Our Finance Minister, in her budget 2021 proposed TDS provisions on Purchase Transactions for the first time in the history of independent India.

Applicability

Section 194Q shall be applicable to all those buyers who satisfies following two conditions:

1. Where aggregate purchases of goods (not services) from a supplier or payment made, whichever is earlier, exceeds Rs. 50 Lakhs during the previous year. AND
2. Where aggregate turnover of purchaser of goods in the immediate previous year exceeded Rs 10 crore

TDS Rate

TDS @0.10% shall be deducted on Purchase Transaction or Payment whichever is earlier.

Effective Date

The proposed effective date on which this section 194Q shall be applicable is from July 1, 2021.

Exceptions

1. This section is not applicable for purchases made from outside India i.e. Imports.
2. This section is not applicable on purchase of services.

Higher Rate of TDS

1. If Seller does not file ITR [Section 206AB]: A new Section 206AB is been introduced in Budget 2021-22, which prescribes higher rates of TDS for those who do not file their Income Tax Return. Therefore, in order to comply with this requirement, Buyer would be required to take documents like ITR acknowledgment from seller.
2. If Seller does not provide PAN: In case seller does not have PAN then higher rate of TDS i.e. 5% of the Purchase transaction/ Payment thereof shall be deducted.

Computation of TDS under Section 194Q

Example:  During the previous year, Tiger purchased goods aggregating Rs 70 Lakhs from Hrithik. Here, Tiger is not required to deduct TDS under Section 194Q till the purchases of Rs. 50 Lakhs but the moment, purchases of Tiger exceeds Rs. 50 Lakhs, TDS @0.10% is required to be deducted. Therefore, on purchases of Rs. 20 Lakhs (Rs. 70 Lakhs – Rs. 50 Lakhs), TDS @ 0.10% is required to be deducted which shall be Rs. 2000.

Consequence of failure to deduct TDS

Where Purchaser fails to deduct applicable TDS , then according to Section 40a(ia), 30% of value of purchase transactions on which TDS is not deducted shall be  disallowed.

Meaning thereby, in the above said example, TDS of Rs. 2000 was required to be deducted but in case buyer fails to deduct TDS then Rs 6,00,000/- (30% of Rs. 20 Lakhs) shall be disallowed to Tiger.

(No doubt such disallowance will be allowed in the year in which said TDS might have been paid)

No Deduction required under Section 194Q

Where TDS is deducted under any other section (other than TCS collected under section 206 C (1H) of the Act), then according to the fifth proviso to the section TDS under Section 194Q is not required to be deducted.  

Example : Suppose, TDS  under Section 194C is deducted on transaction then TDS under Section 194 Q is not required to be deducted, however, where Seller is required to collect TCS under section 206 (1H) then Purchaser will still be required to deduct TDS under section 194 Q.

 DO SECTION 206C(1H) HAVE OVERRIDING EFFECT

Presently, TCS is not being required to be collected where applicable TDS is deducted on transaction. Although, assesse makes arrangement of collection of TCS in invoices and for this assesses ordinarily makes arrangement in their Accounting Software(s). However, this arrangement does not make them compliant of advance payment.

Therefore, in can be rightly interpreted that collection under Section 206C(1H) is not required if TDS is deducted under section 194Q.

However, there may arise a situation where a dispute may arise in between the Buyer and Seller. For instance, Seller charge TCS on invoices in the month of June’21 and on account of any reason, buyer books the invoice in books on or after July 1, 2021. Now, presuming buyers deduct TDS under section 194Q whereas seller may not able to realize the TCS. Here, in this situation disputes may arise in between the Buyer & Seller.

TDS to be deducted on GST

This is the first time that TDS on purchases is introduced. Therefore, a clarification is required as to whether TDS under Section 194Q is to be deducted on actual purchase price or on the amount inclusive of GST. However, till the time there is a clarity on this issue, it is advisable to deduct TDS on net amount and pay the amount of GST in full.

Need of introducing Section 194-Q

In past, transactions involving large amount were found of which trail could not be found and in those transactions GST amount was misappropriated. Therefore, in order to track those fake transactions, Section 194Q is introduced so that a trail of transaction may be created to curb such fake transactions.

Further, in order to avoid confusion and disputes in future, it is suggested to implement either Section 194Q or Section 206C(1H).