Section 194Q of the Income Tax Act, 1961, was introduced to widen the tax base by covering high-value transactions in goods. It was inserted with effect from July 1, 2021, and mandates the buyer of goods to deduct tax at source (TDS) when making specified purchases. This provision plays a critical role in ensuring tax compliance in business-to-business (B2B) transactions. The section applies only under certain financial conditions, such as when the buyer exceeds a specified turnover threshold, and the value of goods purchased exceeds a defined limit.
Definition of Buyer under Section 194Q
Section 194Q mandates that the tax is deductible by the buyer. For this section, the term “buyer” is defined specifically. A buyer is a person whose total sales, gross receipts, or turnover from the business carried on by him exceeds Rs. 10 crore during the financial year immediately preceding the financial year in which the purchase is made. However, a buyer does not include a person who is notified by the Central Government, subject to certain conditions as may be specified.
Responsibility of the Buyer for TDS Deduction
According to Section 194Q, the buyer is responsible for deducting tax at source when paying any sum to a resident seller for the purchase of goods. This obligation arises only when the value or the aggregate value of goods purchased from a resident seller exceeds Rs. 50 lakh in a financial year. The buyer is liable to deduct TDS from such payments from July 1, 2021, onwards. It is essential for businesses that qualify as buyers under this provision to ensure compliance to avoid penalties and interest for non-deduction or late deduction.
Timing of Tax Deduction
Tax is required to be deducted by the buyer at the time of credit of such sum to the account of the seller or at the time of payment, whichever is earlier. This means that even if the amount is not paid immediately but is credited to a suspense account or by any other name in the buyer’s books of account, it will be deemed as credited to the seller’s account, and tax must be deducted accordingly. This timing ensures that tax liability is not deferred through accounting adjustments.
Rate of TDS and Threshold Limit
The rate of TDS under Section 194Q is 0.1 percent of the amount paid or payable more than Rs. 50 lakh. If the seller does not furnish a Permanent Account Number (PAN), the TDS is to be deducted at a higher rate of 5 percent as per the provisions of Section 206AA. The threshold limit for deduction is Rs. 50 lakh. Any amount paid or credited beyond this limit in a financial year will attract TDS at the applicable rate.
Situations Where TDS Under Section 194Q is Not Applicable
There are specific scenarios where Section 194Q will not apply, even if the general conditions are satisfied.
When Tax is Deductible Under Any Other Section
If tax is deductible under any other provision of the Income Tax Act, then TDS under Section 194Q shall not be applicable. The section explicitly states that in such cases, TDS shall be deducted under the relevant section that applies to the transaction. It does not matter whether the tax is deducted under that other section; the mere applicability of another TDS provision will exclude Section 194Q.
When Tax is Collectible Under Section 206C Other Than Sub-Section 1H
If a transaction is subject to tax collection at source (TCS) under Section 206C, excluding sub-section 1H, then Section 194Q will not apply. In such cases, the seller is responsible for collecting TCS, and the buyer is relieved of the obligation to deduct TDS. However, when a transaction falls under both Section 194Q and Section 206C(1H), TDS under Section 194Q will apply and not TCS under Section 206C(1H). This precedence is established to avoid dual compliance on the same transaction and to place the responsibility of compliance on the buyer rather than the seller.
Resolution of Implementation Issues
To address practical challenges that may arise in implementing Section 194Q, the Central Board of Direct Taxes is empowered to issue guidelines with the approval of the Central Government. These guidelines are legally binding on both tax authorities and the person liable to deduct tax. This provision ensures uniformity and clarity in interpreting and applying the section.
Clarifications Issued by the Tax Authority
To ease the compliance burden and clarify doubts, the authority issued Circular No. 13 dated June 30, 2021, and Circular No. 20 dated November 25, 2021. These circulars provided detailed clarifications on the scope, applicability, and exclusions under Section 194Q.
Transactions in Securities and Commodities
Section 194Q shall not apply to transactions in securities and commodities that are traded through recognized stock exchanges. Additionally, transactions in electricity, renewable energy certificates, and energy-saving certificates traded through power exchanges are also excluded. These exclusions were provided to avoid complications in well-regulated and transparent markets where other mechanisms for tax compliance already exist.
