Section 194Q – TDS on Purchase of Goods under the Income Tax Act, 1961:

In a bid to strengthen tax compliance and ensure the timely collection of income tax, Section 194Q of the Income Tax Act has been introduced, focusing on the deduction of tax at source (TDS) on payments made for the purchase of goods. This section primarily targets high-value transactions and aims to reduce the risk of tax evasion in the business-to-business (B2B) trade of goods. Let’s break it down from a tax perspective and explain how it works.

What is Section 194Q?

Introduced in the Finance Act 2021, Section 194Q applies to Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) 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.

Who Needs to Deduct TDS Under Section 194Q?

This provision primarily targets businesses, companies, and professionals whose aggregate value of goods purchased exceeds than Rs. 50 lakhs in any previous year. The buyer must be a resident taxpayer, and the goods being purchased should be part of a business or profession. This section does not apply to individuals or Hindu Undivided Families (HUFs) making personal purchases.
TDS Rate and Deduction Process
If a buyer’s purchases exceed the threshold for triggering TDS in a financial year, the buyer must deduct TDS at 0.1% of the total purchase value exceeding this threshold. For example, if the total value of goods purchased is Rs. 60 lakhs, TDS of 0.1% will be applicable on Rs. 10 lakhs (the value above Rs. 50 lakh), i.e., Rs. 10,000 will be deducted as TDS.

Important Points to Note:

1. Threshold Limit: The deduction only applies when the total purchase value from a single seller exceeds Rs. 50 lakhs in a year. If the purchase amount is below this limit, there is no need for TDS deduction under Section 194Q.
2. Applicability: Section 194Q is applicable on purchases of goods, but it does not apply to purchases of services. For example, if a company is buying raw materials (goods) for manufacturing, TDS will apply, but not for services like consulting or legal fees.
3. Exemptions: Certain entities may be exempt from this provision, such as government bodies and taxpayers covered under other specific TDS sections. However, exemptions need to be clearly specified in the Income Tax Act or notifications issued by the government.
4. Credit of TDS: The amount deducted as TDS under Section 194Q is credited to the seller’s account, meaning the seller can claim the TDS amount against their own tax liability when filing their return.

Why is Section 194Q Important?

This section is an essential tool for improving tax compliance and preventing tax evasion. By mandating TDS on goods purchases, it ensures that businesses contribute to the tax pool, even when they might otherwise attempt to underreport their taxable income. It also creates a trail of transactions, which makes it harder for both the buyer and the seller to evade taxes.