Applicability of Section 194Q TDS on Purchase of Goods

In the Budget 2021-22, a new section 194Q introduced which will be effective from 1st July 2021. In order to broaden and deepen the tax base, it is proposed to levy a TDS of 0.1% on purchase transactions exceeding INR 50 lacs in a year.

In order to minimize the compliance burden, it is also proposed to endow that the responsibility of deduction shall lie only on the persons whose turnover exceeds INR 10 crores.

Who is Liable to Deduct?

A buyer carrying on a business whose total sales or turnover from the business exceeds INR 10 crores during the FY immediately preceding the financial year in which such goods are purchased. 

When Tax Liable to be Deducted?

The tax shall be deducted from the purchases made by a buyer if these conditions are met:

  1. There is a purchase of goods from a resident person;
  2. Goods are purchased for a value or aggregate of value exceeding INR 50 lacs in any previous year; and
  3. The buyer shouldn’t be in the persons excluded list from the provision for deduction of tax.

Time of Deduction

  • At the time of credit of such sum to the seller’s account (even if Suspense A/c) or;
  • At the time of payment thereof through any mode whichever is earlier.

Rate

0.1% of the purchase value exceeding INR 50 lacs if the seller has furnished his PAN or Aadhaar, otherwise, the tax shall be deducted at the rate of 5%.

Exception

(a) Tax is deductible under any of the this Act’s provision; and

(b) TCS under the provisions of section 206C other than a transaction to which section 206C- sub-section (1H) applies.

TDS Under Section 194 Q V/S TCS Under Section 206C (1H)

The buyer shall have the primary and predominant obligation to deduct the tax and no tax shall be collected on such transaction under Section 206C (1H). Notwithstanding, if the buyer makes a default, the liability to collect the tax gets shifted to the seller.

Liability for Non-compliance

Dis-allowance to the extent of 30% of the value of transaction. It means that if the buyer is not able to deduct and deposit TDS as applicable then dis-allowance shall be restricted to 30% of the expenditure amount on which TDS is not deducted and deposited. In addition, if deductor fails to deduct tax at source, he/she shall be liable to pay interest at the rate of 1% for every month or part thereof on the amount of tax he/she failed to deduct. However, if he/she fails to deposit the tax deducted at source, he/she shall be liable to pay interest at the rate of 1.5% for every month or part thereof on the amount of tax he/she failed to deposit to the credit of the Central Government.

Action Points

  • Procurement Team to discern vendors having turnover more than INR 50 lacs.
  • IT Team to make essential changes in the software.
  • Revision of Open PO’s with effect from 01-July-21 since TCS would not be applicable.

Conclusion

The word TDS and Tedious sounds similar. Currently, there are 38 provisions which required TDS from various transactions. If all these provisions harmonize in a table this has increased the compliance burden at no cost to the Assessee. The intention of section 194Q is to broaden and deepen the tax base.

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