On 30th June 2021, the Income Tax Department had issued a circular specifying the guidelines for TDS deduction as prescribed under section 194Q. These guidelines have been provided to remove the complexities of this section as well as Sections 194 Q and 206(1H).

The Finance Act 2021 introduced Section 194Q and made it applicable from 1st July 2021. Section 194Q of the Income Tax Act applies to any buyer who has:

• In the previous financial year has a turnover of more than Rs. 10 crores.
• The value of the goods purchased by the buyer should exceed Rs.50 lakh in a year.

These buyers need to deduct TDS @ of 0.1% on the amounts that exceed Rs.50 lakh. This section is completely opposite of Section 206C(1H).

Section 194Q will prevail Section 206C(1H). Hence if the buyer needs to deduct the TDS, the seller does not need to deduct the TCS as per Section 206(1H).

Example- Mr. X a seller, sold goods to Mr. Y  a buyer and collected TCS as per section 206C(1H). however after applicability of sec. 194Q (1 July 2021) Mr. Y is covered by section 194Q. Since sec 194Q is an overriding section 206(1H) hence Mr. Y will be liable to deduct TDS under this section and Mr. X does not need to collect TCS under sec 206 C (1H).

How to Calculate Threshold for FY 2021-22 as Per Section 194Q?

• Section 194Q of the Income Tax Act does not apply to any sum that has been paid or credited before the 1st of July 2021.
• The threshold amount of Rs. 50 lakh for a FY can be calculated from 1st April 2021.

For example:

If a buyer has paid more than Rs. 50 lakh up to 30th June 2021, the TDS as per Section 194Q will apply to all the payments that will be made after the 1st of July.

How to Adjust GST as per Section 194Q?

• If GST amount is separately mentioned in the invoice:

To calculate TDS as per Section 194Q where the GST amount is separately provided in the invoice TDS should be deducted from the net amount without including the GST.

• IF GST is not provided separately in the invoice

In this case, the TDS will be deducted from the complete amount. In future, the GST component should be invoiced.

• For TCS as per Section 206(1H)

TCS must be deducted from the total sale amount, no adjustment of GST is required.

• If the seller returns the purchase

If the seller returns the money the tax deducted will get adjusted in the next purchase against the same seller. If only goods are replaced no adjustment will be made.

Does Section 194Q Apply to Non-Residents?

• The provisions of section 194Q of the Income Tax Act does not apply to non-residents.
• However, if the non-resident is a permanent resident in India, then Section 194Q will be applicable.

What are the Conditions Specified in Section 194Q for TDS Deduction?

The tax will be deducted only when the following given conditions are satisfied:

• The goods must be purchased only from the resident seller.
• The aggregate value of the goods purchased must be RS. 50 lakhs in any FY.
• The individual should fall into the definition of the buyer as explained in Section 194Q.

When Should the TDS Amount be Deducted as per Section 194Q?

The TDS amount should be deducted at the below-mentioned events which are earlier:

• At the time of the credit of the amount to the account of the seller(includes suspense Account too).
• At the time of the payment by any mode.
• No deduction is made in the case of imports.

Which Organizations are Exempted from Section 194Q?

The transactions made in the following organizations are exempted from applying Section 194Q of the Income Tax Act:

• Recognized stock exchanges
• Electricity
• Renewable energy certificates in registered power exchanges
• Energy-saving certificates in registered power exchanges

Takeaway

It was clarified by CBDT that the TDS provisions as per this section require the buyer to also have a total turnover of Rs. 10 crores in the preceding FY. Many stakeholders faced difficulties in implementing Section 194Q for exchanges as well as clearing corporations. 

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