Treatment of GST and Other State Levies
When the tax is deducted at the time of credit to the seller’s account and the contract or agreement specifies the GST component separately, TDS under Section 194Q should be computed on the amount excluding GST. However, if tax is deducted at the time of payment and the GST portion of the payment is not separately identifiable, TDS is to be deducted on the entire amount paid. This rule ensures uniform treatment of indirect taxes and prevents unjustified tax deductions on components that are not actual income to the seller.
Applicability to Other Levies
This clarification also extends to other state levies like VAT, excise duty, etc. If such levies are indicated separately in the agreement, they may be excluded from the TDS base. The rationale remains the same as that applied in the context of GST.
Treatment of Purchase Returns
In cases where goods are returned after TDS has been deducted on the original purchase, the buyer may adjust the tax deducted against future purchases from the same seller. If the seller refunds the money instead of replacing the goods, the TDS amount may be carried forward and adjusted. However, if the goods are replaced, the original purchase is considered to have been completed, and no further adjustment is required. This ensures fairness and avoids double taxation in case of returns and refunds.
Applicability to Non-Residents
The provisions of Section 194Q do not apply to non-resident buyers whose purchases are not effectively connected with a permanent establishment in India. This exemption aligns with the broader principle of taxing only those non-residents who have a significant economic presence or business connection in India.
Exempt Sellers
Section 194Q does not apply when goods are purchased from sellers who are entirely exempt from income tax. For example, entities exempt under Section 10 or any other Act passed by Parliament are excluded. However, if only a part of the seller’s income is exempt, this exclusion will not apply. The tax will be deductible in such partial exemption cases.
Advance Payments
Since Section 194Q mandates deduction at the time of credit or payment, whichever is earlier, TDS is applicable even on advance payments made by the buyer. This provision ensures that tax is captured even if the transaction is settled partially or fully in advance of delivery or invoice generation.
Year of Incorporation
In the year of incorporation, a new entity cannot satisfy the requirement of having a turnover exceeding Rs. 10 crore in the preceding financial year. Therefore, the provisions of Section 194Q will not apply to such entities during their first year of business. This provides relief to new startups and businesses during their initial phase of operations.
Turnover from Business Activities
To determine eligibility under Section 194Q, only turnover from business activities is to be considered. Receipts from non-business activities are not counted for evaluating the Rs. 10 crore threshold. This ensures that the section applies only to entities engaged in substantial commercial operations.
Interaction of Section 194Q with Other TDS and TCS Provisions
Section 194Q overlaps with certain other tax deduction and collection provisions in the Income Tax Act. To ensure clarity, the law provides a hierarchy among overlapping sections. Specifically, Section 194Q(5) states that if a transaction is already subject to TDS under any other provision of the Act or is covered under TCS provisions of Section 206C (except sub-section 1H), then Section 194Q shall not apply. This provision ensures that taxpayers are not subjected to double deduction or collection on the same transaction.
Interaction Between Section 194Q and Section 194-O
Section 194-O pertains to TDS by e-commerce operators on transactions facilitated through their platforms. If a transaction falls under both Section 194Q and Section 194-O, the provisions of Section 194-O will apply. This prioritization is due to the centralized nature of e-commerce operations and the government’s intent to enforce TDS compliance at the source of aggregation. Furthermore, even if an e-commerce operator is exempt from deduction under sub-section (2) of Section 194-O, such a transaction will still be excluded from Section 194Q.
Role of E-Commerce Operators in TDS Deduction
In transactions facilitated through digital platforms, the primary responsibility to deduct tax lies with the e-commerce operator. This centralization simplifies compliance and enforcement. Once the e-commerce operator deducts tax under Section 194-O, the buyer is relieved from the obligation to deduct TDS under Section 194Q. This ensures that the transaction is not subject to dual deduction.
Interaction Between Section 194Q and Section 206C(1H)
Section 206C(1H) requires sellers to collect tax at source on sales of goods exceeding Rs. 50 lakh in a financial year. However, if the buyer is liable to deduct tax under Section 194Q on such a transaction and does so, then the seller is not required to collect TCS under Section 206C(1H). The preference is given to TDS over TCS in such cases. This rule applies even when the seller has already collected tax under Section 206C(1H) before the buyer could deduct it. In such situations, the transaction will not be subjected to another round of TDS under Section 194Q.
