Section 194Q Of Income Tax Act

Section 194Q is a Section that relates to TDS on the purchase of goods. The Central Board of Direct Taxes (CBDT) introduced 194Q TDS on July 1, 2021. According to this Section, the buyers who purchase goods from a seller are liable to deduct tax at the source, subject to various conditions.

194Q TDS applicability is based on the buyer’s gross sales or annual turnover and the value of the goods purchased. The idea behind introducing this Section is to track a high volume of transactions without leveraging the GST amount.

The following are the essential details related to Section 194Q:

Section 194Q TDS applicability comes into the picture on fulfilment of the following conditions:

Turnover or Receipt Limit

The 194Q turnover limit applies to a buyer’s gross turnover, receipts or sales. The provisions of this Section apply when the turnover exceeds ₹10 crores in the previous financial year. This means that a buyer whose turnover or sales do not exceed ten crores is not required to deduct TDS under Section 194Q.

Status of the Seller

The buyer pays the purchase amount to a resident seller, i.e. he is purchasing the goods from a resident seller. Here, the applicability of section 194Q will cease if the seller of the goods is a non-resident.

Value of Goods

The total value of goods purchased must exceed ₹50 lakhs. Therefore, if the purchase value of goods is less than ₹50 lakhs, TDS will not be deducted.

Nature of Goods

According to the provisions of the Income Tax Act, the TDS under Section 194Q is applicable to both revenue goods and capital goods.

Let us understand Section 194Q TDS applicability on the purchase of goods above 50 lakhs with an example. Suppose a resident buyer purchases goods worth ₹20 lakhs four times from a resident seller in a year. It means his total purchase amounts to ₹80 lakhs. Now, if the buyer’s total turnover in the previous financial year was more than ₹10 crores, he must deduct TDS when making the payment to the seller.

Under Section 194Q, a buyer is required to deduct TDS at the rate of 0.1% on the purchase of goods exceeding ₹50 lakhs in a financial year. This threshold of ₹50 lakh is calculated for each seller individually. In other words, the exemption limit applies seller-wise. Once the purchase value from a particular seller crosses this amount within a financial year, TDS becomes applicable on the excess.

For example, let’s say a buyer purchases goods worth ₹70 lakh from a seller in a financial year. In this case, the first ₹50 lakh is exempt, and TDS will apply only on the remaining ₹20 lakh. Therefore, the buyer must deduct ₹2,000 (0.1% of ₹20 lakh) as TDS under Section 194Q.

In case the seller does not provide PAN (Permanent Account Number) to the buyer, the 194Q TDS rate shall be 5% instead of 0.1%.

TDS under section 194Q must be deducted when the buyer credits the seller’s account or at the time of making the actual payment, whichever comes first. Therefore, it is essential to remember that if the buyer makes payment to the seller through cash, cheque, draft or any such means, he must deduct TDS at the time of making the payment.

However, if the buyer makes payment by crediting the seller’s account, then 194Q TDS is deducted at that time.

Credit means crediting to a suspense account or any other account that is a part of the books of the buyer, who is obligated to make the payment.

If there is an advance payment of the purchase amount, then the TDS must be deducted immediately.

If a buyer does not deduct or deposit the required TDS, 30% of the transaction value may be disallowed as an expenditure while computing taxable income under the Income Tax Act. This can substantially increase the buyer’s tax liability.

In addition to disallowance of expenditure, the Income Tax Department may also levy interest and penalties for non-deduction or late deposit of TDS. Hence, it is crucial for buyers to ensure timely compliance with Section 194Q to avoid financial setbacks and legal complications.

For example, suppose a buyer purchases goods worth ₹1 crore from a seller but fails to deduct
TDS under Section 194Q. In such a case, 30% of the purchase value, i.e., ₹30 lakhs, will be disallowed as business expenditure. This means the buyer’s taxable income will increase by ₹30 lakh, resulting in higher tax liability along with interest and possible penalties.

Under the following situations, 194Q TDS applicability does not apply:

• If the value of goods purchased is less than ₹50 lakhs, the buyer is not liable to deduct any TDS under 194Q purchase of goods.

• When the gross sales, turnover or receipt of the buyer is below the threshold limit of ₹10 crores, he must not deduct any TDS while paying the seller.

• If tax is collectable (TCS) according to the provisions of section 206C of the Income Tax Act but not under section 206 C(1H).

• If TDS is applicable under any other section of the Income Tax Act.

• TDS on the purchase of goods is not applicable if the buyer purchases goods from a non-resident seller.

