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Section 194Q TDS vs Section 206C(1H) TCS on Goods Reconciliation

TDS on Purchases of Goods: Section 194Q, Section 393 and Historical TCS

Separate current purchase withholding from the old seller collection rule. Reconcile thresholds, GST, advances, returns and missing PAN through five historical examples.

By Team assureOffice7 min read

Reviewed by CA Naveen Saraswat · Chartered Accountant | 5+ years in corporate audit & tax compliance | Ex-Big4

Tax return and calculator on desk

First identify the governing period

PeriodApplicable rule
Historical overlap from 1 July 2021 through 31 March 2025Section 194Q applied to covered resident goods purchases. Former section 206C(1H), in effect from 1 October 2020, applied to qualifying sale receipts. Apply the priority and the historical circulars to the actual payment and credit dates.
FY 2025–26Section 194Q continued under the 1961 Act. The Finance Act, 2025 made section 206C(1H) inapplicable from 1 April 2025, amended the related reference in section 194Q(5), and omitted sections 206AB and 206CCA. Do not add old general seller TCS or apply the old non-filer check to this period.
Tax year 2026–27 onward under the Income-tax Act, 2025Apply section 393(1), table serial 8(ii), together with the applicable exclusions and buyer definition, and the 2026 rules. The regular purchase deduction remains 0.1% on the excess over ₹50 lakh for covered transactions. Use the forms and reporting framework for the new tax year. For earlier periods apply the savings provisions.

The historic general seller collection rule must not be confused with separate TCS provisions that can still apply to specified goods or transactions. Check those and the e-commerce operator withholding rule before deciding which purchase deduction applies.

Buyer and seller thresholds

For legacy section 194Q, the buyer's business sales, gross receipts or turnover must exceed ₹10 crore in the immediately preceding financial year. Purchases from the particular resident seller must exceed ₹50 lakh in the current financial year. Deduct at the earlier of credit or payment, including a relevant advance; credit to a suspense or similarly named account can count. The usual rate applies only on the excess, subject to a higher rate where applicable. Capital goods can be covered; that does not make their capitalised cost a revenue expense.

In the historic overlap period, the seller's separate section 206C(1H) trigger used prior-year business turnover above ₹10 crore and consideration received from the particular buyer above ₹50 lakh in the year. It was generally 0.1% of the excess receipt in FY 2023–24. Check statutory exclusions, including exports and items subject to the specified other collection rules. Historic reduced and higher rates depended on the period and PAN or non-filer status.

Historical caseOrdinary result if all other conditions are met
Both business turnovers above ₹10 croreBuyer deducts under section 194Q when applicable; after actual deduction the seller does not collect general goods TCS for the same transaction.
Only buyer above ₹10 croreSection 194Q can apply; seller does not meet the old general TCS turnover test.
Only seller above ₹10 croreHistoric section 206C(1H) can apply to qualifying receipts; it no longer applies from 1 April 2025.
Neither above ₹10 croreNeither of these two turnover-based rules applies; check any different withholding or collection provision.

CBDT Circular 13/2021 paragraph 4.9 gives a specific historical concession: if the seller actually collected section 206C(1H) tax on the same transaction before the buyer could deduct under section 194Q, the buyer need not deduct it again. A line on an invoice is not evidence of collection. The concession does not similarly displace the e-commerce operator's primary responsibility under section 194-O. Keep payment, collection and statement evidence before applying it.

GST, advance payments and returned goods

  • Under Circular 13/2021 paragraph 4.3, if credit is the first trigger and GST is separately indicated under the terms of the agreement or contract, deduct without that GST component. If payment is earlier, deduct on the amount paid subject to the statutory threshold, because the future invoice GST cannot be separately identified at that stage. Reconcile advances to invoices without double counting; do not assume a later invoice creates an automatic GST refund of TDS.
  • On a purchase return followed by a seller refund, the circular allows adjustment of the related TDS against the next purchase from the same seller. If goods are replaced, no such adjustment is required. Document the refund and TDS amount; a credit note or settlement discount is not automatically the same as a refunded return.
  • Under the historic section 206C(1H), Circular 17/2020 provided that no adjustment for GST, sale returns or discounts was required for TCS because the reference point was receipt of sale consideration. Do not reuse this old receipt method for the buyer's TDS base.

