In recent times, the Indian government has implemented various provisions in the Income Tax Act to ensure the proper collection of taxes. One such provision is Section 194Q, which was introduced in the Finance Act, 2021. The section aims to widen the tax base and increase compliance with the provisions of the Income Tax Act. In this blog, we will discuss the key provisions of Section 194Q and its implications.
Section 194Q – An Overview
Section 194Q of the Income Tax Act, 1961, came into effect from July 1, 2021. As per this section, any person who purchases goods worth more than Rs. 50 lakhs in a financial year is required to deduct tax at source (TDS) at the rate of 0.1% of the total purchase value. This section is applicable only to those persons who are not required to deduct TDS under any other provision of the Income Tax Act.
Key Provisions of Section 194Q
- Applicability: Section 194Q is applicable to any person who purchases goods worth more than Rs. 50 lakhs in a financial year. It is applicable to both resident and non-resident sellers.
- TDS Rate: The TDS rate under Section 194Q is 0.1% of the total purchase value. The seller’s PAN (Permanent Account Number) is mandatory for the TDS deduction.
- Threshold Limit: Section 194Q applies only when the purchase value exceeds Rs. 50 lakhs in a financial year. If the purchase value is less than Rs. 50 lakhs, the buyer is not required to deduct TDS.
- Applicability to Resident and Non-Resident Sellers: Section 194Q is applicable to both resident and non-resident sellers. If the seller is a non-resident, the buyer must deduct TDS before remitting the payment to the non-resident.
- Non-Applicability: Section 194Q is not applicable in the following cases:
- When the buyer is a Central or State Government entity or a public sector company.
- When the seller is a person liable to deduct TDS under any other provision of the Income Tax Act.
- Return Filing: The buyer must file a TDS return in Form 26Q within the prescribed time limit. Failure to file the return may attract penalties.
Implications of Section 194Q
Section 194Q has several implications for buyers and sellers. For buyers, it means that they need to ensure that they deduct TDS at the rate of 0.1% on purchases exceeding Rs. 50 lakhs in a financial year. Failure to comply with this provision may attract penalties.
For sellers, it means that they need to ensure that they provide their PAN to the buyer. If the seller fails to provide their PAN, the buyer may deduct TDS at a higher rate of 5%. Additionally, non-resident sellers may need to obtain a Tax Residency Certificate (TRC) to claim the benefits of the Double Taxation Avoidance Agreement (DTAA).
Exemptions and Exceptions
Section 194Q comes with certain exemptions and exceptions. As mentioned earlier, the provision is not applicable if the buyer is a Central or State Government entity or a public sector company. However, if the buyer is a PSU (Public Sector Undertaking) but not a government entity, then the provision is applicable.
Another exception is when the purchase is made from an agriculturist. In such a case, the buyer is not required to deduct TDS under Section 194Q. However, the term ‘agriculturist’ is not defined under the Income Tax Act, which can lead to interpretation issues. Hence, it is advisable for buyers to exercise caution and seek professional advice to determine whether the seller is an agriculturist or not.
Impact on Cash Flow
Section 194Q can have a significant impact on the cash flow of buyers. Since TDS is deducted at the time of purchase, it reduces the cash available with the buyer. This can be particularly challenging for small and medium-sized businesses that have limited cash reserves. Moreover, if the buyer is unable to claim credit for the TDS amount, it can result in a double taxation situation, which can further impact cash flow.
Challenges in Implementation
The implementation of Section 194Q can be challenging for both buyers and sellers. The provision requires buyers to deduct TDS at the time of purchase, which can be difficult to manage in certain situations. For example, if the buyer purchases goods on credit and makes the payment at a later date, it may be challenging to deduct TDS at the time of purchase. Similarly, if the seller is unable to provide their PAN, it can result in higher TDS deductions or delays in payment.
Increased Compliance
Despite the challenges in implementation, Section 194Q is expected to improve tax compliance in the long run. By requiring buyers to deduct TDS at the time of purchase, the provision ensures that sellers have an incentive to disclose their income and comply with tax provisions. Moreover, it widens the tax base by bringing more transactions under the TDS net.
Penalties for Non-Compliance
Non-compliance with Section 194Q can result in penalties and interest charges. If the buyer fails to deduct TDS or deducts it at a lower rate, they can be penalized at the rate of 1% per month or part of the month. Moreover, interest charges at the rate of 1.5% per month or part of the month can also be levied on the TDS amount.
Conclusion
Section 194Q is a recent provision introduced in the Income Tax Act to ensure that the government can widen the tax base and increase compliance with tax provisions. It is applicable to buyers who purchase goods worth more than Rs. 50 lakhs in a financial year and requires them to deduct TDS at the rate of 0.1% of the total purchase value. Sellers need to ensure that they provide their PAN to the buyer to avoid TDS deduction at a higher rate of 5%. The provision has significant implications for both buyers and sellers and is expected to improve tax compliance in the long run.
Read more useful content:
- section 145 of income tax act
- section 10e of income tax act
- section 9 of the income tax act
- section 94b of income tax act
- section 206aa of income tax act
Frequently Asked Questions (FAQs)
What is Section 194Q of the Income Tax Act?
Section 194Q is a provision introduced in the Income Tax Act that requires buyers to deduct TDS on purchases exceeding Rs. 50 lakhs in a financial year.
Who is required to deduct TDS under Section 194Q?
Buyers who purchase goods from a resident seller are required to deduct TDS under Section 194Q, except in certain exempted cases.
What is the rate of TDS under Section 194Q?
The rate of TDS under Section 194Q is 0.1% of the purchase value.
What is the threshold limit for TDS deduction under Section 194Q?
The threshold limit for TDS deduction under Section 194Q is Rs. 50 lakhs in a financial year.
Are there any exemptions to TDS deduction under Section 194Q?
Yes, certain buyers, such as Central or State Government entities or public sector companies, are exempted from TDS deduction under Section 194Q. Moreover, purchases made from agriculturists are also exempted.
What is the due date for TDS payment under Section 194Q?
The due date for TDS payment under Section 194Q is 7 days from the end of the month in which TDS is deducted.
What are the penalties for non-compliance with Section 194Q?
Non-compliance with Section 194Q can result in penalties and interest charges at the rate of 1% per month or part of the month for late payment or non-payment of TDS.
How can buyers claim credit for TDS deductions under Section 194Q?
Buyers can claim credit for TDS deductions under Section 194Q by filing regular TDS returns and providing Form 16A to the seller as proof of TDS deductions.
Are there any reporting requirements for TDS deductions under Section 194Q?
Yes, buyers are required to maintain proper records of purchases and TDS deductions under Section 194Q and file regular TDS returns.
Do buyers need to obtain the seller’s PAN for TDS deduction under Section 194Q?
Yes, buyers are required to obtain the seller’s PAN for TDS deduction under Section 194Q. If the seller fails to provide their PAN, the TDS rate may be higher, and there may be delays in payment.
