TDS on Purchases: Common Compliance Mistakes Manufacturers Make

Section 194Q was introduced in the Finance Act 2021, effective from July 1, 2021, to track high-value transactions and widen the tax net. Under this provision, a buyer is required to deduct TDS at the rate of 0.1% on purchases exceeding ₹50 lakh in a financial year, provided the buyer's turnover or gross receipts exceed ₹10 crore in the preceding financial year. This applies to the purchase of goods, and the threshold is calculated on the aggregate amount of all purchases.

For manufacturers, this means that every time you buy raw materials, components, or machinery, you must monitor the cumulative purchase value. Once it crosses ₹50 lakh, you are obligated to deduct TDS on the amount exceeding the threshold. It's crucial to note that TDS is not deducted on the entire purchase amount, but only on the sum that exceeds ₹50 lakh. For example, if your total purchases are ₹75 lakh, you deduct TDS on the ₹25 lakh above the threshold.

Understanding these basics is the first step to compliance, but many manufacturers still miss critical nuances. Let's dive into the most common mistakes and how to avoid them.

One of the most frequent errors is failing to track cumulative purchases across all suppliers. Manufacturers often have multiple vendors, and purchases are spread across them. The ₹50 lakh limit is not per supplier but the aggregate of all purchases made during the financial year. Many businesses mistakenly believe that TDS applies only when a single purchase exceeds ₹50 lakh, which is incorrect.

To avoid this, implement a robust purchase tracking system. Use accounting software that automatically flags when the cumulative purchase value crosses the threshold. Regularly review your purchase registers and ensure that all purchases—whether for raw materials, consumables, or capital goods—are included. Remember, the threshold applies to all goods purchased, regardless of their nature.

Another overlooked aspect is the inclusion of GST. The TDS is to be deducted on the amount excluding GST. However, if the GST is not shown separately in the invoice, TDS is deducted on the entire invoice value. Ensure your invoices clearly mention GST to avoid over-deduction, which can lead to disputes with suppliers.

Section 194Q applies only to buyers whose turnover or gross receipts from business exceed ₹10 crore in the preceding financial year. Many manufacturers assume they are exempt if their turnover is below this limit, but they fail to consider the aggregate turnover including all branches and business verticals. Also, the turnover must be calculated as per the Income Tax Act, which may differ from the GST turnover.

It's essential to compute your turnover accurately. If you had a turnover of ₹9.5 crore last year but crossed ₹10 crore in the current year, you are not liable to deduct TDS under 194Q for the current year. However, you must monitor your turnover each year, as once you cross the threshold, you become liable from the next financial year.

To stay compliant, review your financial statements and determine your turnover for the previous year. If you're close to the limit, prepare to implement TDS deduction procedures. Ignorance of this condition is no excuse, and the tax department can levy penalties for non-compliance.

Manufacturers often get confused between Section 194Q and other TDS provisions like Section 194C (contracts) or Section 194J (professional fees). While Section 194Q applies to the purchase of goods, it does not override other sections. For instance, if you hire a contractor for maintenance services, you must deduct TDS under 194C. But if you purchase goods from a supplier who also provides installation services, you need to separate the value of goods and services.

Furthermore, Section 194Q has a provision that if TDS is deductible under any other section, that section will prevail. For example, if you buy goods and also pay for freight, the freight component may be subject to TDS under 194C. This dual applicability often leads to mistakes, with manufacturers either deducting TDS under the wrong section or failing to deduct at all.

To avoid this, classify your transactions carefully. If a contract includes both supply of goods and services, you may need to deduct TDS on the service portion separately. Consult a tax expert to ensure you're applying the correct TDS rates and sections.

Once TDS is deducted, it must be deposited to the government by the 7th of the following month. Many manufacturers delay this due to cash flow issues or oversight. Late deposit attracts interest at 1.5% per month or part of the month. Additionally, filing of TDS returns (Form 26Q) is mandatory quarterly. Missing the due date can lead to late fees under Section 234E, which is ₹200 per day until the return is filed.

Manufacturers often miss the deadline for the last quarter, which is due on May 31st. To avoid penalties, set up a TDS calendar with reminders. Use online payment portals like the TIN NSDL for quick deposit and ensure your TAN is active. Timely compliance not only avoids penalties but also builds a good track record with the tax department.

Another crucial aspect is issuing Form 16A to suppliers, which is a certificate of TDS deduction. This must be issued within 15 days from the due date of filing the quarterly return. Failure to issue can result in a penalty of ₹100 per day per certificate. Keep a systematic process to generate and send these certificates promptly.

TDS on purchase can strain relationships with suppliers, especially if they are not expecting a reduction in their payment. Suppliers may resist the deduction, arguing that they are not liable or that it affects their cash flow. However, TDS is not an additional tax; it is a prepayment of the supplier's income tax. The supplier can claim credit for the TDS while filing their return.

To maintain healthy relationships, communicate clearly with suppliers about the TDS requirement. Provide them with the TDS certificate promptly and explain how they can claim the credit. Some manufacturers even negotiate terms to share the TDS burden, but that is not recommended as it complicates compliance.

In practice, many suppliers will ask for a higher price to compensate for the TDS deduction. This is a business decision, but ensure that you still deduct TDS as required by law. Non-deduction can lead to disallowance of the expense under Section 40(a)(ia), meaning you lose the deduction for the purchase amount, increasing your taxable income.

To avoid these common mistakes, implement a systematic approach to TDS compliance. Here's a practical guide:

• Assess Your Liability: Determine if your turnover exceeds ₹10 crore in the preceding year. If yes, you are liable to deduct TDS on purchases exceeding ₹50 lakh.
• Track Purchases: Maintain a centralized purchase register that aggregates all purchases. Use software to alert you when the threshold is crossed.
• Deduct Correctly: Calculate TDS at 0.1% on the amount exceeding ₹50 lakh. Remember to exclude GST if shown separately.
• Deposit Timely: Deposit TDS by the 7th of the following month using the online portal.
• File Returns: File TDS returns quarterly in Form 26Q. Ensure all details match the challans.
• Issue Certificates: Provide Form 16A to suppliers within 15 days of filing the return.

By following these steps, you can ensure full compliance and avoid penalties. Consider automating your TDS processes with tax software to reduce manual errors.

Non-compliance with TDS on purchase can be financially devastating. Here are the key consequences:

• Interest: If you fail to deduct TDS, interest at 1% per month is payable from the date the tax was deductible to the date of deduction. If you deduct but fail to deposit, interest is 1.5% per month.
• Penalty under Section 271H: The tax department can levy a penalty ranging from ₹10,000 to ₹1,00,000 for failure to deduct or deposit TDS.
• Disallowance of Expense: Under Section 40(a)(ia), if TDS is not deducted or deposited, 30% of the purchase amount is disallowed as an expense, increasing your taxable income.
• Prosecution: In serious cases, there can be prosecution under Section 276B, leading to imprisonment and fine.

These penalties are avoidable with proper compliance. The cost of non-compliance far outweighs the effort required to deduct TDS. Always prioritize TDS obligations in your financial planning.

Navigating TDS on purchase under Section 194Q is essential for manufacturers to avoid penalties and maintain smooth operations. By understanding the ₹50 lakh threshold, verifying turnover, distinguishing between sections, and ensuring timely deposits, you can stay compliant. Remember, TDS is not just a legal obligation; it's a responsibility to contribute to the tax system.

Take action today: review your purchase processes, educate your finance team, and implement robust tracking systems. If you're unsure about any aspect, consult a tax professional. Compliance not only protects your business from legal troubles but also enhances your reputation with suppliers and authorities.

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