Clarification Regarding Sequence of Deduction and Collection
The law acknowledges that there may be practical difficulties in coordinating the timing of TDS and TCS deductions. If the seller collects tax under Section 206C(1H) before the buyer has deducted it under Section 194Q, then the buyer is not required to deduct it again. This avoids duplication and ensures equitable treatment. On the other hand, if the buyer has already deducted tax under Section 194Q, the seller should not collect TCS under Section 206C(1H). The objective is to ensure that the tax is collected only once.
Tax Deduction in E-Commerce Transactions
The provisions prioritize deduction of tax by the e-commerce operator under Section 194-O over collection of tax by the seller under Section 206C(1H). This prioritization applies even when the tax has not been deducted due to exemption under sub-section (2) of Section 194-O. The key principle is that once a transaction is subject to TDS under any section, it is excluded from the scope of Section 194Q and Section 206C(1H).
Exclusion of Section 194Q When Section 194-O Applies
When a transaction qualifies for deduction under both Section 194-O and Section 194Q, Section 194-O takes precedence. This rule avoids any confusion regarding who must deduct the tax and simplifies compliance for businesses operating through online platforms.
Primary Responsibility of E-Commerce Operators
The law places primary responsibility for deduction on the e-commerce operator. This ensures that sellers or buyers do not take over this role unless required. Even if a seller collects TCS under Section 206C(1H), it does not absolve the e-commerce operator of the duty to deduct tax under Section 194-O. The rate under Section 194-O is also generally higher, reinforcing the preference for TDS over TCS in e-commerce settings.
Tax Deduction in Dual Coverage Transactions
When a transaction qualifies under both Section 194Q and Section 206C(1H), TDS under Section 194Q shall apply. Once tax has been deducted by the buyer, the transaction exits the purview of TCS under Section 206C(1H). However, if the seller collects tax before the buyer deducts it, no further deduction is required. This mechanism ensures that only one party deducts or collects tax, avoiding duplication.
Adjustments and Record-Keeping
To manage these overlapping provisions effectively, buyers and sellers must maintain clear records of transactions, payments, and tax deductions or collections. Buyers should seek confirmations from sellers regarding any TCS collections made under Section 206C(1H). Similarly, sellers should inquire about TDS deductions made by buyers under Section 194Q before collecting TCS. This coordination helps avoid non-compliance, disputes, and potential penalties.
Reconciliation of TDS and TCS Records
Taxpayers must reconcile their books with Form 26AS and Form 27D regularly. If there are discrepancies in TDS or TCS credit, it may lead to tax demands or delays in refunds. Maintaining proper communication between buyers and sellers about tax deductions and collections is essential to ensure smooth reconciliation with the income tax department’s records.
Cross-Verification Through TDS Returns
Buyers must report TDS deductions under Section 194Q in their TDS returns using Form 26Q. Sellers can cross-verify the deductions through their Form 26AS. Any mismatch can be addressed promptly through revised returns or rectifications. Timely and accurate reporting of TDS is necessary to avoid disputes and ensure the seller gets credit for the tax deducted.
Impact on Business Relationships
The introduction of Section 194Q has added a new compliance layer in B2B transactions. Buyers are now more cautious when making high-value purchases, especially when transacting with multiple vendors. Businesses are entering into formal contracts outlining responsibilities for TDS and TCS to prevent misunderstandings. Clear communication and agreement on tax treatment are essential for sustaining long-term business relationships.
Practical Challenges in Implementation
The implementation of Section 194Q may present certain challenges for taxpayers. These include identifying when the Rs. 50 lakh threshold is crossed, determining the applicability of Section 194Q versus Section 206C(1H), managing GST exclusions, and coordinating with sellers to avoid double deduction. Many businesses have had to upgrade their accounting systems and train staff to ensure proper compliance.
Technology-Based Solutions
To cope with the complexities introduced by Section 194Q, businesses are using enterprise resource planning (ERP) systems that flag high-value purchases and automatically calculate TDS. Some solutions integrate real-time PAN verification and TDS compliance checks to prevent errors. These systems reduce the burden of manual monitoring and minimize the risk of penalties due to oversight.
