In this section we examine the provisions of section 194Q and in what ways it is applied to different sale arrangements.

Introduction

TDS, or tax deducted at source is a system wherein a third party is brought into the equation between the taxpayer and the income tax authorities. This third person is usually the ‘source’ of the income of the taxpayer. For instance, the source of a salary is the employer. The source of rent income is the tenant. And the source of a professional fee is a client. Under the TDS system, the ‘source’ is required to deduct a prescribed percentage of the amount payable as income to the taxpayer as income tax and is directly deposited with the income tax authorities by making an online TDS payment. Amidst our discussions, delve into TDS on the purchase of goods. Decipher tax implications to optimize financial transactions and compliance.

Income from sale of goods was one of the few incomes that had not been brought under the mechanism of TDS. However, with effect from 1st July, 2021, sale of goods will also be subject to TDS deductions under the provisions of the newly introduced section 194Q for TDS on purchase of goods.

Now unlike the other sources of income, the range of transactions on sale of goods is immensely vast. Every second of the day goods are being sold at such drastically varying volumes. With the sales varying from the sale of a matchbox costing one rupee to heavy industrial equipment costing crores of rupees, it is impossible to implement TDS on every single sale in the country. And this is why the provisions of section 194Q specifically stipulates the various circumstances under which TDS becomes applicable on sale of goods. Let us take a look at what these stipulations are.

Section 194Q

Section 194Q of the Income Tax Act states that any buyer making a TDS on the purchase of goods valuing more than ₹50 lakhs from a resident seller must deduct TDS from the total sale value at a rate of 0.1.% and deposit the deducted amount with the income tax authorities by making an online TDS payment. A resident for taxation is any person, Indian or not, who has been residing within the sovereign borders of India for 180 days or more during the financial year. Any person, Indian or not, who has been within the sovereign borders of India for less than 180 days during the financial year is considered to be a non-resident for taxation.

Now this raises the question of why only 0.1% of the sale amount. Surely, the actual tax liability will be much higher. If the whole point of the TDS mechanism is to collect taxes, then why collect only a part of it?

This is because of the logistical impracticality of calculating the taxable business income of the seller in advance. Firstly, to deduct the TDS at the exact rate of income tax, you need to know which slab rate the seller will fall under at the end of the year. For this you need to know the business income of the seller at the end of the year. And business income is not a consistent income that can be approximated on a monthly basis. It fluctuates depending on the economic conditions of the market at different times of the year. So a buyer can’t know how much tax to deduct. 

So then, the follow up question would be, what does deducting TDS on sales achieve? It helps to put large transactions on record for the income tax authorities to look into and investigate if necessary. That is why a minimum volume of the sale needs to be ₹50 lakhs for it to qualify for a TDS deduction. Between the lines, explore TDS on purchase of goods. Gain insights into tax obligations, optimizing your financial approach to procurement.

But what about the trouble a buyer has to go through if it is just a one time purchase? For instance, what if someone has been planning and saving on buying something expensive, like a car or a piece of jewellery that may exceed ₹50 lakhs. Given that a person needs a Tax-deduction Account Number or TAN number to make a TDS deduction and make a TDS payment online, isn’t it too much to ask a person to apply for a TAN number just for the sake of making this one time purchase? So section 194Q has provisions for exempting such transactions by defining the term ‘buyer’ very specifically. As per this section, for a person to qualify as a buyer for the purpose of deducting TDS on Purchase of goods, one has to have a gross turnover of more than ₹10 crores in the year immediately preceding the year of purchase. This provision has been made on the presumption that a person or organisation with a turnover of ₹10 crore and above is likely to make purchases exceeding ₹50 lakhs on a more frequent basis and not once in a while.

Discover how to calculate TDS on salary using our easy TDS calculator and get your TDS calculation formula correct.

The income tax authorities has also issued a circular with regards to section 194Q making some more clarification:

• In the context of TDS on the purchase of goods, both resident sellers and buyers must meet specific criteria. The buyer, akin to the seller, is obligated to be a tax resident, having resided in India for 180 days or more during the relevant and preceding financial years. However, there is an exception to this requirement. A non-resident can qualify as a ‘buyer’ for the purpose of this section if he meets the general stipulations discussed above and has made a purchase exceeding ₹50 lakhs for the purpose of relocating to India permanently.  
• The definition of goods will be as defined in the Sale of Goods Act, with the exception of shares and securities. Shares and securities traded in any recognised stock market are exempt from TDS under this section. Given that stock and shares can be bought and resold several times on the same day, keeping a track of TDS on shares and stocks is nearly impossible. And even the logistical difficulties of deducting TDS on purchase of goods and making the TDS payment online for a stock trader buying shares he plans to sell in an hour is impractical. However, there is no mention of the purchase of stocks and shares not listed on a stock exchange. So purchase of shares from unlisted and private companies will require the buyer to deduct TDS from the amount to be paid to the seller provided that the buyer meets the stipulations that qualify him or her as a buyer for the purposes of this section.

TDS on part payment

Now the section 194Q doesn’t specifically talk about part payments. So we have to look into the principal concept of TDS and see if we can find the answer somewhere else. As a concept, TDS is not a tax. It is a mode of collecting tax. But, it doesn’t facilitate the collection of any tax. It is only meant for income tax. And income tax is levied on income accrued and not income received.

Accrued income is income that has been earned but not received. And accrued income is required to be recognised as Taxable income: https://incometaxindia.gov.in/pages/tools/income-tax-calculator.aspx the moment the seller becomes entitled to the income, irrespective of when he actually receives it. Let’s look at this with an example.

For instance a person R is a manufacturer who buys a particular raw material from B. And the average amount of purchases R makes from B in a year is above ₹50 lakhs. So does R have to deduct TDS from payments made to B? So as discussed above, in order to establish the accrual of this income we have to look at B’s entitlement to the income from sale. And entitlement occurs in two scenarios. One, the actual payment has been received. And two, when there is a formal, written contract in place. So if R and B have an informal arrangement, and each transaction is considered a separate transaction, then the payments cannot be considered a part payment and all such sales made under ₹50 lakhs do not qualify for TDS deduction under section 194Q.

But, if there is a contract in place, and the total value of the contract is above ₹50 lakhs, then it doesn’t matter if each payment is less than ₹50 lakhs, even if it is scheduled in the contract. The fact that the contract is binding makes B entitled to that income and hence R will have to deduct TDS on each payment and make an online TDS payment.

Conclusion

The reason why taxation seems so complicated is because of the diverse styles in which businesses operate on TDS on purchase of goods. The law has to ensure that every single one of these transactions are accommodated because if not, then the taxation may seem unfair and may end up discouraging commercial activity in that section, causing loss of revenue to the government. So while the rules are complex, they are necessary. So it is always advisable to consult a tax expert when you are undertaking a new financial transaction, especially when you are not sure about the tax angle of that transaction. The expert will not just guide you with the tax regulations but could also end up helping you in saving on your taxes. So if you want to consult with a tax consultant, get in touch with Vakilsearch and we will put you to an expert who is just right for your needs. 

Frequently Asked Questions

Also, Read

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• Definition of TDS under section 194J