TDS on purchase of goods under Section 194Q

Section 194Q of the Income Tax Act is recently introduced vide the Finance Act, 2021. Under section 194Q “It is provided for TDS by the person responsible for paying any sum to any resident for purchase of goods. The rate of TDS is kept very low at 0.1%. The tax is only required to be deducted by that person (i.e. ―buyer) whose total sales, gross receipts, or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the purchase of goods is carried out. Tax is required to be deducted by such person if the purchase of goods by him from the seller is of the value or aggregate of such value exceeding fifty lakh rupees in the previous year.”

This new Section 194Q is proposed to be applicable from 1st July 2021.

As per charging proviso to this section, this is going to apply to any person being a buyer responsible for making a payment to a resident (Not applicable for Import Purchase from a supplier outside India) for purchase of goods (NA to services) when value or aggregate of purchase from a supplier or payment whichever is earlier Rs.50 lacs during the previous year. The transaction with any supplier with the addition of which your aggregate purchase/payment for a purchase from that supplier exceeds Rs.50 lacs, will be the transaction effective which TDS will have to be deducted @.10% of the Purchase transaction or payment thereof whichever is earlier.

This section will also apply to an assessee whose aggregate Turnover in the immediate previous year exceeds Rs.10 crore.

Rate of TDS u/s 194Q

Where PAN has been provided	0.1%
Where PAN has not been provided	5%

The scope of this TDS provision with the help of an example.

Assuming that your turnover for the Financial year ending with 31st March 2020 was more than 10 Crore and purchase of goods by you from the seller is of the value or aggregate of such value exceeding 50 lakhs in the previous year, TDS provisions as mentioned in Section 194Q are applicable on you and it is to be deducted @ 0.1%, where the PAN has been provided to you, and 5% in any other case.

Now let suppose, your turnover does not exceed 10 crores, Section 194Q would not apply to you. However, if the seller’s turnover exceeds Rs.10crores, then he would become liable to collect TCS under Section 206(1H).

In the section, it is provided that if TDS is deducted on the transaction under any other section of the Income-tax Act (Other than TCS collected under section 206(c)(1H) of the act then TDS is not required to be deducted on the transaction.

What if, the seller is liable to collect TCS under section 206C(1H) and the buyer is liable to deduct TDS under section 194Q?

Section 194Q shall override section 206C(1H) and hence in such a case only the buyer is needed to deduct TDS and the seller need not to required deduct TDS under section 206C (1H).
Example- Mr. Seller sold goods to Mr. Buyer and collecting TCS under section 206C(1H), however after applicability of sec. 194Q (1 July 2021) Mr. Buyer is covered by sect 194Q. Since sec 194Q is an overriding section hence Mr. buyer shall be liable to deduct TDS under this section and Mr. Seller shall not require collecting TCS under sec 206 C (1H)

The override mechanism can be better understood through the table below:

Particulars	Scenario 1	Scenario 2	Scenario 3
Turnover of Seller (In cr.)	12	6	12
Turnover of Buyer (In cr.)	6	12	12
Sale of goods (In cr.)	2	2	2
Sales consideration paid during the year (In cr.)	1	1	1
Who is liable to deduct or collect tax?	Seller	Buyer	Buyer
Rate of Tax	0.1%	0.1%	0.1%
Amount on which tax to be deducted or collected (In Cr.)	.5	.5	.5
Tax to be deducted or collected.	5000	15000	15000

In Dynamics 365 F&O, the seller environment can not be controlled by the buyer or vice versa. Therefore, it is the user’s responsibility to ensure that buyer deducts tax where both buyer and seller have exceeded prescribed turnover in the previous years.

Point of taxation arises under sec 194 Q?

The point of taxation under this section for the buyer would be the Invoice amount credit to the account of the seller or payment made to the seller, whichever is earlier. Further TDS amount needs to be deducted on amount exceed threshold limit. For Example, Mr. Buyer buys goods from Mr. Seller amounting to INR. 85 lakhs and he is liable to deduct TDS under section 194 Q. Now in this case TDS to be deducted on INR. 35 lakhs (85-50) @ 0.1%

In Dynamics 365 F&O under Tax parameter user has the option to apply TDS on Invoice or payment whichever is earlier. However, if the user has deducted TDS on both Invoice and payment, auto reversal of later executed transaction option is provided through feature management under this feature.

Dynamics 365 F&O Advance threshold mechanism provides the option to the user to exclude previously nontax transactions for TDS calculation. This will help the user to compute TDS on exceed value only.

Threshold limit amount to be computed from the date of applicability of new law or date of the beginning of the financial year?

For purchasing limit of INR. 50 lakhs under section 194Q mentioned previous year, hence purchasing limit of INR 50 lakhs to be considered from 1 April 2021 and not from 1 July 2021.

To address this requirement, the Dynamics 365 F&O provided a new setup Initial threshold for vendors. Users can accumulate purchase transactions from 1 April to 30th June 2021 and define the total accumulated value as an initial threshold value for each vendor separately. This value will be considered as part of the total transaction value to compare with the threshold limit.

TDS under section 194Q should be deducted on the total invoice value (Including GST) or taxable value excluding GST amount?

CBDT must issue a clarification on this issue. However, Dynamics 365 F&O advance threshold feature provides an option to the user to include or exclude “other taxes including GST” for TDS or TCS calculation. Under the withholding tax group, the user has the option to exclude GST tax for TDS calculation.

