Section 194Q TDS vs 206C(1H) TCS on Sale of Goods Guide

High-value trading in goods — from the steel re-rolling mills of Urla and Bhanpuri in Raipur to the rice mills of Kalahandi and Jayapatna — has for some years been subject to two overlapping withholding provisions. Section 206C(1H) (TCS by the seller) applied from 1 October 2020, and Section 194Q (TDS by the buyer) from 1 July 2021. Both targeted purchases or sales above ₹50 lakh a year with a single party, by businesses with turnover above ₹10 crore.

The position has since changed: the Finance Act, 2025 omitted Section 206C(1H) with effect from 1 April 2025. From FY 2025-26 onwards, only the buyer's TDS under Section 194Q applies to ordinary purchases of goods. The TCS provision still matters for past years — open assessments, tax audit reports and reconciliations up to FY 2024-25.

Which Act applies? From 1 April 2026 the Income-tax Act, 2025 replaces the Income-tax Act, 1961. TDS on purchase of goods continues under the new Act as an entry in the TDS table in Section 393, with the same basic structure. This guide uses the familiar 1961 Act references.

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1. Section 194Q: TDS on Purchase of Goods (Buyer's Obligation)

Who must deduct, and how much

Hypothetical example: a manufacturing unit with FY 2024-25 turnover of ₹18 crore buys steel worth ₹85 lakh from one supplier during FY 2025-26.

When to deduct

TDS is deducted at the earlier of:

• credit of the amount to the seller's account in the buyer's books (including a suspense or provisional account); or
• payment, by any mode.

Treatment of GST — CBDT Circular No. 13/2021

• TDS at the time of credit: where GST is shown separately on the invoice, TDS is deducted on the value excluding GST.
• TDS on advance payment: where tax is deducted on an advance (before the invoice), it is deducted on the whole advance, because the GST component cannot yet be identified.

When Section 194Q does not apply — Section 194Q(5)

• Where tax is deductible under any other provision of the Act (for example Section 194C on a works contract).
• Where tax is collectible under Section 206C, other than a transaction on which TCS was collectible under Section 206C(1H) — for example scrap under Section 206C(1).

CBDT Circular No. 13/2021 also clarified that Section 194Q does not apply to transactions in securities and commodities traded through recognised stock and commodity exchanges, or to transactions through power exchanges.

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2. Section 206C(1H): TCS on Sale of Goods (up to 31 March 2025)

For years up to FY 2024-25, a seller whose turnover exceeded ₹10 crore in the preceding year had to collect TCS at 0.1% on sale consideration received from a buyer above ₹50 lakh in the year. Key features were:

• Receipt-based: TCS was collected when the consideration was received, not when the invoice was raised.
• GST included: CBDT Circular No. 17/2020 clarified that TCS was collected on the whole amount received, including GST.
• Exclusions: exports; sales to the Central or State Government, embassies, High Commissions and local authorities; goods covered by other TCS provisions such as Section 206C(1) or 206C(1F); and purchases on which the buyer was liable to deduct TDS under any provision and had deducted it.

The Finance Act, 2025 omitted Section 206C(1H) from 1 April 2025, removing the overlap with Section 194Q.

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3. How the Two Provisions Interacted (up to FY 2024-25)

Where both buyer and seller crossed the ₹10 crore turnover test, Section 194Q took priority:

• Section 194Q(5)(b) excluded from TDS only transactions on which TCS was collectible under Section 206C other than Section 206C(1H); and
• the proviso to Section 206C(1H) said TCS did not apply where the buyer was liable to deduct TDS under any provision of the Act and had deducted it.

So the buyer deducted TDS, and the seller did not collect TCS. CBDT Circular No. 13/2021 confirmed this order of priority.

