Analysis of Section 194Q of Income Tax Act along with Section 206C(1H)

CA Harshawardhan Nigade , Last updated: 17 May 2021
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Analysis of Section 194Q of Income Tax Act

The Finance Act 2020 inserted Sub-Section (1H) in Section 206C, which provides collection of Tax by Seller in case of consideration for Sales of Goods exceeds Rs. 50 Lacs in year.

And of course with New Year & with New Finance Act 2021 new Section 194Q inserted which provides for deduction of tax by a buyer in case of value of purchase exceeds Rs. 50 Lacs.

Everyone knows how they implemented Section 206C(1H) and how tedious work that was. Please don't be confused between 'TDS' and 'Tedious'!! But you are right with this Section 194Q, we can say that both words are the same.

Let's discuss one by one provision of Section 194Q and its relation with Section 206C(1H):

Analysis of Section 194Q of Income Tax Act along with Section 206C(1H)

Inserted Provision 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 per cent. 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 RS. 10 crores 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.

Provisions of section 194Q shall not apply to,-

a transaction on which tax is deductible under any provision of the Act; and
a transaction, on which tax is collectible under the provisions of section 206C other than transaction to which sub-section (1H) of section 206C applies.

Analysis of above provision

To Whom Provisions of Section 194Q is Apply?

As per Section 194Q, it is applicable to Buyer 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 sale of goods is carried out.

However, CG may notify person to whom this section shall not be apply.

Example:

If Turnover in FY 2020-21 is Rs. 12 Crore, then this section will apply for FY 2021-22 i.e. from 1^st July 2021.
In continuation of above If Turnover in FY 2021-22 is Rs. 8 Crore, then this section will not be applicable for FY 2021-22.

Thus Taxpayer needs to verify applicability of this section each year.

What will be Value for deduction of Tax?

As mentioned in above provisions, a sum equal to 0.1 per cent of Purchase Value exceeding fifty lakh rupees as income-tax.

Thus, if value of purchases during the Financial Year exceeds Rs. 50 Lakhs then amount over and above 50 lakhs will be Value for deduction of tax.

What will be the time of deduction of tax?

Section 194Q says, buyer shall deduct tax 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.

Even if it 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.

Whether payment of advance before 01-07-2021 for purchase of goods will be subject to TDS?

As said above time of deduction arises 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. Thus if payment is made before implementation of section 194Q i.e. before 1^st July 2021, the TDS will not be applicable on such payments.

Is 194Q applicable for Purchase of Capital Goods?

Yes. Whether Capital or Revenue, section is applicable for all purchases.

Is 194Q applicable for Import Purchases?

No. As section is applicable at the time of transaction with any resident person, section 194Q is not applicable on import purchases.

Is GST needs to be included in amount while calculating value for TDS like TCS ?

No, Deduction on Total value of purchase without GST.

Difference between Section 194Q and Section 206C(1H)

Particulars	Section 194Q	Section 206C(1H)
Applicable to	Buyer of Goods Where turnover of Buyer exceeds Rs. 10 Crore during immediate Previous Year	Seller of Goods Where turnover of Seller exceeds Rs. 10 Crore during immediate Previous Year
Time of Deduction/ Collection	At the time of Payment or Credit whichever is earlier	At the time of Receipt
Rate	0.1%	0.1%
Transaction Limit	Purchase of goods of aggregate value exceeding Rs.50 Lakhs in P.Y.	Sale consideration received exceeds Rs.50 Lakhs in P.Y
Exclusion	Transaction on which tax is deductible under any provision of the Act; and Transaction on which tax is collectible under the provisions of section 206C other than transaction to which sub-section (1H) of section 206C applies. any other 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;	the Central Government, a State Government, an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign State; or a local authority as defined in the Explanation to clause (20) of section 10; or a person importing goods into India or any other 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;
Due Date for Deposit of Tax	7^th of Subsequent Month	7^th of Subsequent Month
Form for Return	26Q	27EQ

Applicability of Section 206C(1H) and 194Q

Section 194Q prevails Section 206C(1H) i.e. where 194Q applies 206C(1H) would not apply.

Turnover of Seller	Turnover of Buyer	Transaction Value	Section under which transaction falls	Remark
Less Than 10 Crore	Less Than 10 Crore	Above 50 Lakhs	NA	TDS and TCS not applicable
Less Than 10 Crore	More than 10 Crore	Above 50 Lakhs	194Q	Buyer needs to deduct TDS under section 194Q as Turnover of Buyer and transaction value exceeds limit specified
More than 10 Cores	Less Than 10 Crore	Above 50 Lakhs	206C(1H)	Seller needs to deduct TDS under section 206C(1H) as Turnover of Seller and transaction value exceeds limit specified
More than 10 Cores	More than 10 Crore	Above 50 Lakhs	194Q	Limits of Both the section exceed in this situation, however as mentioned above Section 194Q prevails section 206C(1H). Thus section 194Q is applicable.

Applicability of section 194Q & 206C(1H) where Limits under both the sections exceeds

S No.	Situation	Remark
1	Advance Paid by Buyer on or before 30^th June 2021	Trigger point for deduction of TDS is payment or credit whichever is earlier. Thus TDS is u/s 194Q will not be applicable where payments are made before 30^th June 2021. However Seller need to collect TCS on such transaction u/s 206C(1H).
2	Advance Paid by buyer on or after 1^st July 2021	Trigger point for deduction of TDS is payment or credit whichever is earlier. Thus TDS u/s 194Q is applicable and ultimately Section 206C (1H) will not be applicable.
3	Outstanding Balances Payable to Seller as on 30^th June 2021	Trigger point for deduction of TDS is payment or credit whichever is earlier. Thus TDS u/s 194Q is applicable, however Sellers need to collect TCS on such transaction.
4	Buyer was liable but did not deduct TDS	Where Section 194Q is applicable, section 206C(1H) will not be applicable. But in case buyer did not deduct TDS at the time of payment, responsibility to shifted to seller to collect TCS us/ 206C(1H).
5	Buyer deducted TDS but Seller issued invoice with TCS	In such situation seller need to reverse the TCS and for buyer no need to pay extra amount for TCS.
6	Buyer returns the Goods before payment	If Purchase and Purchase return takes place in same month then buyer can deduct and pay TDS on net amount.
7	Buyer returns the Goods after payment	In such case no need to reverse TDS as credit of the same will be available to seller.