Know all about TDS under section 194Q

1. What is TDS under Section 194Q?

• Answer: Section 194Q mandates buyers to deduct TDS (Tax Deducted at Source) of 0.1% on the value of goods bought from a resident seller when the purchase exceeds ₹50 lakh in a financial year. This rule started on July 1, 2021.

2. Who is considered a “buyer” under Section 194Q?

• Answer: A “buyer” is anyone whose business turnover or sales exceeded ₹10 crore in the financial year before the year of purchase.
• E.g. to be eligible as buyer for the FY 2024-25, your turnover must exceeded 10 crore in Fy 2023-24.

3. When should TDS u/s 194Q be deducted ?

• Answer: TDS should be deducted at the earlier of:
  • When the payment is made, or
  • When the amount is credited to the seller’s account.

4. How is the ₹50 lakh threshold calculated for the 2024-25 financial year?

• Answer: Calculate purchases from April 1, 2024, to check if the total exceeds ₹50 lakh for a particular seller. Once you exceed ₹50 lakh, start deducting TDS on further payments.

5. Are transactions through exchanges or clearing corporations included?

• Answer: No, Section 194Q does not apply to:
  • Securities and commodities traded on recognized stock exchanges or through recognized clearing corporations.
  • Transactions in electricity, renewable energy certificates, or energy-saving certificates traded through registered power exchanges.

6. How does TDS u/s 194Q apply when GST is involved?

• Answer:
  • If GST is shown separately in the contract or invoice, TDS is calculated on the value of goods excluding GST.
  • However, if TDS is deducted when payment is made (and no separate GST component is identified at that time), TDS should be on the total amount, as it’s not possible to distinguish GST separately.
  • However, if TDS is deducted when advance payment is made (and no separate GST component can be identified at that time), TDS should be deducted on the entire amount paid. This is because it’s not possible to distinguish the GST component if the payment occurs before the invoice is issued, and the GST amount cannot be identified separately for future billing.
• This situation is clarified by the CBDT wide Circular No. 13 of 2021 dated 30th June 2021 

7. What happens if there’s a purchase return?

• Answer: If goods are returned after TDS deduction:
  • You can adjust the TDS amount against future purchases with the same seller.
  • No adjustment is required if the returned goods are replaced.

8. Does Section 194Q apply to non-resident buyers?

• Answer: Section 194Q does not apply to non-resident buyers unless they have a permanent establishment (PE) in India. A PE is essentially a fixed place where the business operates within India.

9. Is TDS required when buying from a seller whose income is tax-exempt?

• Answer: No TDS is needed if the seller’s total income is tax-exempt under Indian tax law. However, if only part of their income is exempt, then TDS still applies.

10. Does TDS u/s 194Q apply to advance payments made to the seller?

• Answer: Yes, TDS applies to advance payments because the law requires deduction at the time of payment or credit—whichever happens first.

11. Does Section 194Q apply in the year a company is incorporated?

• Answer: No, Section 194Q does not apply in the first year of a company’s incorporation, as there is no prior year turnover to meet the ₹10 crore threshold.

12. How does Section 194Q interact with Sections 194-O and 206C(1H)?

• Answer: Here’s how the sections interact:
  • If Section 194-O (TDS on e-commerce transactions) applies, then Section 194Q doesn’t apply.
  • If TCS (Tax Collected at Source) under Section 206C(1H) applies, the seller collects TCS, and the buyer doesn’t need to deduct TDS again. However, if TDS is already deducted by the buyer under Section 194Q, TCS is not required. Please note : TCS provisions under section 206C(1H) on the sale of goods have been withdrawn with effect from 01-04-2025
  • From 01-04-2025 onwards there won’t be TCS on sale of Goods u/s 206C(1H)

13. What are the consequences of non-compliance of TDS provisions?

Below is a tabular summary of the consequences for failure to deduct or deposit tax at source (TDS), failure to furnish TDS statements, and failure to issue TDS certificates:

• The person responsible for TDS compliance is treated as an assessee-in-default under Section 201 for failing to deduct or deposit TDS.
• Prosecution under Section 276B can be avoided if there’s a reasonable cause or by applying for compounding of the offense.