Analysis of Section 194Q - TDS on purchase of Goods

Introduction

Finance act, 2021 has introduced a new section 194Q w.e.f. 01.07.2021 which requires a specified buyer to deduct TDS w.r.t. purchase of goods from a resident seller.

Statutory Provision

[Deduction of tax at source on payment of certain sum for purchase of goods

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 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.]

Who is liable to Deduction TDS

The buyer is responsible to pay a sum or Rs. 50 lacs or more for purchase of goods shall be liable to deduct TDS at the time of purchase or payment whichever is earlier.

Note: Buyer means whose turnover exceeds Rs. 10 Cr. in previous financial year.

Deductee

• The Resident seller of goods

Rate of TDS deduction

• If PAN Number is available: 0.1%
• If PAN Number is not available: 5%

Transaction value on which TDS needs to be deducted

• Amount exceeding Rs. 50 lacs.
• TDS shall also be deducted even if purchases made for less than 50 Lac Rs. but payment of for purchase of goods made for more than Rs. 50 Lacs.

Example: A buyer whose turnover in preceding financial year exceeds Rs. 10 Crore received invoices for purchase of goods of Rs. 30 Lacs but made payment of Rs. 60 lacs. As Rs. 30 lacs is advance for purchase of goods. He shall be liable to deduct TDS on Rs. 10 Lacs at the time of payment.

• TDS shall be deducted on the value excluding Goods and service tax (GST) if deduction is made on the basis of invoice. However, if deduction is made on the basis of payment, TDS shall be deducted on the entire amount of payment.
• For the purpose of calculation of threshold limit of Rs. 50 Lacs, transaction during the period from 01^st April 2021 to 30^th June 2021 shall also be considered.

Example: Transaction value during the period 01^st April 2021 to 30^th June 2021 is Rs. 70 Lacs. Since transaction value before 01^st July 2021 is more than Rs. 50 lacs, TDS shall be deducted on every purchase from or payment to the seller with respect to whom Rs. 50 Lacs limit crossed.

• In case of purchase return if tax has already been deducted on purchases and the amount is refunded, then tax already been deducted on purchase return may be adjusted against next purchase

Non-applicability of the provisions

• If TDS is deductible under any other provision of income tax act.
• If TCS is collectible under the provisions of income tax act, except u/s 206C(1H) i.e. TCS on sale of goods
• Transactions in securities and commodities through recognized stock exchange or cleared through recognized clearing corporation.
• Transactions in electricity, Renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with regulation 21 of the CERC.
• Purchase or payment by non-resident whose purchases not effectively connected with the permanent establishment.
• If the seller (Deductee) is a person whose entire income is exempt from income tax like RBI, ADB etc.
• If the seller has already collected TCS u/s 206(1H).

Other Important points

• In case the buyer fails to deduct and pay the TDS under this section, then 30% of value of transaction shall be disallowed as expense.
• In case section 194Q and Section 206(1h) both are applicable, section 194Q shall prevail.

Section 194Q V/s 206(1H)