Are you involved in selling or buying goods in India? If yes, you may have encountered the term ‘Section 194Q.’ This recent tax regulation is making waves in the business realm as it aims to streamline tax deduction at the source for specific transactions.
Additionally, ever since it was put into action, Section 194Q TDS has been a subject of discussion and approval. This article will explain Section 194Q in simple terms so you can understand this new tax rule better.
TDS Section 194Q: A Quick Overview
On July 1, 2021, the Central Board of Direct Taxes added Section 194Q to the Income Tax Act. This section applies to buyers in India who purchase goods from sellers, and it kicks in when the transaction exceeds INR 50 Lakhs. Under this rule, a 0.1% TDS rate is applied.
The tax is deducted based on the buyer’s total sales, gross receipts, and turnover. The goal of introducing Section 194Q TDS is to monitor large transactions without relying on the GST amount.
This section assists in monitoring and identifying any fraudulent or counterfeit transactions.
Understanding Section 194Q TDS Rules
Section 194Q applies to:
– Buyers with an annual turnover of over INR 10 crores in the previous financial year.
– Also, if the total value of goods purchased exceeds INR 50 Lakhs in the previous year.
– Payments must be made to a seller who is a resident.
For example, if you’re a buyer and you buy goods worth INR 25 lakhs from the same seller three times in a row during the financial year, the seller can deduct INR 50 lakhs from the total amount of goods purchased. This means the TDS is now 0.1% of INR 25 lakhs.
Timing of TDS Deduction
According to Section 194Q of the Income Tax Act, TDS is to be deducted either at the time of crediting the amount to the supplier’s account or at the time of payment, whichever happens first.
This means that if payment is made via cheque, cash, draft, or any other method, TDS must be deducted at the time of payment. However, if payment is made by crediting the seller’s account, TDS is deducted at the time of credit.
It’s important to note that if the amount is credited to the supplier’s account but payment is made later, TDS should still be deducted at the time of credit, even if payment is not immediate. Similarly, if payment is made at the time of credit, TDS is deducted simultaneously.
Adhering to the correct timing of TDS deduction is crucial to avoid penalties or interest charges.
Section 194Q TDS Deduction Rate
Under section 194Q, TDS is deducted at a rate of 0.1% when the value of goods purchased crosses INR 50 lakhs in the current financial year. However, if the seller’s PAN is not available, the TDS deduction rate increases to 5%.
It’s important to understand that the INR 50 lakhs threshold applies cumulatively for the entire fiscal year. This means that all payments made to the same seller or service provider throughout the fiscal year are combined to determine if the threshold has been surpassed.
Exceptions to Section 194Q TDS
There are exceptions to TDS deduction under Section 194Q:
If a purchase transaction falls under another provision of the Income Tax Act for TDS deduction, like Section 194O for e-commerce transactions, then TDS will apply according to that specific section instead of Section 194Q. However, there’s an exception to this rule under Section 206C(1H), which deals with sellers collecting tax (TCS) for goods sold if the consideration value exceeds Rs 50 lakh in any previous year.
If a purchase transaction is subject to both Section 194Q and Section 206C(1H) for TDS and TCS deduction, only Section 194Q will apply.
It’s important to establish the applicability of TDS and TCS based on the specific rules of the Income Tax Act. It’s advisable to seek guidance from a tax expert to ensure compliance.
The Role of GST in TDS
TDS under GST requires a deduction rate of 2% on payments made to taxable suppliers of goods and/or services by certain specified individuals under GST. This page provides comprehensive information on TDS under GST, covering aspects such as the TDS rate, deduction limit, application process, required documents, relevant interest and penalties, and more.
One method of tax collection is through TDS, which involves deducting various percentages from the amount owed by the recipient for goods or services. This tax collection mechanism is governed by Section 51 of the CGST Act, along with CGST Rule 66.
Who Does Section 194Q Apply to?
Under the following conditions, a buyer is subject to this section:
A buyer whose turnover, gross receipts, or sales in the immediately preceding fiscal year exceeded Rs 10 crore, and who is liable to make a payment to a resident seller for the purchase of goods worth more than Rs 50 lakh.
Example:
In the fiscal year (FY) ending on March 31, 2021, if a buyer had a turnover of over Rs 10 crore, they must deduct TDS from their resident seller on purchases of goods exceeding Rs 50 lakh in the current fiscal year 2021-22.
Section 194Q Declaration Template
A Section 194Q declaration format serves as an important document informing the seller about your obligation to deduct Tax Deducted at Source (TDS) on purchases exceeding ₹50 lakh in a financial year. While there isn’t a specific template, including the following key elements ensures clarity and avoids complications:
1. Header: Clearly state the purpose as a declaration under Section 194Q of the Income Tax Act, 1961.
2. Your Details: Provide your name, PAN number, and designation (if applicable). If representing a company, include the company name and PAN.
3. Turnover Declaration: Specify your turnover for the preceding financial year. If it exceeds ₹10 crore, confirm your liability to deduct TDS under Section 194Q.
4. Indemnity Clause (Optional): You may offer to indemnify the seller for any consequences arising from incorrect information provided in the declaration.
5. Date and Signature: Sign and date the declaration for authenticity.
Creating a declaration with these elements ensures clarity and compliance with Section 194Q requirements.
