TDS Section 194Q: Handling High-Value Purchases, Payment Workflow & Reporting
Introduced in 2021, Section 194Q of the Income Tax Act expanded the scope of Tax Deducted at Source (TDS) to include the purchase of goods. This provision ensures tax traceability in large transactions between buyers and sellers. Understanding its applicability, rates, compliance process, and reporting requirements is crucial for every business with significant annual turnover.
What is Section 194Q of Income Tax Act?
Section 194Q mandates buyers to deduct TDS on high-value purchases of goods exceeding ₹50 lakh from a single seller during a financial year.
Objective of Introducing Section 194Q
The main goal of Section 194Q is to bring high-value goods transactions into the tax net and ensure transparency. It also helps prevent revenue leakage by tracking payments at the source level, especially in B2B trade transactions.
Effective Date & Background
Section 194Q came into effect on 1 July 2021. It was introduced as part of the Union Budget 2021 to complement other TDS/TCS provisions like Section 206C(1H) , ensuring both buyers and sellers maintain proper tax records.
Applicability of TDS Under Section 194Q
To determine whether Section 194Q applies, businesses must check two key thresholds, buyer turnover and transaction value.
Buyer Turnover Threshold (₹10 Crore)
The buyer must have a total turnover exceeding ₹10 crore during the preceding financial year. Only such buyers are required to deduct TDS under Section 194Q on eligible purchases.
Transaction Value Limit (₹50 Lakh)
TDS applies when the total purchases from a single seller exceed ₹50 lakh in a financial year. The deduction is made only on the amount exceeding ₹50 lakh.
Example:
If a buyer purchases goods worth ₹80 lakh from a seller, TDS will apply on ₹30 lakh (₹80 lakh - ₹50 lakh).
Exemptions and Exceptions
Section 194Q does not apply when:
- The transaction already attracts TDS or TCS under another section.
- The seller is a non-resident with no Permanent Establishment (PE) in India.
- The transaction is for the import of goods.
TDS under Section 194Q and TCS under Section 206C(1H) both apply, then only TDS under 194Q will prevail.
TDS Rate & Calculation Under Section 194Q
The TDS rate and calculation process under this section are straightforward but must be handled carefully to avoid penalties.
Standard TDS Rate on Purchase of Goods
The standard TDS rate under Section 194Q is 0.1% on the amount exceeding ₹50 lakh per seller in a financial year.
Example:
If the purchase value is ₹80 lakh, TDS = 0.1% of ₹30 lakh = ₹3,000.
Rate if PAN Not Furnished
If the seller fails to provide a valid PAN, the buyer must deduct TDS at a higher rate of 5% under Section 206AA.
GST Component in TDS Calculation
TDS should be deducted excluding GST if the invoice separately mentions GST.
For example, if the invoice amount is ₹1,18,000 (₹1,00,000 + ₹18,000 GST), TDS applies only on ₹1,00,000.
Payment Workflow & Reporting Obligations
Deducting TDS is just the first step. Businesses must ensure timely deposit, accurate filing, and proper issuance of certificates.
When to Deduct TDS Under Section 194Q
TDS must be deducted at the earlier of the following two events:
- When the payment is made to the seller (by cash, cheque, or digital mode).
- When the purchase entry is recorded in the buyer’s books of account.
Due Dates for TDS Deposit
- Monthly deposit: On or before the 7th of the next month (except March).
- For March transactions: Due by 30 April of the next financial year.
Payment is made using Challan ITNS 281 under the TDS/TCS payment system.
Filing TDS Returns (Form 26Q)
Buyers must report these deductions quarterly using Form 26Q :
- Q1 (Apr–Jun): Due 31 July
- Q2 (Jul–Sep): Due 31 October
- Q3 (Oct–Dec): Due 31 January
- Q4 (Jan–Mar): Due 31 May
Issuance of TDS Certificates
After filing Form 26Q, the buyer must issue a TDS certificate in Form 16A to the seller within 15 days of filing the TDS return. This certificate helps sellers claim credit for the tax deducted.
Impact of Section 194Q on Businesses
Section 194Q has far-reaching implications on buyer-supplier relationships, accounting systems, and compliance structures.
Effect on Buyers and Suppliers
- Buyers: Must maintain real-time tracking of vendor payments to identify when cumulative purchases exceed ₹50 lakh.
- Sellers: Experience cash flow impact due to tax deduction at source but can claim TDS credit in their income tax return.
Compliance Challenges & Solutions
- Managing multiple suppliers and monitoring thresholds manually can be complex.
- Accounting errors may lead to under- or over-deduction of TDS.
- Businesses can use automated accounting software to simplify TDS detection, calculation, and reporting.
Role of Accounting Software like BUSY
BUSY Accounting Software helps automate TDS processes under Section 194Q by:
- Auto-calculating TDS once purchase thresholds are reached.
- Generating TDS challans and Form 26Q data automatically.
- Maintaining audit trails and vendor-wise summaries for easy compliance.
Penalties & Consequences of Non-Compliance
Failure to comply with Section 194Q can result in interest, penalties, and disallowance of expenses.
Interest on Late Deduction or Payment
- For non-deduction: Interest @1% per month until the date of deduction.
- For non-payment after deduction: Interest @1.5% per month until deposit date.
Disallowance of Expenses
Under Section 40(a)(ia), if TDS is not deducted or deposited on time, 30% of the purchase amount can be disallowed as an expense while computing taxable income.
Other Consequences Under the Act
- Late filing of TDS returns attracts penalties under Section 234E (₹200 per day).
Additional penalties may apply under Section 271H for incorrect filings or delays.
Conclusion
Section 194Q plays a critical role in strengthening India’s tax transparency system by extending TDS to the purchase of goods. For buyers with turnover above ₹10 crore, compliance is mandatory once annual purchases from a seller exceed ₹50 lakh.
Timely deduction, deposit, and reporting ensure smooth operations and prevent penalties. Leveraging modern tools like BUSY Accounting Software simplifies TDS tracking, automates calculations, and helps businesses stay compliant with ease.
I am a Chartered Accountant with 5 years of experience specializing in GST, income tax, and HSN code classification. I help businesses with GST compliance, tax planning, and financial advisory, ensuring they meet regulatory requirements while optimizing their tax strategies. I aim to simplify GST filings, income tax laws, and HSN code classifications, helping professionals and business owners stay informed and compliant.
Frequently Asked Questions
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What is Section 194Q of the Income Tax Act?
Section 194Q requires buyers with turnover over ₹10 crore to deduct TDS at 0.1% on purchases exceeding ₹50 lakh per seller in a financial year.
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What is the TDS rate under Section 194Q?
The standard rate is 0.1%, and 5% applies if the seller fails to provide a valid PAN
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When should TDS be deducted under Section 194Q?
TDS should be deducted when payment is made or purchase is booked in the buyer’s books—whichever occurs earlier.
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Does GST get included in TDS calculation under Section 194Q?
No. If GST is shown separately in the invoice, TDS is deducted on the value excluding GST.
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What happens if TDS under Section 194Q is not deducted?
Non-compliance leads to interest, penalties, and disallowance of 30% of the purchase amount as a business expense under Section 40(a)(ia).