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2021

A Brief Overview of TDS on Payment to Resident Contractors and Professionals under Section 194M

A Brief Overview of TDS on Payment to Resident Contractors

It is a newly inserted section in Budget 2019 which is applicable from 1stSeptember, 2019. This section was introduced to cover some specified high value transactions of personal nature which were previously excluded from TDS provisions. The tax authorities observed that some individual and HUFs make very high payments to the professionals towards commission, contract fees or fees for rendering professional or technical services. As these individual/HUF are not subject to tax audit u/s 44AB, they are not liable to deduct TDS on such transactions; hence, the introduction of Section 194M to cover such high value transactions.

Requirement of Introduction of this Section:

  • This section was introduced to address a loophole in some existing TDS sections due to which some high value transactions were not being captured in the tax net. The reason was that Individual and HUF were not liable to deduct TDS under certain sections and if the payer is an individual or HUF, the tax was not deducted.
  • As per existing provisions of 194J and 194C, individual & HUF are not required to deduct TDS if:
  • Payment made exclusively for personal purposes
  • Payment made for other than personal purpose but individual & HUF are not required to get their accounts audited.
  • Hence, when expenses of the nature covered under Section 194J or 194C are incurred by an individual or HUF, they did not deduct TDS due to above provisions.
  • Section 194M eliminates this loophole as individual / HUF are required to deduct TDS under this section if aggregate amount of payment for some specified transactions defined under this section exceed Rs. 50 lakh.

Liability to Deduct TDS:

  • As mentioned earlier, An Individual or HUF who are not required to get their books of accounts audited are liable to deduct TDS under section 194M.
  • However, the payment should be made towards personal expenses.
  • TDS deduction liability arises only when the transaction value of such payments exceed Rs. 50 Lakh to a single entity in a financial year.
  • This section is applicable only when the payment is made to a resident contractor or a resident professional. Hence, this section is not applicable to Non-Residents.
  • Lower TDS certificate can be submitted under this section.

Specified Transaction covered under this Section:

  • Liability to deduct TDS under this section arises at the time of payment to a resident contractor by an individual or HUF for carrying out work in the nature of personal purpose.
  • This section covers such transactions which are not covered under section 194C, 194J and 194H. Following are the specified payments which are covered under this section:
  1. Payment to a resident contractor by an individual or HUF for carrying out work in the nature of personal purpose and “work” here means:
  • Advertising;
  • Broadcasting and telecasting (including the production of programmes);
  • Carriage of goods and passengers using any mode of transport (but not railways);
  • Catering;
  • Manufacturing or supply of a product as per the specification of a customer by using material purchased from him/her.

Notes:

  • The term ‘Work’ does not include manufacturing or supplying a product according to the specification of a customer by using material purchased from other than such customer.
  • As per clause (iii) of section 194 C, Contract shall include sub-contracts.
  1. Payment to a resident professional for giving professional services by an individual or HUF for carrying out work in the nature of personal purpose and “professional services” here means:
  • Fees for professional service;
  • Fees for technical service;
  • Remuneration or fee or commission to a director of a company (which is not liable to TDS u/s 192);
  • Royalty;
  • Non-compete fees which means payment made for not carrying out any business or profession.
  1. Payment to a Resident Individual or HUF by way of Commission:
  • Any Payment (not covered u/s 194H) made to a resident individual by way of commission.

Note: Any payment by way of Insurance Commission is not covered under Section 194M.

Rate of TDS:

  • TDS shall be deducted at 5% if the total amount paid to a resident exceeds Rs 50 Lakh in a particular financial year.
  • In case the PAN of the deductee is not available, then TDS will be deducted at 20%.

Important Instructions for the Payee/Deductee under Section 194M:

  • Provide PAN to the Payer/Deductor to furnish the information regarding TDS to the Income Tax Department.
  • Verify deposit of taxes deducted by the Payer/Deductor in your Form 26AS Annual Tax Statement.
  • Insist on obtaining Form 16D from the Payer/Deductor which has been downloaded from TRACES website only.
  • The Payee/Deductee can apply to the Assessing Officer under Section 197 to obtain Nil or Lower TDS certificate in respect of sum paid or payable which are subject to TDS under section 194M if his estimated tax liability are justified to the satisfaction to the Assessing Officer to issue such certificate.

Note: The individual or HUFs who has to deduct tax can pay the tax to the government by quoting his or her PAN only. Not required to get a tax deduction account number (TAN) for TDS deduction.

Time of Deduction of TDS:

  • The Deductor who is liable to deduct TDS under provisions of this sectionis required to deduct TDS within earlier of the following dates:
  • At the time of credit of income to the account of the payee; or
  • At the time of payment in cash, cheque, draft, or by any other mode.
  • For this purpose credit to ― Expense Payable account‖ or Suspense account‖ or any other name shall be deemed to be a credit of such income to the account of the payee.
  • Payment may be made in cash or by issue of a cheque or draft of by any other mode.

Time Limit of filing Return-cum-Challan:

  • The TDS deducted under section 194M is to be deposited to the credit of the Government within 30 days from the last day of the month in which TDS is deducted.
  • Unlike other normal cases, there is no need to file a separate quarterly TDS return.
  • The TDS amount should be deposited through a Challan-cum-Statementin Form No. 26QD under rule 31A after generating and downloading the same from the web portal specified by the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems) or the person authorized by him.
  • There is no need to get a TAN for the purpose of this section. Instead of TAN, PAN of the deductor should be quoted in the Challan-cum-Statement.

Due Date of Issuance of TDS Certificate:

  • Every person responsible for deduction of tax under section 194M shall furnish the certificate of deduction of tax at source in Form No. 16D to the payee within fifteen days from the due date for furnishing the Challan-cum-Statement in Form No. 26QD.

Interest on Late Filing:

Section

Nature of Default

Interest Payable

Period for which interest is to be paid

201A

Non deduction of tax at source, either in whole or in part

1% per month or part thereof

From the date on which tax deductible to the date on which tax is actually deducted.

After deduction of tax, Non-payment of tax either in whole or in part

1.5% per month or part thereof

From the date of deduction to the date of payment.

Notes:

  • The above interest should be paid before filing of TDS return. The deductor can make the payment of interest on such late payment of TDS before filing TDS returns or demand raised by TRACES.
  • The interest paid u/s 201A is not allowed as an expense under the Income Tax provisions.
  • Interest to be calculated on a monthly basis and not on the number of days i.e. part of a month is considered as a full month.

 

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