Calculating TDS
TDS (Tax Deducted at Source) kicks in when your annual purchases from a single supplier cross Rs 50 lakh. It’s computed by subtracting Rs 50 lakh from the total purchases made from that specific vendor in the fiscal year. This Rs 50 lakh mark acts as a limit for each seller, ensuring TDS is applied only on amounts exceeding this threshold. This systematic approach simplifies TDS management for significant transactions with a specific vendor, aiding compliance with tax regulations.
Example:
Suppose a buyer makes three purchases from a vendor, each worth Rs 15 lakh. TDS applies when the total purchases surpass Rs 30 lakh (after deducting Rs 15 lakh from each transaction). Only the excess amount, Rs 15 lakh, is subject to TDS at the rate of 0.1%. This method ensures accurate and compliant financial dealings between the buyer and seller by applying TDS prudently on amounts exceeding the specified threshold.
When to Deduct TDS
TDS (Tax Deducted at Source) is deducted either when cash is credited to the seller’s account or when payment is made, whichever comes first. If there’s no advance payment involved in a purchase, TDS is deducted at the time of buying the items. However, once an advance payment is made, TDS deduction becomes necessary right away. This ensures prompt and accurate compliance with tax regulations, ensuring TDS is withheld promptly from financial transactions, including advance payments. This approach ensures adherence to regulatory requirements in financial dealings.
TDS Return: Form 26Q
Form 26Q, the TDS return, must be submitted within the specified deadlines for each quarter of the fiscal year. These deadlines are May 31 for the quarter ending March 31, July 31 for the quarter ending June 30, October 31 for the quarter ending September 30, and January 31 for the quarter ending December 31. Meeting these deadlines is essential for ensuring accurate and timely reporting of taxes withheld at the source. It helps support efficient tax administration and regulatory compliance by maintaining transparency in financial activities and simplifying the reporting process. This systematic approach fosters an effective and responsible tax environment.
Exceptions
Section 194Q of the Income Tax Act (ITA) does not apply when TDS is required for a purchase transaction under another ITA provision. For instance, if a purchase transaction falls under both Section 194O (related to e-commerce transactions) and Section 194Q, Section 194O governs. An exception to this is Section 206C(1H), which mandates a seller to collect tax at source (TCS) when the sale of goods exceeds Rs 50 lakh in a financial year. However, if a purchase transaction triggers both Section 194Q and Section 206C(1H) TDS obligations, Section 194Q takes precedence. This structured approach clarifies tax responsibilities in scenarios involving dual tax implications on goods acquisitions.
TDS Deposit Due Date
The entity deducting TDS, called the deductor, must ensure that the TDS is paid to the government by the due date. Typically, the due date for TDS payments is the 7th of the following month, with a few exceptions.
For instance, if an organization wants to pay TDS for July, the due date for payment would be August 7th. However, there is an important exception for March, where TDS payments can be made until April 30th.
For government assessments that don’t use a challan for TDS payment, the payment must be made on the same day as the original transaction.
Failure to Provide PAN
If a buyer requests the vendor’s Permanent Account Number (PAN) but doesn’t receive it, the Tax Deducted at Source (TDS) rate increases to 5% instead of the usual 0.1%.
It’s crucial to note that without PAN details, the TDS rate stands at 20% in all other cases. However, for transactions covered under Section 194Q, the TDS rate remains at 5%.
Changes in Section 194Q of Income Tax Act
Under Section 194(Q) of the Income Tax Act, any funds held in a “suspense account” or similar accounts in a buyer’s financial records are subject to Tax Deducted at Source deductions when the buyer is liable to make a payment.
Transactions covered under both Section 206C(1H) and Section 194Q allow for deductions. In such cases, the responsibility falls under Section 194Q.
The regulations outlined in Section 194(Q) do not apply to purchases from non-resident vendors.
If a buyer fails to comply with the amended Section 194(Q) regulations, they must disallow expenses of up to 30% of the transaction value.
For Example:
Consider ABC Inc. purchasing equipment from XYZ Corp for ₹1,00,000. According to the revised Section 194(Q), ABC Inc. can claim specific expenses related to this transaction from tax regulations. However, if they fail to adhere strictly to the regulations, they must disallow expenses of no more than thirty percent of the transaction’s value.
In this scenario:
Transaction Value: ₹100,000
Maximum Allowable Disallowed Expenditure: 30% of ₹100,000 = ₹30,000
Furthermore, ABC Inc. has incurred expenses such as shipping charges for product transportation, installation, and maintenance, which they would typically use to claim tax deductions. Despite the actual total expenditure possibly exceeding this amount due to failure to comply with the rules, the allowable deduction for expenses is limited to ₹30,000.
Hence, overall, the purchaser (ABC Inc.) should not exceed 30% of the transactional value when claiming tax deductions under the amended Section 194(Q).
Conclusion
Section 194Q of the Income Tax Act of 1961 plays a crucial role in expanding the tax base by including more transactions within the TDS framework. For individuals engaged in buying or selling goods, understanding Section 194Q is essential. Compliance with its provisions is necessary to prevent any legal consequences. Consult the best CA in Pune.
Familiarizing oneself with the applicability and exceptions of Section 194Q can assist businesses and individuals in fulfilling their tax responsibilities efficiently. For any queries, contact us, today!