Five FY 2023–24 examples

  1. Both thresholds met: The buyer and seller had prior-year business turnover of ₹85 crore and ₹145 crore. The buyer credits three invoices before paying; their basic amounts are ₹30 lakh, ₹35 lakh and ₹40 lakh. At assumed 18% GST, the gross amounts are ₹35.40 lakh, ₹41.30 lakh and ₹47.20 lakh. Using the basic amounts in this credit-first example, the cumulative totals are ₹30 lakh, ₹65 lakh and ₹105 lakh. TDS is nil, ₹1,500 on the ₹15 lakh crossing amount, then ₹4,000, or ₹5,500 total. Assume the buyer deducts before the seller could collect on the corresponding receipts. The seller does not collect historical section 206C(1H) tax on those transactions.
  2. Advance before invoice: Assume the buyer satisfies the turnover test and a ₹60 lakh advance, paid before credit, is credited against the contractual basic price of ₹80 lakh. GST of ₹14.40 lakh is separately stated on the later invoice and none is paid separately with the advance. With no earlier purchases, the advance triggers ₹1,000 TDS on ₹10 lakh above the threshold and the cash advance is ₹59.99 lakh. On invoice credit, the unpaid basic amount is ₹20 lakh, giving ₹2,000 more TDS. Total TDS is ₹3,000 and the final cash payment is ₹34.38 lakh (₹94.40 lakh less ₹60 lakh gross advance and ₹2,000). Different terms, GST allocation or timing can change the computation.
  3. Historical seller collection: A buyer with ₹4.80 crore prior-year business turnover pays a qualifying seller ₹20 lakh, ₹25 lakh and ₹30 lakh in the year. Qualifying cumulative receipts including GST are ₹20 lakh, ₹45 lakh and ₹75 lakh. At the third receipt, ₹25 lakh exceeds the threshold, so the old TCS is ₹2,500. Reconcile the seller's legacy Form 27EQ and the buyer's tax credit. The same fact pattern after 1 April 2025 does not trigger section 206C(1H).
  4. Refunded purchase return: The buyer deducted ₹1,500 on the portion of a ₹65 lakh purchase above ₹50 lakh. The seller refunds ₹10 lakh of goods, all within the earlier taxable portion on these facts, and no replacement is provided. The related TDS is ₹1,000. On the next ₹20 lakh basic purchase, compute ₹2,000 before adjustment and deduct ₹1,000 after applying the circular. Total deduction across the two entries is ₹2,500, consistent with ₹75 lakh net purchases and the assumed rate.
  5. Missing PAN: A qualifying buyer makes ₹85 lakh of covered purchases. On the ₹35 lakh excess, apply legacy section 206AA's 5% special reference for section 194Q, assuming no different applicable rate. Tax is ₹1,75,000. The ordinary 0.1% would yield ₹3,500, a shortfall of ₹1,71,500. Analyse interest, recovery and disallowance separately; a rate shortfall is not automatically a ₹10.50 lakh disallowance. In a distinct case of complete non-deduction on ₹35 lakh claimed as revenue expenditure, 30% of that amount is ₹10.50 lakh before any applicable relief or timing rule.

Reconciliation checklist and common questions

Keep the prior-year business turnover calculation, supplier residence and PAN, transaction dates, invoices, advances, GST breakdown, returns, TDS or TCS evidence and filed statements. Use legacy Form 26Q for applicable earlier resident payments and Form 140 under the 2026 rules for the corresponding current resident statement. Verify payment and statement deadlines for the specific period and deductor. Do not treat GST data or a tax credit statement as a substitute for the purchase ledger.

What if the buyer is newly incorporated?

CBDT Circular 13/2021 says section 194Q does not apply to a buyer in its year of incorporation because it does not meet the preceding-year business turnover test. Other provisions must be checked separately.

What about exchanges or imports?

The circulars address specified recognised exchange and clearing transactions and specified electricity transactions on CERC-registered power exchanges. Follow the precise exclusions. Section 194Q requires a resident seller; for imports from non-residents analyse actual Indian chargeability and the applicable non-resident withholding provision separately.

What if tax was not deducted or deposited?

Under the legacy law, examine section 201 and section 40(a)(ia), including statutory timing and any payee-compliance relief. Section 201(1A) generally uses 1% per month or part for non-deduction to deduction, and 1.5% per month or part for the delay after deduction to payment. Distinguish a revenue deduction from capital cost, and a complete omission from a shortfall. Apply current provisions to current transactions. Historic collection failures under section 206C may raise separate recovery, interest and penalty questions under the law for that year.

Sources

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