Understanding Sec 194Q: How it impacts And Why It’s Important

Prashant Gupta December 21, 2024
Understanding Sec 194Q

Background

Business returns constitute less than 2% of overall Income Tax Returns filed in India for AY 2021-22, underscoring the pressing need for Step-by-Step Understanding  Sec 194Q. Furthermore, clearly indicating evasion of taxes. To combat tax evasions and non-filing of returns, the Indian government has expanded TDS and TCS provisions in the past two years.

The government is working towards bringing dividends, purchases, sales, e-commerce operators, etc., all under the scope of TDS and TCS as it makes tracking transactions easier. Specifically, the TDS/TCS provisions on purchases and sales are redefining steps for India’s taxation system.

Understanding Sec 194Q: Gaining Proficiency in Step-by-Step Mastery of Section 194Q and Understanding Its Impact

Section 194Q, introduced under the Finance Act, 2021, effective from 1st July 2021, aims to curb tax evasions and fraud. Additionally, it mandates that buyers with turnovers exceeding Rs 10 crores in the preceding financial year deduct tax on purchases over Rs 50 lakhs, given the seller’s Indian residency.

Moreover, with 194Q in effect, all high-volume sale/purchase transactions will come under record, thereby significantly reducing the chances of evasions. However, these provisions inevitably add to the concerns of the CFOs and tax heads of large-scale companies in terms of its implementation and reporting.

Challenges faced by large-scale companies are:

Since large-scale companies have a high volume of sales and purchases both, availing of accurate TDS credits as well as deducting vendor TDS get wearisome for tax and finance teams.

Year-on-year locking of tax credits is a common problem among large-scale enterprises. Errors in availing of TDS credits and deducting TDS affect working capital efficiencies and invite tax scrutiny.

The process of maintaining vendor records, obtaining low tax deduction certificates, tracking vendor payments, availing TDS/TCS credits, reconciling 26 AS, etc., is voluminous and time-consuming, especially when done manually.

Thus, finance and direct tax teams should find the automation and technology-enabled solutions. 

Understanding Sec 194Q

Understanding Sec 194Q: Streamlining Compliance through Step-by-Step Automation

Technology and automation make it easier to handle TDS/TCS deductions, availing credits, and reconciling Section 194Q step by step. To ensure complete TDS and TCS credits, it’s vital to reconcile 26 AS regularly and maintain accurate accounts. Instead of waiting until year-end, companies should aim to reconcile 26AS quarterly to avoid credit losses. Businesses have to try to complete this reconciliation every three months.

Automation enables companies to incorporate reconciliation into their regular assessments. This, in turn, helps in proactive communication with vendors and reduces the risk of working capital shortages and credit losses.

Firmway is one such software that assists with 26 AS reconciliations. It is a web-based SaaS product that automates time-consuming reconciliations. Many big firms in India rely on it to simplify the reconciliation procedure for massive 26 AS entries and books of accounts. It includes a PAN-TAN connection, automated reconciliation, and communication of differences. As a result, it simplifies the implementation of new tax regulations, such as 194Q.

Conclusion

The Indian government is taking steps to make the country more tax-compliant, and large businesses should assist. Businesses can quickly comply with new tax requirements thanks to technology. Automation helps highlight unresolved issues regarding 26 AS reconciliations and gives CFOs data-driven insights. Therefore, businesses should use automated technology and software to help create a tax-compliant economy.