Training and Awareness Among Taxpayers
Many small and medium enterprises may still be unaware of their responsibilities under Section 194Q. Regular training, professional consultations, and updates from tax authorities help improve compliance. Businesses should also develop internal compliance checklists for high-value purchases and periodically review supplier contracts to confirm tax obligations.
Penalties for Non-Compliance
Failure to deduct tax under Section 194Q or to deduct at the correct rate can lead to serious consequences. The buyer may be deemed an assessee-in-default under Section 201. Interest under Section 201(1A) and penalties under Section 271C may also be levied. Businesses need to establish standard operating procedures to prevent such lapses.
Appeal and Redress Mechanism
In case of genuine difficulties or disputes, taxpayers may approach the assessing officer for clarification or rectification. They may also file an appeal before the Commissioner of Income Tax (Appeals) or higher forums. The Central Board of Direct Taxes has the power to issue clarifications and circulars, which can be relied upon by taxpayers in case of litigation.
Impact on Working Capital
Since TDS under Section 194Q is deducted on payment or credit above Rs. 50 lakh, it may impact the seller’s cash flow, especially when payments are delayed. Sellers must account for the TDS amount while planning their cash inflows. Buyers should also communicate clearly about the TDS deductions so that the seller can claim credit and adjust their tax liability accordingly.
Clarification on Price Discovery Platforms
The exemption for e-auctioneers also indirectly supports businesses that use online platforms primarily for price benchmarking rather than finalizing purchases. Since the actual transaction does not occur on the platform, there is no responsibility on the platform operator to deduct TDS. In such cases, if the buyer independently purchases goods from a seller post-auction, the obligation to deduct tax under Section 194Q may arise if the threshold conditions are met. Therefore, clarity in transaction flow and contract documentation is critical to determine who is liable for deduction under applicable sections.
GST Component and Tax Deduction
When calculating the amount on which tax is to be deducted under Section 194Q, the component of Goods and Services Tax should be excluded if certain conditions are met. Specifically, if tax is deducted at the time of credit to the seller’s account and the invoice or contract shows the GST component separately, then TDS should be calculated on the base amount excluding GST. However, if tax is deducted at the time of payment and it is not possible to separate the GST component from the payment, then TDS must be deducted on the entire amount. This principle ensures that tax is not deducted on amounts that are not income in the hands of the seller.
Treatment of Other State Levies
The same rule applies to other state-imposed levies such as VAT, excise duty, or other local taxes, provided these components are separately mentioned in the invoice. If the taxes are embedded in the price and not shown distinctly, the entire value will be subject to TDS. This clarification helps avoid over-deduction and ensures that only the income portion of the invoice is subjected to tax deduction.
Refund and Purchase Return Adjustments
When goods are returned after the buyer has deducted tax under Section 194Q, there may be a situation where the purchase value effectively falls below the threshold, or the tax deducted becomes disproportionate. In such cases, if the seller refunds the amount, the TDS already deducted can be adjusted against the next purchase transaction with the same seller. If the goods are replaced instead of being refunded, then the transaction is considered completed and no adjustment of TDS is required. This flexibility helps maintain the integrity of the deduction process while accounting for business realities such as product returns or quality rejections.
Advance Payments and Their Tax Treatment
Section 194Q specifically mandates that tax should be deducted at the time of payment or credit, whichever is earlier. This means that advance payments made for goods also fall under the purview of TDS. Buyers must remain cautious and ensure that advance payments to a seller, when crossing the Rs. 50 lakh threshold, are subjected to tax deduction. This advance deduction is not contingent on the delivery of goods or the receipt of an invoice. The deduction obligation arises the moment the payment or credit occurs, irrespective of when the goods are supplied.
TDS in Case of Multiple Transactions
Businesses often make several transactions with a single vendor over the course of a financial year. When the aggregate value of these transactions exceeds Rs. 50 lakh, the obligation to deduct tax under Section 194Q arises. TDS must be applied only on the amount exceeding Rs. 50 lakh. Therefore, buyers must maintain accurate cumulative records of purchases from each vendor to monitor when the threshold is breached. Accounting software should be configured to track this threshold automatically to avoid lapses.
