Section 194M of Income Tax Act

The Union Budget usually introduces changes and reforms to various aspects of taxation. These changes aim to reduce compliance hurdles and make taxation easier and more streamlined for taxpayers. The Union Budget of 2019 introduced some key reforms to Section 194M of the Income Tax Act, which pertains to the tax deducted at source (TDS) and tax collected at source (TCS) for individuals and Hindu Undivided Families (HUFs). In this article, we will explore Section 194M in greater detail.

What is Section 194M

Section 194M of the Income Tax Act is related to the TDS and TCS for individuals or HUFs who are conducting a business or providing professional services, the gross receipts of which exceed ₹50 lakhs.

The Union Budget of 2019 introduced Section 194M, which laid out provisions for individuals and HUFs making payments to resident contractors. Previously, individuals and Hindu Undivided Families (HUFs) had no liability to deduct tax at source when payments were made to such parties for personal or business use.

Since there were no tax compliances regarding the TDS for such payments, there was scope for tax evasion. The section was designed for individuals and HUFs who made large payments but were not covered under the tax audit.

Applicability of Section 194M

Section 194M is applicable if payments made to a resident professional, contractor, or for commission exceed the threshold limit. The threshold limit for Section 194M is ₹50 lakhs. If the total gross payments do not cross this threshold, then Section 194M is not applicable.

By setting a threshold, the section provides relief to smaller taxpayers and the middle-income group while covering only parties that make large transactions.

Who is Required to Deduct TDS

 According to Section 194M, individuals or HUFs that make payments to resident professionals or contractors, or for commission or brokerage, are required to deduct TDS if the gross receipts exceed the threshold limit.

It is worth noting that this section is only applicable to individuals and HUFs who are not liable to deduct TDS under Sections 194C, 194H, and 194J of the Income Tax Act.

Work, Contract, and Professional Services under Section 194M

To better understand the applicability of Section 194M, let’s take a look at the activities that are considered work, contract, or professional services.

Work under Section 194M covers:

• Advertising
• Production, broadcasting, and telecasting of programs
• Carriage of goods or passengers for modes other than railway
• Catering

Manufacturing and supplying products according to the customer's specifications, utilising materials purchased from the same customer. If the material is purchased from someone other than the customer, this provision does not apply.

Professional Services under Section 194M cover:

• Legal
• Medical
• Accountancy
•  Architectural
• Engineering
•  Technical Consultancy
• Interior Decoration
• Any other activity as notified by the government

Contracts under Section 194M cover:

• Supply of labour under a contract
• Payments for construction
• Payments for repair work
• Any other contractual work

TDS Rate & Threshold

For taxpayers, it is vital to understand the TDS rate and the threshold under Section 194M.

Payments to any resident professional, contractor, or commission that exceed the threshold limit of ₹50 lakh has a TDS rate of 5%. The TDS applies to the whole amount, and not just the amount that is over the threshold limit. If the PAN of the deductee is not available, TDS will be deducted at a rate of 20%.

The TDS rate under section 194M was temporarily reduced to 3.75% from May 2020 to March 2021, due to the COVID-19 pandemic. However, the rate was hiked back to 5% from April 1, 2021.

Let’s look at an example of how TDS would be calculated under Section 194M.

If Mr. A paid ₹1 crore to Mr. B as commission, the TDS would be deducted at 5% on the entire amount.

TDS = ₹5 lakh.

Mr. B paid Mr. C ₹45 lakh for repair work. Since the gross receipt of ₹45 lakh is below the threshold level of ₹50 lakh, there is no need to deduct TDS.

Section 194M: Payment & Compliance

TDS under Section 194M will be deducted:

• At the time of payment by cash, issue of a cheque, or a draft
• On credit of the amount

Due Date

After making a payment, the party responsible for deducting TDS has to file Form 26QD. The form has to be filed within 30 days from the end of the month in which the payment was made. For example, if the payment was made on May 9, the due date to file the form is June 30th.

Certificate of TDS

After deducting tax under Section 194M, the party who deducted the tax is required to provide the payee with a certificate under Form 16D within 15 days of the due date of furnishing the challan-cum-statement under Form 26QD. The challan-cum-statement

No Need for TAN

Under Section 194M, individuals or HUFs who deduct TDS are not required to obtain a Tax Deduction and Collection Account Number (TAN).

Exceptions & Penalties Under Section 194M

The threshold limit of Section 194M is the primary exception for taxpayers. If the gross receipts of payments made are under the threshold limit of ₹50 lakh, there is no requirement to deduct TDS.

An individual or HUF may be liable to pay a penalty of up to ₹10,000 and interest if they fail to deduct TDS or fail to deposit with the government. The interest rate is 1% per month on the TDS amount that was not deducted or deposited.

Conclusion

The introduction of Section 194M created a wider base to cover individuals and HUFs that were not subject to tax audit. Moreover, the section provided ease to middle-income taxpayers. For individuals and HUFs, it is crucial to know the applicability of Section 194M, the compliance requirements, and the penalties for non-compliance.