Wednesday, May 1, 2024

Comprehensive Guide on Section 194Q of the Income Tax Act with Illustrations

Section 194Q of the Income Tax Act has introduced a TDS (Tax Deducted at Source) mechanism applicable to certain transactions involving the purchase of goods. This guide provides a detailed explanation of Section 194Q, along with illustrations and tables to enhance understanding.

1. Applicability of Section 194Q

Section 194Q becomes applicable when certain conditions related to the buyer's turnover and the purchase value are met.

  • Buyer’s annual turnover: Must exceed INR 10 crores in the previous financial year.
  • Purchase value: Must exceed INR 50 lakhs in the current financial year.

Illustration of Applicability:

Annual Turnover of BuyerMore than INR 10 crores in the previous FY
Purchase Value from a SellerMore than INR 50 lakhs in the current FY

Example: In FY 2023-2024, ABC Ltd. has a turnover of INR 12 crores from FY 2022-2023. In July 2023, it makes a purchase worth INR 60 lakhs from XYZ Pvt. Ltd. Since both conditions are met, Section 194Q applies, and ABC Ltd. must deduct TDS.

2. TDS Deduction: Timing and Rate

TDS should be deducted at the time of credit or payment, whichever is earlier. The standard rate of deduction is 0.1% on the amount exceeding INR 50 lakhs. The TDS rate is 5% if the seller does not provide a PAN.

Illustration of TDS Deduction:

Suppose the purchase amount is INR 70 lakhs:

  • TDS is calculated as 0.1% of (70 lakhs - 50 lakhs) = 0.1% of 20 lakhs = INR 20,000.

3. Exemptions from Section 194Q

Here are specific scenarios where TDS deduction under Section 194Q is not required:

ScenarioExemption Status
Purchases < INR 50 lakhsExempt from TDS under Section 194Q
Turnover in previous FY < INR 10 croresExempt from TDS under Section 194Q
Other TDS applicableExempt from TDS under Section 194Q
TCS applicable under Section 206C (1H)No exemption from Section 194Q

4. Interplay Between Sections 194Q and 206C(1H)

Section 194Q takes precedence over Section 206C(1H), which involves TCS on the sale of goods. This is to avoid both TDS and TCS on the same transaction.

Illustration of Interplay:

If a transaction is subject to both 194Q and 206C(1H), 194Q is applied, avoiding the requirement of TCS under 206C(1H).

5. Comparison with Section 194-O

Section 194-O involves TDS on e-commerce transactions and takes precedence over 194Q.

Section 194-OTakes precedenceE-commerce payments focus
Section 194QSubordinateGeneral goods purchase

Frequently Asked Questions (FAQs)

Q: How is GST considered for TDS calculation under Section 194Q?

  • A: If the GST is not shown separately, TDS will be calculated on the total invoice amount including GST.

Q: What are the penalties for non-compliance with Section 194Q?

  • A: Non-deduction can lead to a disallowance of 30% of the expense amount under Section 40(a)(ia), which could significantly affect the profitability due to increased tax liability.

This comprehensive guide, with tables and illustrations, provides clarity on the nuances of Section 194Q, ensuring a practical understanding for compliance and effective tax planning.