Reimbursement of expenses (attracted 194Q)

Hi Pratik,

You’ve raised a very relevant and practical issue — especially now that employee reimbursements are increasingly used for operational convenience, but Section 194Q (TDS on purchase of goods) still applies where thresholds and conditions are met.

Let’s go through it step by step to clarify why there's a TDS issue here, and how you can set up controls to manage this without defaulting or causing loss to the employer.

✅ Quick Recap of Section 194Q

• Applicable From: 1st July 2021

• Who Needs to Deduct: Buyer whose turnover > ₹10 crore in the preceding FY

• When: On purchase of goods > ₹50 lakh in a year from a resident seller

• Rate: 0.1% TDS on purchase value exceeding ₹50 lakh

• Trigger Point: At the time of credit in books or payment, whichever is earlier

🎯 The Core Problem in Your Case

Even though:

• Invoice is in the name of the employer,

• And goods/services are for the employer,

• The payment is made by the employee, and then reimbursed later,

The TDS under 194Q should have been deducted by the employer at the time of payment or booking, not at the time of reimbursement.

Since the payment was made by credit card (employee’s), but the legal buyer is still the employer, Section 194Q applies.

This creates a TDS default if not handled properly.

💡 How to Handle This Operationally (And Avoid Default)

✅ 1. Treat All Employee-Funded Purchases as Purchases by Employer

You need to track and account for vendor-wise purchase amounts, even if paid through employee cards.

TDS under 194Q should still be:

• Deducted on behalf of the employer (buyer),

• Based on the aggregate purchases from each vendor.

So, the mode of payment doesn’t change TDS obligation — the buyer is still the employer, and TDS must be tracked accordingly.

✅ 2. Set Up a Process: TDS Tracking Before Reimbursement

You should design a simple internal control:

📋 Step-by-step process:

1. Maintain vendor-wise tracker of purchases — regardless of who paid.

2. When an employee submits reimbursement:

   • Verify the vendor name and amount.

   • Check if purchases from this vendor exceed ₹50 lakh in FY.

3. If yes, deduct TDS under 194Q before reimbursing the employee:

   • Debit employee’s reimbursement account net of TDS, and

   • Deposit TDS to government under employer’s TAN.

4. Issue TDS certificate (Form 16A) in the name of the vendor.

✅ 3. Adjust TDS Entry in Accounting

• Full invoice amount should be debited to the purchase/expense account.

• TDS portion credited to TDS payable.

• Balance paid to employee as reimbursement (after deducting TDS from vendor’s side).

Example:

• Invoice = ₹7.5 lakhs

• Vendor YTD total = ₹55 lakhs (TDS applicable on ₹5 lakh)

• TDS @ 0.1% = ₹500

• Reimburse employee ₹7,49,500

✅ 4. Proactive Communication with Employees

• Issue a circular/email to all employees:

  • Reimbursement of goods above ₹50L vendor-wise will be subject to TDS.

  • Ask them to submit invoices within 7–10 days to ensure timely compliance.

🔧 Optional: Build an Automation or Approval Workflow

If this is happening frequently:

• Use an Excel-based tracker or ERP integration to flag vendors crossing the ₹50L limit.

• Link it with reimbursement workflow, so finance/accounting team is prompted to deduct TDS before approval.

⚠️ Risk if Ignored

• If TDS under 194Q is not deducted, the employer becomes assessee-in-default.

• Plus, 30% disallowance of purchase expense under Section 40(a)(ia) could apply.

• Interest & penalty for late deduction and deposit.

✅ Final Summary