194M: TDS on Payments to Resident Contractors and Professionals
Updated: Oct 3
Section 194M of the Income Tax Act is an important section because it directs the levy of TDS on certain payments by individuals or Hindu Undivided Families (HUFs) who are not required to conduct a tax audit. In case of payments to resident contractors and professionals for the purpose of conducting any work or rendering services, this section is of great importance. Thus, knowing the technicalities of 194M will help save the taxpayer from facing certain penalties.
Through this article, let us understand the important features of Section 194M, applicability, and day-to-day compliance by the person liable under this section.
Table of Contents
Budget 2024 Update: TDS Rate Reduced from 5% to 2%
As part of the government's efforts to streamline tax compliance and reduce the tax burden on taxpayers, the Budget 2024 has introduced a significant change in the TDS (Tax Deducted at Source) rate for certain transactions. Effective from 1st October 2024, the TDS rate, which was previously set at 5%, will be reduced to 2%.
This reduction is aimed at easing the cash flow burden for individuals and businesses, especially those involved in high-volume transactions such as professional services, contract work, and commission-based earnings. By lowering the TDS rate, the government intends to encourage greater compliance, simplify the tax deduction process, and provide relief to taxpayers who often face a heavy upfront deduction on their income.
This change will apply to payments where TDS is applicable, such as fees for professional and technical services, commissions, and other payments outlined under relevant sections of the Income Tax Act. The move is expected to positively impact small and medium-sized enterprises (SMEs), contractors, and professionals by allowing them to retain more cash flow while still adhering to tax regulations.
Brief Overview of 194M: TDS on Payments to Resident Contractors and Professionals
Introduced in 2019, Section 194M of the Income Tax Act extends the scope of the payments made to resident contractors and professionals. This section is significant as it covers payments above INR 50 lakh in a year made by individuals or HUFs not liable for a tax audit to resident contractors and professionals for the work executed, including supply of labor, or for professional services. The inclusion of Section 194M is critical in capturing such transactions with a large amount that used to escape the TDS net and thus broadening the tax base and also ensuring multi-level tax compliance.
Section 194M is indicative of the changing nature of the tax laws in the country, constantly evolving to meet economic shifts and expanding the coverage of the taxman's collection activities into a wider range of activities.
What is Section 194M?
The provision of Section 194M is not contained in the Income Tax Act. It has been introduced in the Finance Act of 2019 with the aim of extending the purview of TDS to cover certain transactions that were not coming within the existing TDS provisions of the Income Tax Act. This section applies to payments made by individuals or Hindu Undivided Families (HUFs) for whom there is no compulsion for tax audit under Section 44AB. The motive is to capture high-value transactions and ensure tax compliance at the payment source.
The applicability of Section 194M is quite broad and extends to any individual or HUF making payments to resident contractors and professionals exceeding INR 50 lakh in a financial year. This provision ensures that taxes are collected up front on high-value transactions which were otherwise outside the ambit of TDS regulations due to the non-audit status of the payer.
Types of Payments Covered Under Section 194M
Section 194M requires TDS to be deducted on the following types of payments:
Payment for Carrying Out Any Work: Any payment covered under this section to carry out any work whatsoever. It may be to contractors or subcontractors for carrying out any work under a contract, which includes but not limited to the work of construction, manufacturing, or giving services concerning such activities.
Payment for Professional Services: Payments made for professional services shall also be included. Professional services are those services that involve a professional activity characterized by the need for specialized skills or knowledge, like a doctor's services or a lawyer's services.
Commission or Brokerage: Any payment made as commission or brokerage to a resident excludes any such payment on which TDS is deducted under any particular provision of the Income Tax Act
Reason for Introduction of Section 194M: TDS on Payments to Resident Contractors and Professionals
There was a huge gap in the framework of tax deduction under the Indian Income Tax Act before the introduction of Section 194M. Individuals and Hindu Undivided Families (HUFs) that were not under a tax audit had no obligation to deduct tax at source in respect of major payments made to resident contractors and professionals. The gap existed because significant financial transactions could avoid the formal tax scrutiny that, for instance, businesses under tax audits are subject to. The logic was that with the expansion of the economy, and with an increase in the volume of high-value transactions by non-audited entities, a more inclusive mechanism was necessary to ensure fairness and effectiveness.
Section 194M introduced by the Finance Act of 2019 seeks to address this gap in the legislative purpose to close the loopholes. The government recognized the need to impose the collection of tax at source on such transactions having consideration in excess of INR 50 lakh. This will ensure that the taxes accruing on such transactions of high value are collected promptly and to lessen the burden of compliance at the later stage of assessment.
