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Section 194Q of Income Tax Act and its impact on TDS

The Finance Act, 2021 brought in several important amendments in the Income Tax, 1961. One such amendment was the inclusion of Section 194Q in the Act which governs Tax Deducted at Source (TDS) on purchase of goods. The Section came into effect on July 1, 2021. It has a few significant implications especially when coupled with Section 206C(1H) which governs Tax Collected at Source (TCS) on the sale of goods.

The new section is an interesting addition due to the fact that it is a move to address the shortcomings of the aforementioned Section 206C(1H) which was brought in the previous year. Due to some transactions being excluded from coming under TCS provisions, Section 194Q on TDS has been added this year.

When will TDS be deductible under Section 194Q?

According to Section 194Q, TDS will be deductible when a buyer makes a payment to a seller who is also a resident and the said payment is for the purchase of goods that are of value exceeding Rs. 50 lakhs. The said ‘purchase of goods’ refers to both capital and revenue goods. The rate of TDS is 0.1% of the said value which will increase to 5% when the seller does not have a Permanent Account Number (PAN). Another thing to note is that TDS is deductible under the section even when payment is credited to a suspense account (a section in a ledger that records entries which are uncertain leading to a need for further classification).

Who is a buyer?

The section defines who a buyer is in the explanation stating that a person who has total sales or gross receipts or turnover exceeding Rs. 10 crores in the preceding financial year will qualify as a buyer. Further, if the Central Government has expressly notified that a person cannot be a buyer or that TDS provisions would not apply, the aforesaid provisions will not apply.

When can TDS be deducted?

Now, the TDS can be deducted either at the time when the sum of money is credited to the seller or when the sum is directly paid. If the buyer does not comply with the provisions of this section, Section 40a(ia) will come into being through which expenditure up to a maximum of 30% of the value of goods will be disallowed.

Exceptions to Section 194Q

One important exception to note with regard to Section 194Q is that it won’t apply if other provisions of the Income Tax Act mandate deduction of TDS in the concerned transaction. Yet another exception is when TCS is collectable on the transaction according to the provisions of Section 206C(1H) of the Act. 

When can TCS be collected under Section 206C(1H)?

As mentioned previously, Section 206C(1H) governs TCS on sale of goods. This provision will apply on a seller who receives a consideration for sale of goods with value more than Rs. 50 lakhs during a financial year. Further, the Section defines ‘seller’ as a person who has total sale or gross receipts or turnover exceeding Rs. 10 crore during the preceding financial year (similar to the definition of a ‘buyer’ under Section 194Q).

Now, when only Section 206C(1H) existed, there was the possibility of TCS provisions not being applicable even when consideration exceeded Rs. 50 lakhs due to the fact sales or gross receipts or turnover were not over Rs. 10 crore in the preceding financial year. Such transactions did not come under the purview of either tax collection or deduction and hence, the government sought to bring them under the same. This was why Section 194Q was introduced through the Finance Act, 2021. 

Mutual exclusivity of Section 194Q and Section 206C(1H)

Therefore, now both Sections co-exist to ensure that transactions are not exempt from tax collection or deduction due to the conditions not being met. But, it is important to note that the two sections are mutually exclusive, in the sense that if one starts to apply, the other will not apply. So if TDS can be deducted under Section 194Q, TCS can not be collected under Section 206C(1H) and vice versa.

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