Well with Finance Act 2021 a lot of changes have been introduced to the Income Tax Act! Not only various new sections have introduced but also a lot of amendments have been done to the existing ones. In this article we will be focusing on the newly introduced section 194Q- Its applicability, Its co – relation with 206C(1H), compliance dates w.r.t this section and penal consequences in case of non- compliance of the same.

At the end of this article, we are pretty sure you will be well versed with this section and its practical implementation.

Section 194 Q introduced by FA 2021 is for Tax Deduction at Source on payment made for Purchase of goods. A bare reading of law states:

Deduction of tax at source on payment of certain sum for purchase of goods.—(1) Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, shall at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 per cent of such sum exceeding fifty lakh rupees as income-tax.

Let’s decode the wordings of this section step by step:
1. Who is buyer? – As per explanation given to section 194 Q any person who has Total Sales, Gross Receipts or Turnover from business carried on by him exceeding Rs.10 crore in the previous financial year shall be a buyer liable to deduct TDS under this section. Now a few questions that may come in one’s mind-

1. What do we mean by Turnover, Sales or Receipts here?

As per my understanding Total Turnover, Sales or Gross Receipts means turnover from the sale of goods as well as services provided by the business. Accordingly, if there is sale of scrap the same shall be included for calculating the threshold limit for this section. If the business is earning any commission or providing rental services the same too needs to be included in turnover. The turnover needs to be calculated Net of Sale Return and any Trade Discounts being offered as these are directly related to the sales. GST should not be included as a part of Turnover for calculating threshold limit as Income Tax Act has nowhere clarified the same. Going on the concepts that we follow for the applicability 44 AB, safe to say same could be followed here too.  Section 145A begins with “For the purpose of determining the income chargeable under the head “Profits and gains of business or Profession” which makes this provision inapplicable for other purposes as it talks for limited purpose of calculating Income Chargeable. 

1. Do we need to include Sale of Capital goods, Sale of Property in the definition of Turnover?

The answer to this shall be in negative, as the section states from the “business carried on by him”. Accordingly Receipts from Sale of Fixed assets, Receipt from sale of Immoveable Property need not be included for the purpose of calculation of threshold.

2. Do we need to Deduct TDS from payments made for Import of Goods?

No, as the section clearly states – payments made a resident. Accordingly, this section is not applicable for payments made for Import of Goods.

3. TDS to be deducted on Purchase of goods or services?

Liability to deduct TDS is only against purchase of goods and not services as the same is clearly stated in the section.

4. From whom such TDS is to be deducted?

TDS needs to be deducted from the payment made or credited to the account of a seller from whom goods to the tune of Rs. 50 Lakhs (aggregate) have been purchased during any Previous year. As per reading of the section the word used is *any* previous year. As per my understanding the same needs to be calculated separately for each financial year in the same way as it is done for 206C1(h) as it is practically not possible to do the same, moreover it led to additional burden each year.

5. If 206C (1H) is applicable on my seller and the turnover of buyer too exceeds 10 crore then in this case who shall be responsible for compliance?

Sub section (5) to section 194 Q states that the provisions of Section 194Q are not applicable if 

• tax is deductible under any other Section
• tax is collectible under the provisions of Section 206C other than a transaction on which 206C (1H)

It clearly states that TDS is not to be deducted if tax is collectible under Section 206C other than 206C (1H). Therefore, as per my interpretation it is TDS that has to be deducted in such a case and not TCS. Also, 206C (1H) states that the same shall not be collected if TDS is deducted under any provisions of the act. Accordingly, it is liability of the buyer in such a case to deduct TDS. 

6. Whether TDS will be deducted on Advance for purchase of Goods?

The answer to this question shall also be in Affirmative. Section states TDS o be deducted on “payment made for purchase of goods” and not “payment made for goods purchased”. Accordingly, in case of advances also TDS that has to be deducted and not TCS in a case where both buyer and seller have to comply with


194Q and 206C (1H) respectively. TCS under 206C (1H) is to be collected at the
time of receipt of consideration. Now question may arise that what will be done in case of advances paid for purchase of goods? Is TDS to be deducted or TCS to be collected as point of taxation shall be consideration paid/received respectively in both cases.  

Sec 194Q clearly states TDS not to be deducted where TCS is collected except 206C (1H). Therefore, 194Q overrides 206C (1H). Accordingly, in such case it is TDS that has to be deducted and not TCS.

7. What shall be the rate in case seller’s PAN is not available or ITR for past 2 years has not been filed by the seller?

As per the provision of the newly introduced section 206CC & proviso added to section 206 AA, rate of TDS in such a case shall be 5% instead of .10%.

8. Do we need to include purchases /payments made before 01 July 2021 to calculate threshold limit of Rs. 50 Lakhs?

Yes. Any purchases / payments made before 1 July 2021 needs to be added for calculating the threshold limit of Rs. 50 Lakhs, as the section states value exceeding fifty lakh rupees in any previous year. Although in case purchase or payment if any has been made for a transaction before 1 July 2021 then no TDS needs to be deducted under this section on the same. As here trigger point is earliest of Credit / Payment which in that case would already have been happened.

For example: 

9. What constitutes goods?

The same has not been defined under the Act. However, Sale of Goods Act, 1932 defines goods as follows: “‘Goods’ means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale”. Therefore, this section might also be applicable on Purchase of Fixed assets like Machinery.

10. Are there any exceptions to this section?

Yes, TDS is not required to be deducted under this section if:

• tax is deductible under any other Section
• tax is collectible under the provisions of Section 206C other than a transaction on which 206C (1H) applies.

So accordingly, TDS liability under this section won’t be triggered if you buy a Car for a value above Rs. 50 Lakhs as TCS would already have been collected from you.

11. Consequences of non-compliance?

If buyer fails to deduct and deposit TDS at applicable rates, expenditure to the extent of 30% will be disallowed under Section 40a (ia) of the Act.

12. Whether TDS needs to be deducted on amount Inclusive of GST?

As per CBT Circular No. 23/2017 – The Board hereby clarifies that wherever in terms of the agreement or contract between the payer and the payee, the component of ‘GST on services’ comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XV Il-B of the Act on the amount paid or payable without including such ‘GST on services’ component. Even though above circular was issued for GST on Services, ratio of the said Circular can be extended to provisions of section 194Q as well. Accordingly, TDS should be on amount exclusive of GST. However, in case of TCS the tax is to be collected on consideration received (including GST) as point of taxation is the time of receipt.

13. Whether 206C(1H) will have no relevance now?

206C (1H) shall work parallel along with 194Q. In cases where turnover of seller exceeds 10 crore and that of buyer is below 10cr and sale of goods is made for a consideration in excess of Rs.50 Lakhs, in all such cases seller shall be liable to collect TCS. Also, in cases where pending payments of earlier financial years are being received in excess of threshold limit then also 206C (1H) shall come into picture. Also, where turnover of P. Y is less than 10 cr in case of both buyer and seller then no liability on account of 194Q and 206C (1H) may arise.

14. What if seller has multiple branches?

Needless to say, that the threshold criteria are to be seen PAN wise and not GSTN wise. Also, the threshold limit needs to be calculated for each seller each year separately.

Hope that through the above FAQ’s most of the practical scenarios had been covered. Also, one may ask their clients to identify such buyers from whom they have Purchases in excess of Rs. 50 Lakhs. Accordingly, a Letter needs to be drafted and communicated to the buyer about the same so that TDS is deducted instead of TCS collection. (This will be a possible scenario where both buyer and seller have turnover in excess of Rs.50 Lakhs and the seller is collecting TCS on Invoice.)