on Rs. 5 lakhs*

TCS u/s 206C(1H): Not applicable (see exception).

Note:

*in case seller’s PAN number is not available, then the rate of TDS shall be 5%

**in case buyer’s PAN number is not available, then the rate of TDS shall be 1%