Section 194M of the Income Tax Act : A Complete Analysis

 

Budget 2019 has proposed a new Section 194M, which requires an individual or a HUF, to deduct TDS @ 5%, where they make payment exceeding Rs. 50 Lac in a year to a contractor (referred to in Section 194 C) or to a professional (referred to in Section 194 J)

The proposed Section 194M reads as under : –

Section 194M:

(1) Any person, being an individual or a Hindu undivided family (other than those who are required to deduct income-tax as per the provisions of section 194C or section 194J) responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract or by way of fees for professional services during the financial year, shall, at the time of credit of such sum or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent. of such sum as income -tax thereon:

Provided that no such deduction under this section shall be made if such sum or, as the case may be, aggregate of such sums, credited or paid to a resident during a financial year does not exceed fifty lakh rupees.

(2) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.

Explanation.– For the purposes of this section,––

(a) “contract” shall have the meaning assigned to it in clause (iii) of the Explanation to section 194C;

(b) “professional services” shall have the meaning assigned to it in clause (a) of the Explanation to section 194J;

(c) “work” shall have the meaning assigned to it in clause (iv) of the Explanation to section 194C.

Analysis and  Key features are as under : –

1. Who should be the Payer: – Provisions are applicable to an individual or a Hindu undivided family, even though they may not be carrying on any business or profession ;

It excludes an individual or a Hindu undivided family who are required to deduct TDS  under Section 194C or Section 194J, i.e, mainly those individuals or HUF who are liable to tax audit and carrying on business or profession ;

2. Who should be the Recipient: – The recipient should be a  resident. Payments to non-residents are not covered under this Section.

3. Nature of work performed: – Payment should be for carrying out any work (including the supply of labour for carrying out any work) in pursuance of a contract or by way of fees for professional services during the financial year;

4. Time of deduction of TDS: – TDS  shall be deducted at the time of credit of such sum or at the time of payment of such sum in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier ;

5. Rate of TDS under Section 194M: – TDS shall be deducted @ 5% of such sum.

6. Threshold Limit of TDS under Section 194M: – TDS shall be deducted only when such sum, or aggregate of such sums, exceeds fifty lakh rupees in a year.

The memorandum, explaining the provisions of Finance (No.2) Bill, 2019, provides the following reasoning behind the insertion of Section : –

At present, there is no liability on an individual or Hindu undivided family (HUF) to deduct tax at source on any payment made to a resident contractor or professional when it is for personal use.

Further, if the individual or HUF is carrying on business or profession which is not subjected to an audit, there is no obligation to deduct tax at source on such payment to a resident, even if the payment is for the purpose of business or profession.

Due to this exemption, the substantial amount by way of payments made by individuals or HUFs in respect of contractual work or for professional service is escaping the levy of TDS, leaving a loophole for possible tax evasion. To plug this loophole, it is proposed to insert a new section 194M in the Act to provide for levy of TDS at the rate of five percent on the sum, or the aggregate of sums, paid or credited in a year on account of contractual work or professional fees by an individual or a Hindu undivided family, not required to deduct tax at source under section 194C and 194J of the Act, if such sum, or aggregate of such sums, exceeds fifty lakh rupees in a year.

However, in order to reduce the compliance burden, it is proposed that such individuals or HUFs shall be able to deposit the tax deducted using their Permanent Account Number (PAN) and shall not be required to obtain Tax deduction Account Number (TAN).

This amendment will take effect from 1st September 2019.

Article Written By- Rohit Kapoor
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