Section 194Q of the Income Tax Act

Section 194Q of the Income Tax Act pertains to transactions with a high volume falling under the ambit of Tax Deduction at Source (TDS). For this 194Q TDS, there is a threshold limit on the purchase value. If any payment for the purchase of goods or availing of services exceeds this threshold, the buyer would be liable to deduct TDS under the 194Q section. 

Let us understand in detail how this section relates to your purchase-related transactions. 

What is Section 194Q of the Income Tax Act?

The Central Board of Direct Taxes introduced Sec 194Q of the Income Tax Act on the 1st of July 2021. Mostly searched on the web as ‘TDS 194Q’, it pertains to the tax deduction on the payment made to purchase goods or services. TDS is a buyer-specific tax, and section 194Q of the Income Tax Act is also an Indian buyer-specific section. 

The Section 194Q TDS applicability is on purchases worth ₹50 lacs and above in the previous financial year. A 194Q rate of TDS would apply to such purchases made by Indian sellers. 

This tax deduction is placed in the high-volume purchase mechanisms for the Government of India (GoI) to trace huge volumes of transactions. This also helps the GoI identify income disclosure cases. 

What is the 194Q TDS rate?

The TDS on purchase of goods 194Q rate is 0.1 per cent on the purchase of goods exceeding ₹50 lacs in the previous financial year. Since this is TDS, 0.1 per cent is the source rate for the deduction for TDS u/s 194Q of the Income Tax Act. 

What is Section 194Q’s applicability? 

TDS Section 194Q only applies to Indian sellers. 194Q does not apply to sellers outside India. It applies to both revenue and capital goods. 

Here are the salient features of the TDS 194Q applicability. 

• Any Indian buyer whose gross receipts or sales or annual turnover in the immediately previous financial year exceeded ₹10 crores
• Any Indian buyer who has purchased goods or availed services from a resident Indian seller  
• The value or aggregate value of goods and services in the previous financial year is more than ₹50 lacs.

Here is an example explaining the applicability of TDS under section 194Q.

Example 

Consider that an Indian resident buyer had more than ₹10 crores of turnover for a financial year ending the 31st of March, 2023. Therefore, if a buyer has purchased goods from an Indian seller, they must deduct TDS on purchases above ₹50 lacs for the financial year 2022-23.

Exemptions

Section 194Q of the Income Tax Act has the following exemptions: 

• Non-Indian buyers and purchase of goods that have no direct connection to India
• Not applicable during the year (financial year) of incorporation of the new buyer.
• Purchase of goods from sellers whose income is exempted from tax 
• Section 206C tax deduction, except 206C(1H) applicable transactions
• Any purchase made by GoI or the Indian State Governments 
• If Section 194O is already applied to transactions under consideration
• Transactions that involve stock exchanges, electricity and renewable energy

How is GST related to the 194Q TDS Section?

For 194Q TDS calculation, GST (Goods and Services Tax) is used to apply the deduction rate of 0.1 per cent. However, the buyer needs to exclude GST while calculating their annual turnover. 

How is TDS 194Q calculated? 

Here is a hypothetical example for understanding the 194Q TDS calculation. 

Suppose a buyer has purchased goods worth ₹25 lacs four times each from an Indian seller. In a financial year, he has purchased goods worth ₹1 crore in total.

So, the value above ₹50 lacs would attract TDS at the rate of 0.1%. 

Therefore, TDS has to be deducted from ₹1 crore minus ₹50 lacs. Thus, the TDS rate would be ₹50 based on the above calculation. 

What are the implications of Sec 194Q non-compliance? 

Non-compliance with sec 194Q would attract severe consequences and penalties like the following:

• Failure of TDS deduction by the buyer would be penalised as per Section 40A(IA). Under this section, 30 per cent of the total non-deducted TDS purchases would be disallowed as expenses.
• This 30 per cent would consequently be treated as your income and taxable as per your tax slab. 
• This consequent income would be taxed or clubbed with your total annual income.

Conclusion

Section 194Q of the Income Tax Act applies to the purchase of goods and services that cross a threshold of ₹50 lacs in the previous financial year. It applies only to Indian buyers and sellers, and its non-compliance would attract a penalty.