How to Safeguard your Cash Flow From the Impact of Section 194Q

Section 194Q requires the buyers to deduct TDS at the rate of 0.1% on payments made to sellers for the purchase of goods. This could significantly affect the sellers’ cash flows.

The Government of India inserted Section 194Q to the Income Tax Act 1961 through the Finance Act 2021. This move was aimed at providing the government with a 360-degree view of direct and indirect taxes, discouraging underreporting of sales by businesses and enhancing tax compliance.

While this section will boost tax collections for the government, it can also affect the cash flows of businesses. Check out how this section will influence payments from your customers:

Tax deducted at source (TDS) under Section 194Q

Section 194Q of the Income Tax Act 1961 became effective from July 1, 2021. It stipulates TDS deduction at the rate of 0.1% by buyers on the payments made to sellers (resident) for the purchase of goods of the value or aggregate of such value exceeding INR 50 Lakhs.

Here are some common questions and answers about TDS under Section 194Q:

How can a buyer deduct TDS under this section? 

• The buyer should have a turnover of INR 10 Crores or more in the financial year immediately preceding the current one. 

When can the TDS be deducted? 

• At the time of credit of the sum to the seller’s account or the time of payment by any mode, whichever is earlier.

On what amount is the TDS deducted?  

• The buyer is liable to deduct an amount equal to 0.1% of the sum exceeding INR 50 Lakhs as TDS.

TDS rate increases up to 20% under Section 206AB

While the TDS rate on buyer-seller transactions involving goods in Section 194Q is at 0.1%, it can increase manifold under Section 206AB of the Income Tax Act 1961 that also came into force on July 1, 2021. Section 206AB has the provision of higher TDS rates for non-filers of Income Tax Returns (ITRs). However, before understanding the implications of this section, it is imperative to understand the meaning of “Specified Person” under the Income Tax Act 1961.

Specified Person furnishing Permanent Account Number or PAN

In this case, the buyer is required to deduct TDS at the higher of the following rates. 

•         Twice the applicable rate of TDS (0.1% x 2 = 0.2%)
•         Or 5%  

Specified Person unable to furnish PAN

If the seller fails to furnish the PAN, the buyer is required to deduct TDS at the rate of 20%. 

The impact of Section 194Q on accounts receivable

Section 194Q will reduce Accounts Receivable (AR) by 0.08% in the case of a non-specified person, as explained in the table below.

How you can avoid higher tax implications under Section 194Q

As you can see, the TDS on your customer payments owing to the combined effect of Section 194Q and Section 206AB could vary from 0.1% to 20%. Therefore, you must take adequate steps to ensure that you only pay the appropriate amount as tax.

“Businesses need to understand the implications of Section 194Q and Section 206AB and make sure that they pay the appropriate amount as tax. It will help them reduce the impact of these sections on their cash flows,” said Vinay Sachdeva, vice president of operations for C2FO India.

In summary

The introduction of Section 194Q will increase the government’s tax collections and ensure better tax compliance. At the same time, it will reduce your cash flow, especially if you are a Specified Individual as per the Income Tax Act 1961. In line with this, you need to follow the aforementioned steps to lessen its impact on your customer payments. It will go a long way in helping your organization achieve faster recovery and growth in these uncertain times.

In case of any query, please get in touch with the C2FO Supplier Relationship Manager at +91 7035 7035 93 or send an email to [email protected].