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4. Decision Steps for a Purchase of Goods (FY 2025-26 onwards)

1. Is the transaction covered by another TDS or TCS provision? For example a works contract (Section 194C) or scrap (TCS under Section 206C(1)). If yes, apply that provision; Section 194Q does not apply.
2. Is the seller a resident? If not, Section 194Q does not apply.
3. Did the buyer's turnover exceed ₹10 crore in the preceding financial year? If not, there is no TDS under Section 194Q.
4. Have purchases from this seller crossed ₹50 lakh in the year? If yes, deduct 0.1% on the amount above ₹50 lakh (5% if the seller has no PAN).
5. For FY 2024-25 and earlier only: if the buyer did not deduct under Section 194Q, check whether the seller was required to collect TCS under Section 206C(1H).

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5. Comparison: Section 194Q vs Section 206C(1H)

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6. Hypothetical Scenarios from Regional Industries

A. Steel re-rolling and trading (Urla, Bhanpuri, Siltara)

• Scrap: sale of scrap is subject to TCS at 1% under Section 206C(1). Because TCS is collectible under Section 206C(1), the buyer does not deduct TDS under Section 194Q on those purchases.
• Finished steel and billets: a buyer with turnover above ₹10 crore deducts 0.1% TDS on purchases above ₹50 lakh from the mill. For years up to FY 2024-25, the mill would have relied on the buyer's confirmation that TDS was being deducted before not charging TCS.
• Advances: where a buyer pays an advance to lock in prices, TDS is deducted on the full advance, including the GST element, since no invoice exists yet.

B. Rice mills (Kalahandi, Jayapatna, Dhamtari)

• Custom milling for State agencies: milling charges paid by agencies such as the Odisha or Chhattisgarh State Civil Supplies Corporation are for work, not goods. Any TDS falls under Section 194C, which excludes Section 194Q.
• Sales to large wholesalers: a wholesaler with turnover above ₹10 crore buying more than ₹50 lakh of rice from the mill deducts 0.1% TDS. From FY 2025-26, sales to smaller buyers attract neither TDS nor TCS.

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7. Reconciliation and Tax Audit

Common sources of mismatch

1. Timing: the buyer deducts TDS when crediting an invoice on 28 March, but pays on 5 April. The seller sees the TDS in the earlier year's Form 26AS while the receipt falls in the next year — the seller must match TDS credit to the income it relates to.
2. GST base: Section 194Q TDS is on the value excluding GST (when deducted on the invoice), while Section 206C(1H) TCS for earlier years was on the gross receipt including GST. Comparing Form 26Q and Form 27EQ figures without adjusting for GST creates apparent differences.
3. AIS vs GST returns: the department compares turnover in GSTR-1 / GSTR-3B with TDS credits reported in the seller's AIS. A simple reconciliation helps:

Tax audit — Clause 34 of Form 3CD

The tax auditor reports whether TDS under Section 194Q was deducted and deposited, the amount on which tax was deductible versus deducted, and any delays. Interest under Section 201(1A) is 1% per month for failure to deduct and 1.5% per month for failure to deposit after deduction.

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8. Compliance Checklist for Finance Teams

1. Check the preceding year's turnover at the start of each year to see whether the business is a "buyer" for Section 194Q.
2. Obtain vendor PANs and check their status on the e-filing portal; missing PANs mean deduction at 5%.
3. Configure the accounting software (Tally, SAP, Zoho) to track party-wise purchases against the ₹50 lakh threshold and to compute TDS on the value excluding GST.
4. Remove any Section 206C(1H) TCS settings from sales masters for FY 2025-26 onwards, while keeping earlier-year data for reconciliation.
5. Deposit TDS by the 7th of the following month (30 April for deductions made in March).
6. File Form 26Q quarterly by 31 July, 31 October, 31 January and 31 May. Late filing attracts a fee of ₹200 per day under Section 234E.
7. Reconcile monthly — purchase registers, GSTR-2B and the vendors' TDS credits — so that errors are corrected before the year closes.

Withholding-tax provisions are amended frequently, including in the transition to the Income-tax Act, 2025. Confirm the current position before applying the figures in this guide.

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