How Section 194M seeks to enhance Tax Compliance and Expand the Tax Base?
Section 194M is designed to enhance tax compliance and broaden the tax net in several ways:
Advance Tax Collection: Section 194M ensures that the government is able to collect the taxes upfront with the transaction, and it does not depend on the process of self-assessment at the end of the year for payees. Upfront collection helps prevent tax evasion and ensures a steady flow of revenue to the government.
Bringing Non-Audited Individuals and HUF into the System: This provision will specifically target non-audited individuals and HUFs. Very often, these types of taxpayers undertake huge financial transactions, but are beyond the scope of TDS due to the transaction limit.
Simplification of Compliance: Section 194M simplifies compliance for those who are not required to obtain a TAN. It allows them to deduct tax using their PAN.
Tax Evasion Detection and Prevention: Section 194M will detect and prevent tax evasion by bringing more transactions under the TDS umbrella. By doing so, it reduces opportunities for taxpayers to under-report their income and defer tax payments, ensuring greater transparency and compliance.
What is the Meaning of ‘Work’, ‘Contract’, And ‘Professional Services’ in Section 194M?
Meaning and Definition of 'Work'
In the context of Section 194M, 'work' generally means labor, service, undertaken on a contract and paid for. The following are, but are not limited to, the usual examples of work:
Construction work: Whether it be the construction of a new structure or the renovation of an existing structure.
Manufacturing operations: Any operation or series of operations used to assemble or create a product under a contract.
Maintenance services: Cleaning, repairs, or upkeep of any building or equipment.
Advertising services: Making or giving of any sign, card, or other device to advertise any items or use of, or any other advertising service.
Definition of 'Contract' and Examples
A 'contract' under Section 194M means a legally enforceable agreement between two or more parties to carry out specific tasks or provide services or goods in return for consideration. A few examples are:
Supply contracts: Supply contracts are agreements for the supply of goods or materials and are often related to special projects or constructions.
Combination contracts: Contracts that consist of agreements for both the supply of services and goods: for instance, a turnkey project.
Meaning of 'Professional Services' and Some Examples
'Professional services' refer to specialized services that are rendered by a person who holds qualification or technical expertise, and his activities are often regulated by statutory licensing bodies. Such services require some specific type of education or professional credential. Some of the examples of 'professional services' are:
Legal services: Which are provided by legal practitioners or consultants.
Accounting services: For example, bookkeeping, auditing, or providing financial consulting services by a chartered accountant.
Architectural services: Such as licensed architects providing design and consultation services.
Medical services: Which are offered by medical practitioners.
Who has To Deduct TDS under Section 194M?
Section 194M contains certain specific provisions applicable to TDS for payments made by a category of persons who are typically not subjected to the regular TDS provisions applicable to businesses or corporations. The criteria defining who is required to deduct TDS under Section 194M are as follows:
Individuals: Any natural person not acting as part of a business entity. In the context of TDS under Section 194M, individual payers are required to deduct TDS if they pay more than INR 50 lakh in a financial year to a resident contractor or professional for certain services or work. This is applicable even if individuals are not liable to a tax audit under other provisions like Section 44AB of the Income Tax Act.
Hindu Undivided Families (HUFs): HUF is a separate entity under Indian tax law that constitutes all members of a Hindu family combining their resources as a joint family. This entity is treated as a separate taxpayer from its members. HUFs who are not subject to tax audits but making payments more than INR 50 lakh in a year shall comply with the TDS provisions of Section 194M.
When to Deduct TDS under Section 194M?
Timing is essentially crucial for deduction under Section 194M. According to the provisions of Section 194M, TDS has to be deducted at the time of payment or at the time of crediting the amount, whichever is earlier.
This means:
At the time of payment: When the actual payment is made to the contractor or professional.
At the time of crediting: At the time of crediting the amount to the account of the contractor or the professional, even though the actual payment has not been made as of now.
This dual criteria ensures that the tax is collected promptly, reducing the risk of non-compliance due to deferred payments or accounting practices that could delay the recognition of the transaction.
What is the Rate of TDS under Section 194M?
