The Budget 2019 proposed various changes to the existing sections of the income tax laws and introduced some new Sections for TDS, such as 194M and 194N.
194M – TDS on payment to resident contractors and professionals. Continue reading to know more.
194N – TDS on cash withdrawal in excess of Rs 1 crore. Click here to read more about section 194N.
Budget 2024 Update
The TDS rate has been proposed to decrease to 2% from 5% with effect from 1st October 2024.
What Is Section 194M?
In general, TDS/TCS provisions are to be complied with by individuals or HUFs only if they are doing business or profession and gross receipts exceed Rs.1 crore or Rs.50 lakhs, respectively. However, a few sections require compliance with their provisions even if the above conditions are not satisfied, and section 194M is also one among them.
It applies when the total amount paid to a resident individual for carrying out any contractual work or commission/brokerage paid (not being insurance commission) or providing any professional service in a financial year exceeds Rs 50,00,000.
If such individuals or HUFs have gross receipts from business or profession in excess of Rs. 1 crore or Rs. 50 lakhs respectively, TDS deduction is applicable as per Sections 194C, 194H and 194J. The individual and/or HUF who have to deduct TDS under Section 194C (TDS on payment to a contractor), 194H (Commission or brokerage) and 194J (TDS on payment on professional fees) do not have to deduct tax at source under Section 194M.
Individuals or HUFs who have to deduct tax can pay the tax to the government by quoting their PAN only. They are not required to get a tax deduction account number (TAN) for TDS deduction.
Payments to non-residents are not covered under this section.
Reason For Introduction Of Section 194M
The finance bill of 2019 introduced Section 194M, which provides for tax deduction at source from any money paid by an individual or HUF to a resident contractor when the services are provided for personal use. Therefore, this section applies to personal as well as business related payments.
Before the introduction of this section, there was no liability on an individual or HUF to deduct tax at source in the situation mentioned above.
Also, individuals or HUFs carrying business or profession (not breaching the turnover threshold) were also not deducting any tax at source, even when the payment was made for the purpose of business or profession.
A major amount of payment made for contractual works, commission/brokerage (other than insurance commission_ and professional fees was escaping the levy of TDS because of this exemption, creating a scope for tax evasion.
Key points to note:
- This section is not applicable to non-residents.
- Lower TDS certificates can be submitted under this section.
- Quote PAN in place of TAN: The government has given relaxation under this section, individual or HUF can deposit TDS to the government using PAN in place of TAN and TAN is not required to be obtained.
- This section is applicable from 01 September 2019.
What Is Meaning Of ‘Work’, ‘Contract’, And ‘Professional Services’ In Section 194M?
Work: The expression “work” in this section would include:
- Advertising
- Broadcasting and telecasting, including the production of programs for such broadcasting or telecasting.
- Carriage of goods and passengers by any mode of transportation other than railways.
- Catering.
- Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. But does not include manufacturing or supplying a product according to the requirements or specifications of a customer by using material purchased from a person, other than such a customer.
Professional Services: The phrase, professional services in this section would include:
- Legal
- Medical
- Engineering
- Architectural
- Accountancy
- Technical consultancy
- Interior decoration
- Any other professional service as notified by the government
Contract: This expression includes a sub-contract.
Who Has To Deduct TDS Section 194M?
An individual or HUF who pays a resident for contract work completed, commission/brokerage paid(other than insurance commission), or any professional service provided will have to deduct tax at source under 194M.
As per the Union Budget 2019, any individual/HUF paying any sum to a resident for carrying out any work (including the supply of labour) under any contract or by way of fees for professional services rendered during the financial year exceeding Rs 50,00,000 in a year will have to deduct TDS at 5%. (With effect from 1st October 2024 this rate is proposed to be reduced to 2%)
This section will be effective from 1 September 2019 onwards. The TDS amount will be deducted on any payment made after this date, even if the contract existed before, provided the payment exceeds Rs 50,00,000.
Time Of Deduction Section 194M
TDS amount will be deducted on the earlier of the following dates:
- At the time of credit of the amount.
- At the time of payment by cash or by the issue of a cheque or draft.
Rate Of TDS Section 194M
TDS at 5% will be deducted under 194M if the total amount paid to a resident exceeds Rs 50,00,000 in a particular financial year.
In case the PAN of the deductee is not available, then TDS will be deducted at 20%.
Due Date For Depositing TDS Under Section 194M
The person responsible for deducting tax under section 194M shall file Form 26QD. The due date to file Form 26QD is within 30 days from the end of the month in which you made the payment. For example, if you paid on 1st December 2023, the due date for TDS payment is on or before 30th January 2024.
Certificate Of Tax Deducted Under Section 194M
The person who deducts tax under section 194M shall furnish a certificate under Form No.16D to the payee within 15 days of the due date of furnishing the challan cum statement in Form 26QD.
No Requirement To Obtain TAN
The provisions of section 203A, which require obtaining a Tax Deduction Account Number (TAN), shall not apply to the person required to deduct tax in accordance with the provisions of section 194M.
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