Introduction of Section 194Q – TDS for buyers as per Finance Act, 2021

The Finance Act, 2021 received its Presidential assent on March 28, 2021. The bill has undergone above 100 amendments before being passed by the parliament.

The Act introduces a new Section 194Q which is effective from July 1, 2021. As per the provisions laid down in the bill, the buyer would be liable to deduct TDS if the transaction, aggregate or single, exceeds Rs. 50 lakhs in the previous year. The prevailing Act includes section 206C(1H) which lays down similar guidelines regarding TCS. Before understanding the need for Section 194Q while we already had Section 206C, let’s dive into its provisions.

Components for Section 194Q:

· The ‘buyer’ has to be a person with a person with a turnover of Rs. 10 crores in the preceding year.

· ‘Seller’ implies to the resident of our country.

· The ‘goods’ exchanged are yet to be clarified, meaning are they interpreted as goods or the Act implies to services as well.

The Rate of tax deduction:

The buyer has to file TDS at 0.1% on the amount exceeding Rs. 50 lakhs. So, let’s consider this as an example:

Rishi, a businessman with a turnover of Rs. 25 crores, purchases goods worth 70 lakhs from Khushal, an Indian resident. Then, rishi has to pay a tax of 0.1% on 20 lakh (2,000). It is to be paid at the time of payment or credit, whichever is earlier.

Note: If the Permanent Account Number (PAN) of the seller is unavailable, the tax deducted for the buyer would be @5%.

Exemptions under Section 194Q:

· Section 194Q will not be applicable if the provisions of the contract attract any other Section laid down under the Finance Act, 2021.

· If tax is deductible under Section 206C, then Section 194Q can be exempted unless the (1H) of 206C applies, then the transaction is subjected to Section 194Q.

Other points related to Section 194Q:

· One cannot evade Section 194Q by merely crediting the amount under ‘Suspense Account’.

· Provisions of section 194Q are not applicable when the seller is a non-resident.

· In case the buyer fails to comply with the tax deduction provisions covered under section 194Q. Then, as per the provision of section 40a(ia), there would be disallowance of expenditure up to 30% of the value of the transaction.

Key differences between Section 194Q and Section 206C(1H):

Section 206C is a seller focused aspect whereas Section 194Q has laid down provisions for the buyers. However, it has been mentioned under Section 194Q, if a contract attracts both, Section 206C as well as Section 194Q, the transaction has to be complied under Section 194Q only.