Rate Of TDS Under Section 194M
The prevailing rate of TDS is 5% under Section 194M. This rate is fixed and is the same for all transactions subject to TDS under this section, whatever be the nature of the service or work provided. The rate of deduction for TDS, however, can be influenced by the following:
PAN Information: The rate of TDS, if the payee does not furnish his PAN to the payer, shall be higher of the following: at the rate specified in the relevant provisions of the Act; or at the rate of twenty percent.
Type of Entity: The standard rate, and hence the differential rate of TDS, is to be easy, so the person and HUF, during whose course of business the payment is made, while paying under section 194M needs not to worry, and will also not have to make a different rate chart based on rates against the type of payment or entities.
What is the Due Date for Depositing TDS under Section 194M?
Once the TDS has been deducted, the payer is obligated to deposit the amount with the government within a specified timeline. The due dates for depositing TDS under Section 194M are as follows:
For payments made in the month of March: The TDS should be deposited by the 30th of April of the next financial year.
For payments made in any other months: The TDS must be deposited by the 7th of the following month. For example, if a payment requiring TDS deduction is made in September, the deducted TDS should be deposited by the 7th of October.
Consequences of Late Deposit of TDS:
Following are the consequences of late depositing the TDS:
Interest: Interest is charged on the late deposit of TDS, which is currently at the rate of 1.5% per month or part of the month, calculated from the date on which TDS was deducted to the date when it is actually deposited.
Penalties: The Income Tax Act also provides for penalties for the late deposit of TDS, which are as severe as the amount of TDS that is not deposited in time.
TDS Certificate under Section 194M
Under Section 194M, the payer (deductor) has the responsibility to deduct TDS at the time of making the payment to the contractors or professionals. Upon deduction of TDS, the deductor has to issue a TDS certificate, Form 16D, to the payee (deductee). This certificate has to be issued within 15 days from the due date for the statement of tax deducted at source, i.e., Form 26QD.
The process of issuing TDS Certificate is very easy
Deduction of Tax: Here, the payer will be deducting the tax at the time of payment on his part.
Depositing the Tax: The person deducting the tax will deposit it to the account of the government within the 30th day of the following month for the tax deduction month.
Filing Form 26QD: The TDS return filing should be done by a payer in Form 26QD, a quarterly statement of TDS under section 194M after the deposit in the account.
Downloading Form 16D: After entering all details, the TDS certificate in Form 16D should be downloaded from TRACES website, and it should be issued to the deductee.
Legal Importance and uses of TDS Certificate
The TDS certificate performs several functions, as follows:
Proof of Payment of Tax: This is proof that tax has been deducted on payments made by the payer for the services of the payee.
Tax Return Filing: The payee can also claim the tax already deducted (TDS) from his payments to the payer, for his records while filing his income tax return.
Avoidance of Double Taxation: Income is taxed only once, so there is no scope of double taxation.
Requirement of TAN under Section 194M
Normally, under the Income Tax law, a Tax Deduction Account Number (TAN) is required for entities that deduct tax at the source. However, under Section 194M, individuals and HUFs not required to obtain TAN can deduct tax using their Permanent Account Number (PAN). This exemption from the requirement further simplifies the compliance process as it:
Reduces Compliance Burden: Individuals and HUFs will be exempt from obtaining and keeping a separate TAN generally applicable for businesses.
Simplifies Tax Procedures: The use of PAN instead of TAN simplifies the tax deduction and payment procedures, which will be beneficial for non-business taxpayers in their effort to comply with the tax laws.
Compliance Tips for Section 194M: TDS on Payments to Resident Contractors and Professionals
Best Practices to Ensure Compliance under Section 194M
Timely Deduction: Ensure that TDS is deducted at the time of payment and is deposited with the government within the stipulated timelines.
Record-keeping: Maintain proper documentation of transactions along with all TDS calculations and payment receipts. It would play a very important role in case of an assessment or inquiry made by the tax authorities.
Regular Updates on Tax Laws: Stay updated with any changes made in the TDS rates or the scope of provisions under Section 194M.
Common Errors to Avoid
Failure to Deduct or Late Deduction: Among all errors, the most common is the failure to deduct TDS at the time of payment or late deduction. Setting reminders regarding payment dates can avoid these errors.
Wrong Computation of TDS: Wrong computation of TDS can result in penal consequences. Usage of prescribed software for TDS calculation and professional help may prevent this error.
Non-Issuance of TDS Certificate: Delay in issuing or non-issuance of Form 16D may cause inconvenience to the payee as well as some legal hassles.
FAQ
Q1. What is Section 194M?
