Analysis of Section 194Q of Income Tax Act, 1961

Analysis of Section 194Q

Finance act 2021 introduced new Section 194Q – TDS on purchase of goods. It will be coming into effect on July 1, 2021. Since the rate of TDS kept low (0.1%), intention of this section is to collect information about the high value transactions.

1: Effective date of applicability

Section 194Q is coming into effect from July 1, 2021 onwards.

2: Transactions attracting TDS u/s 194Q

Payment made by a buyer to the resident seller for the purchase of goods of the value exceeding INR 50 Lakhs in any previous year. Tax shall be deducted even if the amount is credit to the any account whether suspense account or any other mode.

3: Person liable to deduct tax u/s 194Q

A buyer, whose total sales, gross receipts or turnover from the business carried on by him exceed INR 10 Crore during the financial year immediately preceding the financial year in which the purchase of goods is carried out.

4: Rate at which tax is to be deducted

Tax shall be deducted at 0.1% (5% if the seller PAN is not provided) on the amount paid on or after July 1, 2021.

5: Amount on which tax is to be deducted

Tax shall be deducted on the payment made by the buyer to a resident seller in excess of INR 50 Lakhs during the previous year. Tax shall be deducted on the amount paid on or after July 1, 2021 only. In order to calculate the threshold, payment made till June 30, 2021 will be taken in to account and tax shall be deducted on the amount paid on or after July 1, 2021 in excess of INR 50 Lakhs.

6: Section 194Q is not applicable to following transactions.

Transaction on which:

1. tax is deductible under any of the provisions of the Income Tax Act, 1961; and

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

As per second proviso to Section 206C (1H), this sub-section shall not apply, if the buyer is liable to deduct tax at source under any other provision of the Income Tax Act, 1961 on the goods purchased by him from the seller and has deducted such amount. Buyer is liable to deduct tax at source u/s 194Q.

7: Consequence of non-compliance

If buyer fails to deduct tax u/s 194Q, 30% of the expenditure will be disallowed as per Section 40a(1a) of the Act.

Examples:

Scenario I

a) Amount paid till June 30, 2021 - INR 25 Lakhs

b) Amount paid on or after July 1, 2021 – INR 35 Lakhs

Solution : Tax is deductible at 0.1% on INR 10 Lakhs (25 Lakhs+35 Lakhs -50 Lakhs)

Scenario II

a) Amount paid till June 30, 2021 - INR 55 Lakhs

b) Amount paid on or after July 1, 2021 – INR 25 Lakhs

Solution : Tax is deductible at 0.1% on INR 25 Lakhs. Tax is not deductible on the amount paid till June 30, 2021

Plain text of Section 194Q:

(1) 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 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% of such sum exceeding fifty lakh rupees as income-tax.

Explanation.—For the purposes of this sub-section, "buyer" means a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the purchase of goods is carried out, not being a person, as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.

(2) Where any sum referred to in sub-section (1) is credited to any account, whether called "suspense account" or by any other name, in the books of account of the person liable to pay such income, such credit of income shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(3) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.

(4) Every guideline issued by the Board under sub-section (3) 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.

(5) 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.]

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