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TDS Under Section194Q / TDS on Purchase of Goods Under Goods and Services Tax / Circular No. 13 of 2021

By Yogesh Verma (CS/LLB) / 2 min read / Article

The Government of India introduced Section 194Q in the Income-tax Act, 1961, through the Finance Act, 2021. This section became effective from July 1, 2021, and requires a buyer to deduct Tax Deducted at Source (TDS) while making payments for the purchase of goods exceeding a certain limit. To clarify its implementation, the Central Board of Direct Taxes (CBDT) issued Circular No. 13 of 2021 on June 30, 2021. Let’s break down this circular into simple points for better understanding.

1. What is Section 194Q?

Section 194Q applies to buyers who purchase goods from resident sellers where the total purchase value exceeds ₹50 lakh in a financial year. The buyer must deduct 0.1% TDS on the amount exceeding ₹50 lakh at the time of payment or credit, whichever is earlier.

2. Who is Considered a Buyer?

A buyer under this section is defined as:

• A person or business whose total sales, turnover, or gross receipts exceed ₹10 crore in the financial year immediately preceding the purchase year.
• The government may notify certain persons who will not be considered as buyers under this section.

3. When is TDS Deducted?

• The buyer must deduct TDS when either making the payment or crediting the seller’s account, whichever happens first.
• If the purchase value does not exceed ₹50 lakh, no TDS is required.
• If payments were made before July 1, 2021, they are not covered under this section.
• However, while calculating the ₹50 lakh threshold, payments made since April 1, 2021 are included.

4. Key Clarifications from Circular No. 13 of 2021

4.1 Transactions through Stock & Power Exchanges

Certain transactions do not require TDS deduction under Section 194Q, including:

• Stock and commodity exchanges where trading is done through recognized stock exchanges or clearing corporations.
• Power exchanges where transactions involve electricity, renewable energy certificates, and energy-saving certificates.

4.2 Calculation of the ₹50 Lakh Threshold

• Payments made before July 1, 2021 are not subject to TDS.
• However, to check whether TDS is applicable, purchases made from April 1, 2021, are counted toward the threshold.

4.3 Treatment of GST & Purchase Returns

• GST Exclusion:
• If GST is separately mentioned in the invoice, TDS is deducted excluding GST.
• If TDS is deducted on payment instead of credit, the full amount (including GST) is considered.
• Purchase Returns:
• If TDS was deducted on a purchase that was later returned, the deducted TDS can be adjusted against future purchases.
• If the purchase is replaced with new goods, no adjustment is needed.

4.4 Non-Residents as Buyers

• A non-resident buyer does not need to deduct TDS under Section 194Q unless the purchase is connected to a permanent establishment (PE) in India.

4.5 Exempt Sellers

• If the seller’s income is exempt from tax, TDS under Section 194Q is not applicable.
• However, this exemption is valid only if the seller’s entire income is exempt, not just a portion.

4.6 Advance Payments

• If a buyer makes an advance payment, TDS must be deducted at the time of payment.

4.7 Applicability in the First Year of a Business

• Since a buyer must have ₹10 crore turnover in the previous year to be covered under Section 194Q, a newly incorporated business is exempt in its first year.

4.8 Businesses with Turnover Below ₹10 Crore

• If a business has gross receipts exceeding ₹10 crore, but its business turnover is ₹10 crore or less, Section 194Q does not apply.

5. Additional Considerations Under Section 194Q

5.1 Impact on MSMEs

• Many small and medium enterprises (MSMEs) fall under the purview of this section if they exceed the ₹10 crore turnover limit.
• MSMEs should ensure proper record-keeping and compliance to avoid penalties.

5.2 Consequences of Non-Compliance

• If the buyer fails to deduct TDS under Section 194Q, they will be liable for interest and penalties under the Income-tax Act.
• Expenses on which TDS was not deducted may be disallowed in the income tax computation, increasing the taxable income of the buyer.

5.3 Reporting Requirements

• Buyers need to report TDS deductions under Form 26Q while filing TDS returns.
• TDS certificates should be issued to sellers in Form 16A.

6. Interaction Between Section 194Q and Other Tax Provisions

The circular explains how Section 194Q interacts with other provisions like Section 194-O and Section 206C(1H):

7. Conclusion

Circular No. 13 of 2021 provides much-needed clarity on the practical aspects of implementing Section 194Q. It ensures smooth compliance by outlining the situations where TDS is applicable and addressing concerns related to GST, purchase returns, non-resident buyers, and exempt sellers. Businesses should carefully track their turnover, payment thresholds, and tax deductions to comply with these provisions.

By understanding these rules in simple terms, taxpayers can ensure compliance and avoid unnecessary penalties. If you are a business with a turnover above ₹10 crore, make sure to check whether your purchases cross the ₹50 lakh threshold and comply accordingly!

Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.