Section 194M Income Tax : TDS on payment by Individual/HUF to contractors and professionals

Finance Bill 2019 inserted Section 194M of Income Tax Act with effect from the 1st day of September, 2019: Payment of certain sums by certain individuals or Hindu undivided family.

Video Explanation of Section 194M Income Tax

Commentary on Section 194M of Income Tax Act

• Effective Date : Section 194M of Income Tax Act effect from the 1st day of September, 2019
• TDS Rate : TDS 5%  of such sum paid or credited under Section 194M of Income Tax Act
• Why TDS has to be deducted : If 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) pays to 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,
• NIL/ Lower TDS Certificate : If contractor or professional wants that his TDS should not be deducted at 5% , then he can file file application for issue of certificate for nil or lower rate of TDS u/s 197 of Income tax act
• When TDS will not  be Deducted u/s 195M of Income Tax Act :
  • 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 Rs 50 lakh.
  • If Sum is paid to Non Resident Contractor or Proffessional ( Note : TDS u/s 195 will be applicable )
• Who has to deduct TDS : 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.
• When TDS has to be deducted :
  • 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

• Meaning of Contract u/s 195M of Income Tax Act :“contract” shall have the meaning assigned to it in clause (iii) of the Explanation to section 194C of Income Tax Act
  • As per clause (iii) of the Explanation to section 194C of Income Tax Act  : “contract” shall include sub-contract.
• Meaning of Work u/s 195M of Income Tax Act : “work” shall have the meaning assigned to it in clause (iv) of the Explanation to section 194C.
  • As per clause (iv) of the Explanation to section 194C of Income Tax Act :

    “work” shall include—

    (a)		advertising;
    (b)		broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
    (c)		carriage of goods or passengers by any mode of transport other than by railways;
    (d)		catering;
    (e)		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 requirement or specification of a customer by using material purchased from a person, other than such customer.]

• Meaning of Professional Fees u/s 195M of Income Tax Act : “professional services” shall have the meaning assigned to it in clause (a) of the Explanation to section 194J of Income Tax Act
  • As per clause (a) of the Explanation to section 194J of Income Tax Act ”
    

    “professional services” means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section;

• No Need for TAN , TDS Deposit on PAN basis : It is also proposed that a person deducting tax under section 194M shall be able to deposit TDS on the basis of the Permanent Account Number (PAN) only. he Need not Apply for TAN (Tax deduction Account Number)
• Procedure to Deposit TDS u/s 194M of Income Tax Act  :-  For deposit of TDS by individual or HUF paying rent of more than Rs 50,000 per month u/s194IB, there is challan-cum-statement in Form 26QC. For deposit of TDS by any person paying consideration for transfer of immovable property of 50 lacs or above u/s 194IA there is challan-cum-statement in Form 26QB. On the similar lines, Govt. may prescribe challan-cum-statement for deposit of TDS under new section 194M.
• Due Date for Payment of TDS u/s 194M of Income Tax Act :  Since no separate due date has been prescribed for deposit of tax deducted under section 194M., it appears that, the due dates for deposit of tax under the new provisions of Section 194M shall be same, i.e., within 30 days from the end of the month in which tax is deducted. Rule 30 of Income Tax Rules may be Amended by Govt for this purpose.

Budget 2019 Speech of Finance Minister on Section 194M of Income Tax Act

Annex to Part B of Budget Speech
Direct Tax Proposals:
1. Widening and deepening of tax base
1.1 Deduction of tax by certain individuals or HUF: Presently, there is no requirement for an individual or HUF to deduct tax at source on payments made to a resident contractor or professional when it is for personal use, or if the individual or HUF is not subjected to audit for his business or profession. It is proposed to insert a new provision making it obligatory for such individual or HUF to deduct tax at source at the rate of five per cent. if the annual payment made to a contractor or professional exceeds Rs. 50 lakh. It is also proposed that a person deducting tax under this section shall be able to deposit TDS on the basis of the Permanent Account Number (PAN) only. It is also proposed to enable filing of application for issue of certificate for nil or lower rate of TDS.

Section 194M of Income Tax Act :

As per Clause 46 of Finance Bill 2019 ( Dated 05.07.2019)  after section 194LD of the Income-tax Act, the following sections shall be inserted with effect from the 1st day of September, 2019,

Payment of certain sums by certain individuals or Hindu undivided family.

‘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.

Explanation of Clause 46 of Finance Bill 2019 on Section 194M Income Tax Act

Clause 46 of the Bill seeks to insert new sections 194M relating to payment of certain sums by certain individuals or Hindu undivided family and 194N relating to payment of certain amounts in cash in the Income-tax Act

Sub-section (1) of the proposed new section 194M seeks to provide for levy of tax deduction at source at the rate of five per cent. on any sum, or aggregate of sums, paid by 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) to a resident for carrying out any work (including supply of labour for carrying out any work) or by way of fees for professional services at the time of credit to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier

The proviso to the said sub-section provides that no incometax referred to in sub-section (1) shall be deducted, if such sum or aggregate of such sums paid to a resident does not exceed fifty lakh rupees during the financial year

Sub-section (2) of the proposed new section 194M seeks to provide that the provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section

Why Section 194M of Income Tax Act is inserted

As per Memorandum explaining Finance Bill 2019 ( Dated 05.07.2019)

B. WIDENING AND DEEPENDING OF TAX BASE

Tax Deduction at Source (TDS) on payment by Individual/HUF to contractors and professionals

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 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, 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 per cent. 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.

[Clause 46]

Section 194M of Income Tax Act : Lower TDS Certificate

As per Clause 48 of Finance Bill 2019 ( Dated 05.07.2019)  : Amendment of section 197

“In section 197 of the Income-tax Act, in sub-section (1), for the figures and letters “194LBC”, the figures and letters “194LBC, 194M” shall be substituted with effect from the 1st day of September, 2019”

Clause 48 of the Bill seeks to amend section 197 of the Incometax Act relating to certificate for deduction at lower rate. It is proposed to amend sub-section (1) of the said section so as to provide that the sums on which tax deduction at source has been deducted under section 194M shall also be eligible for certificate for deduction at lower rate. This amendment is consequential in nature for the insertion of proposed new section 194M.

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