Section 194M is a provision of the Indian Income Tax Act that requires every individual or HUF who is not required to undertake a tax audit, to deduct income tax at source (TDS) from payments made to a resident contractor or professional for services rendered. This has been effective since 1st September 2019.
Q2. Who is required to deduct TDS under Section 194M?
Every individual or HUF making payment to a resident contractor or professional for work-related or service-related activities and the sum of the total of such amount paid during the financial year exceeding INR 50 lakh is required to deduct TDS under Section 194M.
Q3. What is the rate of TDS under Section 194M?
The rate of TDS under Section 194M is 5% on the sum of amount paid to a resident contractor or professional.
Q4. Do I need a TAN to deduct TDS under Section 194M?
No. Individuals and HUFs who are deducting TDS under section 194M need not have a TAN. They can simply deduct TDS using their PAN.
Q5. What type of payment is covered under section 194M?
Any amount exceeding INR 50 lakh paid during the financial year for any work, service, or professional services or commission/brokerage to a resident.
Q6. When should the TDS be deducted under Section 194M?
TDS should be deducted at the time of credit of such sum to the account of the payee or at the time of payment, whichever is earlier.
Q7. What is the due date for depositing TDS under Section 194M?
The TDS deducted under Section 194M should be deposited to the government by the 30th day of the month following the month in which the TDS was deducted.
Q8. How can one file the declaration for TDS under Section 194M?
The declaration for TDS deduction under Section 194M can be filed using Form 26QD, and the corresponding TDS certificate, Form 16D, can be generated from the TRACES website.
Q9. What happens if TDS is not deducted or deposited under Section 194M?
If TDS is not deducted or not deposited after deduction, the deductor will be liable to pay interest on the due amount and could also face penalties as per the provisions of the Income Tax Act.
Q10. Can the deducted TDS under Section 194M be claimed back?
Yes, the payee can claim the deducted TDS as a tax credit while filing the annual income tax return, provided he has received the TDS certificate (Form 16D) from the deductor.
Q11. Is Section 194M applicable for payments made to non-residents?
No, Section 194M is applicable only to payments made to resident contractors or professionals. For payments made to non-residents, Section 195 of the Income Tax Act governs the deduction of TDS.
Q12. Does Section 194M apply to payments made to employees?
No, Section 194M does not apply to payments made to employees. Employee salaries are subject to TDS under Section 192, not 194M. Section 194M covers payments to contractors, professionals, or service providers, excluding employees.
Q13. Can payments made for personal services also fall under Section 194M?
Yes, even payments for personal services, such as hiring a contractor for home renovation or a professional for private consultation, will attract TDS under Section 194M if the amount exceeds INR 50 lakh in a financial year.
Q14. How is Section 194M different from Section 194C and Section 194J?
Section 194C and Section 194J require businesses or individuals under tax audit to deduct TDS on payments to contractors and professionals. However, Section 194M applies to individuals or HUFs who are not subject to a tax audit but make payments exceeding INR 50 lakh to contractors or professionals in a financial year.
Q15. Is GST included while calculating the TDS amount under Section 194M?
No, TDS under Section 194M is calculated on the base amount (excluding GST). Therefore, TDS should only be deducted on the amount paid for the service or work, not on the GST component.
Q16. How can the deductor issue the TDS certificate under Section 194M?
The deductor can issue the TDS certificate using Form 16D, which can be downloaded from the TRACES portal. The certificate should be issued to the payee after the TDS has been deducted and deposited with the government.
Q17. Are there any penalties for late filing of TDS returns under Section 194M?
Yes, a late fee of INR 200 per day is charged for late filing of TDS returns under Section 194M, subject to a maximum of the total TDS amount. Additionally, interest and penalties may apply if TDS is not deposited on time.
Q18. What are the consequences of failing to deduct TDS under Section 194M?
If TDS is not deducted under Section 194M, the deductor may be liable to pay interest at 1% per month from the date the tax was deductible. Furthermore, if TDS is deducted but not deposited, interest at 1.5% per month will be charged from the date of deduction until payment.
Q19. Does Section 194M apply to payments made for capital asset purchases?
No, Section 194M does not apply to payments made for the purchase of capital assets such as land, buildings, or machinery. It is only applicable to payments made for services provided by contractors or professionals.
Q20. Is Section 194M applicable for lump sum payments or installment payments?
Section 194M applies to both lump sum and installment payments. TDS should be deducted at the time of each payment, whether in installments or in a lump sum, once the total payments exceed INR 50 lakh in a financial year.
Comments