Year of Incorporation and Section 194Q Applicability
Section 194Q applies only if the buyer’s turnover in the preceding financial year exceeds Rs. 10 crore. In the case of a newly incorporated entity, there is no preceding financial year where turnover can be evaluated. As a result, Section 194Q does not apply in the year of incorporation. This exemption provides relief to start-ups and new businesses, allowing them time to establish operations before becoming subject to complex TDS requirements.
Calculation of Turnover for Threshold
While calculating whether the Rs. 10 crore turnover threshold has been met, only receipts from business activities are considered. Receipts from non-business sources such as capital gains, dividends, or interest income are excluded. It is also important to ensure that the turnover is calculated on a gross basis and includes all taxable and exempt sales from business operations. Accurate classification of receipts is necessary to determine whether the entity qualifies as a buyer under Section 194Q.
Section 194Q in Case of Composite Dealers
Dealers registered under composition schemes, especially under GST, may not be required to collect or pay GST in the normal course. However, if their turnover in the previous year exceeds Rs. 10 crore, they may still be required to deduct TDS under Section 194Q when purchasing goods exceeding Rs. 50 lakh. The applicability of Section 194Q is based on turnover and not on GST registration or tax-paying status. Hence, composite dealers must evaluate their obligations under this section independently.
Non-Resident Buyers and Permanent Establishments
Section 194Q does not apply to non-resident buyers unless the transaction is effectively connected with a permanent establishment in India. This provision ensures that only those non-residents who have a substantial presence and commercial connection in India are brought within the TDS net. Non-residents without a permanent establishment are not liable under Section 194Q, thereby avoiding jurisdictional conflicts and encouraging international trade without excessive compliance burdens.
Transactions with Exempt Entities
When a buyer purchases goods from an entity that is wholly exempt from income tax, such as an educational institution registered under Section 10 or an entity established under an Act of Parliament that exempts its income, Section 194Q does not apply. However, this relief applies only if the entire income of the seller is exempt. If the seller has partial exemption or engages in commercial activities, the buyer is still obligated to deduct tax. Verification of the seller’s tax-exempt status becomes important to determine compliance responsibilities accurately.
Role of Tax Deduction in Advance Payments
Advance payments are quite common in business, especially in sectors like manufacturing, infrastructure, and wholesale trade. Since Section 194Q applies to advance payments, buyers must ensure that tax is deducted even before receiving an invoice or shipment. This leads to practical challenges in identifying the GST component or other levies included in such payments. In such cases, TDS must be deducted on the gross amount paid, as it is not possible to apportion the tax component precisely.
Deduction and Reporting in Form 26Q
Tax deducted under Section 194Q must be reported quarterly in Form 26Q. Buyers must ensure that the PAN details of the seller are correctly reported to avoid defaults or mismatches. TDS returns are due at the end of each quarter and must be filed within the statutory deadline to avoid interest and penalties. The seller will be able to claim credit for the tax deducted only if it is properly reflected in Form 26AS based on the buyer’s return. Accuracy and timeliness are therefore essential in reporting.
Importance of Timely Compliance
Late deduction or non-deduction of TDS under Section 194Q can attract interest and penalties. Interest under Section 201(1A) is levied for every month or part of the month during which the default continues. Penalties under Section 271C may also be levied for failure to deduct tax. These consequences can significantly affect the financial health of a business and lead to reputational risk. Buyers must implement robust systems and assign responsibility for TDS compliance to trained personnel.
Internal Controls for TDS Compliance
Organizations should establish standard operating procedures for TDS under Section 194Q. This includes mapping all vendor accounts, maintaining a running total of purchases made from each vendor, and identifying vendors whose cumulative transactions approach the Rs. 50 lakh limit, and ensuring that TDS is deducted as soon as the threshold is crossed. Integration of tax compliance modules in ERP systems can help automate these tasks and reduce the risk of non-compliance.
Challenges Faced by Small Businesses
Small and medium enterprises may find it difficult to understand and implement the provisions of Section 194Q, especially when dealing with numerous vendors and high transaction volumes. These businesses may lack access to expert tax advice or sophisticated accounting systems. Government agencies and trade bodies can assist by conducting awareness programs, issuing simplified guides, and offering technical support to help such businesses comply without an excessive administrative burden.
