Section 269T of the Income Tax Act : Challenges for Firms in TDS Compliance
This Article provides a good overview of the challenges firms face with Section 194T of the Income Tax Act, which mandates TDS on payments to partners. Here are some key takeaways:
Section 194T to come on the statute by the Finance (No. 2) Act, 2024 w.e.f. 01.04.2025. Section 194T reads as under:
Payments to partners of firms.
194T. (1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent.
(2) No deduction shall be made under sub-section (1) where such sum or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm does not exceed twenty thousand rupees during the financial year.
Key Issues:
- Applicability Date: While the Act came into effect on April 1, 2025, its applicability to payments made before this date for the preceding financial year (2024-25) requires careful interpretation.
- Deduction on Non-Deductible Amounts: The Act mandates TDS on all payments to partners, regardless of whether those payments are deductible expenses for the firm. This can create discrepancies and potential tax disputes.
- Timing of Deduction: The requirement to deduct TDS at the time of credit or payment, whichever is earlier, can pose challenges for firms with delayed payments or credits to partner accounts.
- Residential Status of Partners: The Act doesn’t explicitly address the TDS obligation for non-resident partners, creating ambiguity regarding the applicability of Section 194T versus Section 195.
- Nature of Income: The characterization of payments to partners as business income for TDS purposes may not always align with the partner’s tax treatment, potentially leading to mismatches in tax filings.
Overall:
Section 194T introduces a new layer of complexity for firms, particularly regarding the timing of deductions, the treatment of non-deductible payments, and the applicability to non-resident partners.
Recommendations:
- Clearer Guidelines: The Income Tax Department should issue detailed guidelines and FAQs to address the ambiguities and provide clarity on the implementation of Section 194T.
- Software Updates: TDS software providers should update their software to incorporate the provisions of Section 194T and facilitate accurate TDS calculations and filings.
- Industry Consultations: The government should engage with industry stakeholders to address concerns and seek feedback on the practical implications of Section 194T.
This analysis highlights the need for careful consideration and proactive steps to ensure compliance with Section 194T while minimizing potential challenges and disputes.