By CA Surekha Ahuja
Section 194Q of the Income-tax Act, 1961, introduced with effect from 1 July 2021, continues to have wide-ranging implications for businesses with substantial turnover. It casts the obligation of deducting tax at source on specified buyers making high-value purchases of goods from resident sellers. For Assessment Years 2025–26 and 2026–27, the provision remains fully operative and is subject to close regulatory scrutiny. This article explains the legal framework, interpretation, procedural compliance, and frequently asked questions in a practical, professional context.
Legal Framework of Section 194Q
Section 194Q reads as under:
Any person, being a buyer, who is responsible for paying any sum to any resident 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 thereon.
Key Conditions and Legal Interpretation
Who is a Buyer under Section 194Q
The term "buyer" is defined to include a person whose total sales, gross receipts, or turnover from business exceeds ten crore rupees during the financial year immediately preceding the year in which the purchase is made. This implies:
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For AY 2025–26, turnover in FY 2023–24 must exceed ten crore rupees.
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For AY 2026–27, turnover in FY 2024–25 must exceed ten crore rupees.
Turnover from professional services is not considered for the threshold. The provision applies even to buyers not subject to tax audit, provided the turnover threshold is satisfied.
The section does not require the buyer to be a resident, but the CBDT has clarified through guidelines that a non-resident buyer is outside the scope of section 194Q if the transaction is not effectively connected with a business in India.
Threshold for TDS Deduction
TDS is to be deducted only if the buyer purchases goods from a resident seller for a value exceeding fifty lakh rupees in aggregate in a financial year. Tax is to be deducted only on the portion exceeding fifty lakh rupees.
For example, if purchases from a seller amount to ninety lakh rupees in a year, TDS is applicable on forty lakh rupees at the rate of 0.1 percent.
Timing of Deduction
Tax is to be deducted at the earlier of the following:
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At the time of credit of the amount to the account of the seller (including suspense account), or
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At the time of payment by cash, cheque, or any other mode.
TDS may also apply on advance payments if the fifty lakh rupee threshold is crossed.
Rate of TDS
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The applicable rate is 0.1 percent on the amount exceeding fifty lakh rupees.
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In case the seller does not furnish a valid PAN, the rate increases to 5 percent under Section 206AA.
Applicability to Goods Only
Section 194Q applies strictly to purchases of goods. It does not apply to services. The term "goods" is not defined in the Income-tax Act but is interpreted in line with the Sale of Goods Act or GST law depending on context.
Interplay with Other TDS and TCS Provisions
Section 194Q interacts significantly with Section 206C(1H), which imposes TCS on the sale of goods by a seller. The law and CBDT guidelines provide as follows:
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If both section 194Q (TDS by buyer) and section 206C(1H) (TCS by seller) apply, then section 194Q shall prevail.
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If the transaction is already subject to TDS under any other provision, then section 194Q will not apply.
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In cases involving e-commerce operators under section 194O, the obligation to deduct tax under section 194O overrides section 194Q.
Practical Compliance and Procedures
To ensure full compliance, buyers should implement the following procedural measures:
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Assess Turnover of Previous Year
Confirm whether total business turnover in the preceding financial year exceeded ten crore rupees. -
Track Supplier-Wise Payments
Monitor purchases from each resident seller to identify when the cumulative amount exceeds the fifty lakh rupee threshold. -
Ensure PAN Availability
Verify and collect valid PAN from vendors to avoid a higher rate of 5 percent. -
System-Based Flags and Automation
Configure accounting or ERP software to auto-flag purchases crossing the threshold. -
Timely Deposit of TDS
TDS must be deposited on or before the 7th of the following month (30th April for deductions in March). -
Filing of TDS Returns
TDS must be reported in quarterly Form 26Q with the following due dates:-
31 July (April to June)
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31 October (July to September)
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31 January (October to December)
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31 May (January to March)
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Maintain Documentation
Keep detailed records of invoices, payments, vendor PANs, and TDS deduction calculations for audit and assessment purposes.
Frequently Asked Questions (FAQs)
1. Who is liable to deduct tax under section 194Q?
A buyer whose turnover in the preceding financial year exceeds ten crore rupees and who purchases goods from a resident seller exceeding fifty lakh rupees in aggregate.
2. Does the TDS threshold apply per seller or in total?
The fifty lakh rupee threshold applies on a per-seller basis each financial year.
3. Is GST included in the value for TDS purposes?
If the GST component is separately indicated in the invoice and TDS is deducted at the time of payment, it may be excluded. However, if TDS is deducted at the time of credit, GST should be included. This is as per CBDT Circular No. 13 of 2021.
4. What happens if the seller’s PAN is not available?
TDS must be deducted at 5 percent under section 206AA.
5. Is TDS to be deducted on advance payments?
Yes, if the fifty lakh rupee threshold is crossed, TDS applies even on advance payments.
6. Does 194Q apply to import transactions or payments to non-residents?
No, TDS under section 194Q applies only where the seller is a resident in India.
7. How is 194Q different from 206C(1H)?
Section 194Q applies to the buyer and takes precedence. Section 206C(1H) applies to the seller but stands overridden when both apply to the same transaction.
Common Errors to Avoid
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Failing to track cumulative purchases across branches or divisions.
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Deducting TDS only on the first transaction without monitoring total payments to a seller.
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Ignoring the applicability of TDS on advances.
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Delays in deposit or filing of TDS returns, resulting in interest and penalty.
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Assuming that professional turnover qualifies toward the ₹10 crore threshold (it does not).
Consequences of Non-Compliance
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Interest under section 201(1A) at 1 percent per month for late deduction and 1.5 percent for late deposit.
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Disallowance of 30 percent of expenditure under section 40(a)(ia) in the computation of business income.
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Penalty and prosecution in serious cases of deliberate default.
Conclusion
Section 194Q represents a critical compliance obligation for buyers with substantial turnover. With its overriding nature over TCS provisions and strict deduction timelines, it demands robust tracking and system-based controls. For Assessment Years 2025–26 and 2026–27, taxpayers must proactively identify applicable vendors, monitor cumulative purchases, and implement automated compliance systems. Ensuring full adherence will not only avoid penal consequences but also reinforce tax governance standards in business operations.