Other Provisions Applicable to Section 194Q
Section 194Q has several supplementary provisions and overlaps that must be navigated carefully for proper compliance. One key area is how it interacts with Section 206C(1H), which deals with TCS (Tax Collected at Source) on the sale of goods. Section 194Q takes precedence over Section 206C(1H) when both could apply to the same transaction. This means if a buyer is liable to deduct TDS under Section 194Q, then the seller is not required to collect TCS under Section 206C(1H).
Another aspect is the treatment of advance payments. Section 194Q applies even if payment is made in advance before the actual purchase of goods, as the liability to deduct TDS arises at the time of credit or payment, whichever is earlier. If the payment is made before the purchase is entered in the books, TDS is still applicable at the time of payment.
If a buyer fails to deduct TDS under Section 194Q, they may be disallowed the expense under Section 40(a)(ia) of the Income-tax Act, which means 30% of the purchase expense may be disallowed from the computation of taxable income. Further, interest and penalties can also be levied under sections 201 and 271C.
Practical Examples for Clarity
Example 1: When TDS is Applicable
ABC Ltd., a company with a turnover of ₹15 crore in FY 2023–24, purchases goods worth ₹60 lakh from XYZ Ltd. in FY 2024–25. Since ABC’s turnover exceeds ₹10 crore in the preceding year and the purchases from XYZ exceed ₹50 lakh in the current year, Section 194Q applies. ABC must deduct 0.1% TDS on ₹10 lakh (i.e., ₹60 lakh – ₹50 lakh).
Example 2: When TDS is Not Applicable
If ABC Ltd. had a turnover of only ₹9 crore in FY 2023–24, Section 194Q would not apply in FY 2024–25, even if purchases exceed ₹50 lakh, because the turnover condition is not fulfilled.
Example 3: Payment in Advance
ABC Ltd. agrees to purchase goods worth ₹55 lakh and pays ₹20 lakh in advance. The advance is paid before the invoice is raised or the purchase is recorded in the books. TDS should be deducted on the ₹20 lakh at the time of payment, even if the purchase has not yet been accounted for.
Important Clarifications by CBDT
The CBDT (Central Board of Direct Taxes) issued Circular No. 13 of 2021 to clarify several doubts:
- Section 194Q does not apply to transactions in securities and commodities traded through recognized stock exchanges or cleared and settled by recognized clearing corporations.
- Transactions carried out through exchanges such as electricity exchanges are also outside the scope.
- If the seller is a non-resident, and the transaction is not taxable in India, TDS under Section 194Q will not apply.
- TDS is not applicable on the GST component if it is separately mentioned in the invoice.
Consequences of Non-Compliance
Failing to deduct TDS under Section 194Q can lead to:
- Disallowance of expenditure: As mentioned earlier, 30% of the amount on which TDS was required but not deducted can be disallowed under Section 40(a)(ia).
- Interest: Interest at the rate of 1% per month or part of the month from the date on which tax was deductible till the date of actual deduction.
- Penalty: Under Section 271C, the Assessing Officer may impose a penalty equal to the amount of TDS not deducted.
- Prosecution: In extreme cases, prosecution proceedings may be initiated under Section 276B.
Best Practices for Businesses
To ensure smooth compliance with Section 194Q, businesses should:
- Review vendor contracts and transaction volumes to identify suppliers crossing the ₹50 lakh threshold.
- Configure ERP/accounting software to automatically flag such vendors and calculate TDS.
- Maintain robust documentation for payments, purchase entries, and TDS records.
- Coordinate with vendors to avoid duplication of TDS/TCS and ensure proper credit is passed.
Conclusion
Section 194Q is a significant addition to the TDS framework aimed at widening the tax base and improving traceability of high-value transactions. Its implementation requires close monitoring of vendor payments and robust accounting practices. While it may overlap with TCS provisions under Section 206C(1H), the priority rule and CBDT guidance help clarify such scenarios. Proper compliance not only avoids penalties and disallowances but also ensures smooth reconciliation of taxes deducted and claimed by both parties.