Section 194Q

Section 194q of Income tax Act 1961 was established by Finance Act 2021. It deals with Tax Deducted at Source (TDS) on purchase of products rather than provision of services.

What Is Section 194Q?

In July 2021, Indian government enacted section 194Q of Income Tax Act, 1961. This clause offers Tax Deduction at Source (TDS) for purchases of commodities made in excess of ₹50 lakhs in preceding year.
1. Acquisitions from non-resident sellers are exempt from Section 194Q.
2. provision of TDS on services is not included in this clause.

Who Is Liable To Deduct TDS Under Section 194Q?

Section 194Q of Income Tax Act, 1961 states that buyer, not seller, is in charge of deducting Tax Deducted at Source (TDS) when purchasing goods.

Requirements for TDS Deduction:

1. Turnover Threshold: In preceding fiscal year, buyer's total sales, gross receipts, or turnover from business must surpass ₹10 crores.
2. Purchase Threshold: Within single fiscal year, amount purchased from resident seller must surpass ₹50 lakhs.
3. Type of products: TDS clause only applies to acquisition of particular products that government has designated. At moment, this comprises things like coal, cement, iron & steel products, etc.
 

What Is Rate Of TDS Under Section 194Q?

When buyer purchases products from seller for more than ₹ 50 lakh, tax is due at source at rate of 0.1% on any amount over ₹ 50 lakh in fiscal year. 

Example under Section 194Q: ₹60 lakhs if you buy items in fiscal year.

Under Section 194Q, Tax Deducted at Source (TDS) is equal to (₹60,00,000 - ₹50,00,000) × 0.1%.
0.001 × 100,000 = ₹1,000 is TDS.
 

Threshold Limit For TDS Deduction Under Section 194Q

Under section 194Q TDS, there is minimum threshold of INR 50 lakhs for deduction of Tax Deducted at Source (TDS). However, there are few factors that go into determining this amount. Let's get clear knowledge of this:

1. Goods & Services Tax (GST) is not included in purchase price for determining threshold limit.

2. If buyer makes advance payment, it is best to subtract Tax Deducted at Source (TDS) from total amount, which includes Goods & Services Tax (GST) component. This is because it can be difficult to determine precise amount of GST.

3. If seller gives you refund at time of transaction, you can use that refund to balance Tax Deducted at Source (TDS) against another purchase transaction.

Section 194Q Declaration Format

On seller's letterhead, with buyer's name & address

Sub: Declaration & information for tax deduction at source under Act 194Q.

Greetings, Sir

Regarding your letter dated _________, which asked for our declaration & information regarding tax deduction at source under section 194Q of Act, this is in reference to it. following details are being supplied:

1. Since your business is required by Section 194Q of Act to deduct tax, you may do so for any sum over ₹ 50 lacs in current fiscal year at rate of 0.1% of sale consideration that your business paid to us or credited to us. We further affirm that, as of July 1, 2021, we will not pursue any action to collect revenue at source under section 206C(1H) of Act.

2. Our company's Permanent Account Number is. Furthermore, in accordance with details provided below, we have correctly filed our income reports for previous three assessment years:

Calculation Of TDS

• A purchase from seller of more than ₹ 50 lakh throughout fiscal year.
• After deducting ₹ 50 lakh from entire purchase price, TDS needs to be taken off.
• Threshold amount is ₹ 50 lakh, which represents deduction for each seller in each fiscal year.

Example of TDS Calculation:

Assume that customer pays seller ₹ 20 lakh for products three times in total, for total of ₹ 60 lakh in transactions. He must now take ₹ 50 lakh off total cost of products he bought. Only ₹ 10 lakh must have TDS (0.1%) withheld from it.
 

When Should TDS Under Section 194Q Be Deducted & Deposited

When such sum is paid to seller or credited to his account, whichever comes first, that is when TDS is to be subtracted.

Stated differently, you must deduct this TDS at time of goods purchase if you haven't paid advance. On other hand, you have to deduct 194Q TDS right away if you have paid in advance.
 

Consequences Of Non-Compliance With Section 194Q

Income tax authorities may impose penalties & interest on employers & individuals who neglect to deduct TDS. Payments that are not deductible, such as salaries, are not subject to deduction if they are made without any withholding tax or if withholding is made but not sent to central government. sum equal to 30% of withholding tax is not deductible. People who must deduct TDS but fail to deposit will be penalized one percent interest every month or fraction of month. Assesse may be penalized in amount equal to amount of TDS that is not withheld or deposited if they neglect to deduct or deposit TDS. Assesse may spend up to seven years in jail if they refuse to pay tax demand.

Conclusion

Section 194Q of Income Tax Act, introduced in Finance Act 2021, mandates withholding tax on specified goods & services. It places buyer under obligation to deduct tax at source when purchasing specified goods or services, impacting sellers who must consider compliance with this provision. threshold limit triggers requirement for transactions above specified values. Understanding these implications is crucial for both buyers & sellers in managing their financial transactions effectively while ensuring tax compliance.