Steps to do the setup for TDS under section 194 Q

To define the initial TDS threshold value for transactions executed from 1st April 2021 to 30th June 2021 user must enable the initial TDS threshold option through feature management:

Navigate to: Workspaces > Feature management.
Refresh your browser to enable the form.

Note: The new option is enabled to automatically reverse TDS at the time of settlement if TDS is deducted on Invoice and payment. The option will auto-enable, and the user can disable it.

Define the Initial TDS threshold value for each vendor

Navigate to Tax > Setup > Withholding Tax > Initial threshold achieved values.
Select Vendor account.
Select Withholding tax code.
Fill Initial threshold turnover amount (Invoice value of transaction executed during 1st April -30 June 2021)

Create a new withholding tax component group:

Navigate to Tax > Setup > Withholding tax > Withholding component group.
Create a new withholding component group called “POG”.
Description: Purchase of Goods
Status: Resident
Section: 194Q

Threshold definitions

Navigate to Tax > Setup > Withholding Tax > Threshold definitions.
Create a new record.
Set Name = POG
Set Description = POG threshold definition
Click Threshold designer
Click New
Click fast tab General.
Set Effective from = 4/1/2021
Set Effective to = 3/31/2022
Set Lower limit = 0
Set Upper limit = 50,00,000
Select Type = Cumulative
Focus on Cumulative: 0 – 50,00,000; 4/1/2021 - 3/31/2022.
Focus on POG.
Click New
Click fast tab General.
Set Effective from = 4/1/2021
Set Effective to = 3/31/2022
Set Lower limit =50,00,000
Set Upper limit = 0
Mark Final level
Close the form.

Withholding Tax code:

Navigate to Tax > Withholding tax > Withholding tax code
Create new record
Set Withholding tax code = POG
Set Withholding tax name = Purchase of Goods Threshold Definition
Set Tax type = TDS
Select threshold hierarchy = Yes
Select PAN-based accumulation = Yes
Set Withholding tax component = POG
Set Main account = 202122
Set Settlement period = TDS
Set Receivable account = 1322611
Click button Values.
Set Value = 0.1
Set PAN non availability % = 5
Close this form

Focus on POG

Mark Apply threshold
Click Threshold references
Create a new record.
Set Account type = Vendor
Set Account code = All
Set Account or Group = Blank
Set Threshold = POG
Click Threshold designer
Focus on POG
Click New cumulative; 0 – 50,00,000; 4/1/2021 - 3/31/2022
Click New
Set PAN status = Received
Click fast tab General.
Set value = 0
Set Reason code = Y
Set Calculate tax = No
Set Include in turnover base = Yes
Unmark Calculate previously non taxed transactions.
Focus on POG: 50,00,000 - MAX; 4/1/2021 - 3/31/2022.
Click New
Set PAN status = Received
Set Value = 0.1
Click fast tab General.
Set Calculate tax = Yes
Set Include in turnover base = Yes
Unmark Calculate previously non-taxed transactions.
Close the forms.

Create Withholding Tax group:

Navigate to Tax > Withholding Tax > Withholding tax group.
Create a new record.
Set Withholding tax group = POG
Set Description = POG - Threshold Definition
Select Tax type = TDS
Include GST tax component for TDS calculation = IGST, CGST, SGST
Click fast tab Setup.
Click Add
Select Withholding tax code = POG
Click Designer.
Create a new record.
Set Tax code = POG
Select Taxable basis = Gross amount
Close the form.

Attach withholding Tax group to vendor account:

Go to Accounts payable
Select INMF-000001, Invoice, and delivery > Withholding Tax (Yes), TDS group -POG.

Create and post Invoice Journal:

Go to Accounts payable > Invoices > Vendor invoice journal
Click on New > Account type (Vendor), Account (INMF-000001), Invoice (IN-9), credit (15,00,000.00). offset account type (Ledger), offset account (600120). Already posted transaction 20,00,000, Initial threshold value: 20,00,000
Click on withholding tax.

It is observed withholding tax is getting calculated as per the set-up Percent (0.1). for this vendor as expected, the total cumulative transaction value including the initial threshold crossed 50,00,000 as below:

Initial threshold achieved value	20,00,000
First transaction	20,00,000
Second transaction	15,00,000
TDS	Total cumulative value 55,00,000 -50,00,000 Threshold value = 5,00,000 @0.1% = 500

Reversal of TDS on Invoice settlement when TDS is deducted on both Invoice and Payment separately

As per the Income-tax Act, TDS must be deducted on Invoice and Payment whichever is earlier. If by mistake the user deducts TDS on both Invoice and payment separately then at the time of settlement of invoice with payment TDS on the later transaction should reverse.

Example

Threshold value: 5000

Invoice amount: 7000

TDS @0.1%

TDS deduction:

Description	Dr.	Cr.
Purchases	5000
TDS Payable		5
Account Payable		4995

Payment made 7000.

Description	Dr.	Cr.
Account Payable	7000
TDS		7
Bank		6993

As per the income tax rule TDS should be deducted from invoice or payment whichever is earlier.

So, the Invoice is posted first, and payment needs to reverse as below up to the value of the Invoice i.e 5

Description	Dr.	Cr.
TDS Payable	5
Account Payable		5