Before the introduction of Section 194Q, TDS Section 206C (1H) was in force to govern the purchase and sale of goods. According to Section 206C (1H), the seller of goods is liable to collect tax at source (TCS) if the sale value exceeds ₹50 lakhs in the previous financial year.

From July 1, 2021, the provisions of Section 194Q became applicable. In many cases, the purchase and sale of goods were taxable under Section 194Q as well as 206C (1H). In such a scenario, the provisions of Section 194Q prevailed over Section 206C (1H).

However, with effect from April 1, 2025, Section 206C (1H) was completely abolished to avoid confusion and enhance clarity. Now, only 194Q TDS is applicable.

According to section 194-O of the Income Tax Act, TDS is applicable to the payment made by the e-commerce operator to the e-commerce participants. However, if a transaction falls under the purview of sections 190-O and 194Q, then the following shall apply:

• If a transaction requires tax deduction under sections 194Q and 194-O, then it will be taxed as per the provisions of section 190-O and not 194Q.

• When an e-commerce operator deducts tax as per the provisions of section 190-O, then the transaction will not be liable to any TDS under section 194Q.

Non-Applicability of 194Q TDS

Section 194Q TDS does not apply in these cases:

• Buying/selling shares or commodities on stock exchanges.
• Trading electricity or energy certificates on power exchanges.
• On the GST portion of a bill (if shown separately).
• When goods are returned and the seller refunds the money.
• Buying from sellers fully exempt from income tax.
• In the first year of a buyer’s business.

Securities and Commodities

The provisions of TDS specified under section 194Q are not applicable to the purchase and sale of securities and commodities traded through recognised stock exchanges. They also include transactions cleared and settled by recognised clearing operations.

Trading Certificates

No TDS will be applicable on the electricity, energy saving certificates and renewable energy certificates traded on recognised power exchanges.

GST Component

TDS on the purchase of goods will not apply to the GST component if the TDS is deducted at the time of payment to the seller’s account. It is also not applicable where the GST component separately exists in the contract or agreement between the seller and buyer.

Purchase Return

Suppose there is a purchase return of goods. In that case, the TDS that is already deducted under the provisions of section 194Q shall be adjusted against the next purchase from the same seller if the following conditions are fulfilled:

• If the purchase return happened after the tax deduction

• The tax has been deducted under section 194Q.

• The seller has refunded the amount.

However, if the seller has replaced the goods returned with new goods, then the above adjustment will not be required. The TDS deducted will be considered as complete for the replaced goods.

Exempt Seller

When a buyer procures goods from a seller who is exempt from income tax under the Act, the provision of TDS under section 194Q will not be applicable. However, if only a part of the seller’s income is exempt, the provisions of 194Q of the Income Tax Act will apply.

Year of Business Incorporation

A buyer will not deduct any TDS on the purchase of goods in the first year of his business as the turnover will be zero in the immediately preceding financial year.

Public Sector Corporations

TDS under section 194Q is applicable to all public sector undertakings and companies established under the provisions of the Central or State Act or any other authoritative body.

The declaration of 194Q serves as information to the seller that the buyer is liable to deduct tax under section 194Q on purchases exceeding ₹50 lakhs in a financial year. While there is no specific format, it is essential to maintain the standard format to ensure clarity.

Here are the essential elements of the declaration:

The Header

The header must clearly state the purpose as a declaration under section 194Q of the Income Tax Act.

Details of the Buyer

The details of the buyer, such as the name, PAN number and designation, must be mentioned. The buyer must also provide the details of the organisation and PAN if he represents one.

Turnover

A buyer must specify the turnover amount of the preceding final year. One must also declare the liability to deduct TDS under 194Q if the sales is more than ₹10 crore.

Indemnity Clause

The indemnity clause is an optional provision in the declaration wherein the buyer offers indemnity to the seller in case he faces any consequences due to incorrect information in the declaration.

Date & Signature

Lastly, the declaration must contain the buyer’s signature and the date on which the declaration is made.

Section 194Q of the Income Tax Act requires a buyer to comply with the TDS provisions while purchasing goods from a seller. He must deduct TDS @0.1% if his turnover exceeds ₹10 crores in the previous financial year and the value of goods purchased from the same seller exceeds 50 lakhs.

If any of the above conditions are not fulfilled, the buyer is not liable to deduct TDS. Also, if the purchase and sale of goods are covered under multiple sections of the Income Tax Act, then as mentioned above, the TDS will be deducted only under one of the sections.

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