Section 194M: TDS on Payment of certain sum by certain Individual / HUF

The Finance Minister presented the Union Budget for the Financial Year 2019-2020 on 5^th July 2019 and on 1^st August 2019 said the Finance Bill, 2019 got assent from the President Shri Ram Nath Kovind. The Budget introduced new section 194M covering TDS applicability on payment done to resident contractors, commission / brokerage and professionals. Let us analyze what the newly introduced section 194M has to say, in the present article.

Basic applicability of section 194M

Individual or HUF [whose total sales / gross receipt / turnover from business or profession doesn’t exceed the monetary limit specified under section 44AB (a) or (b)] making payment to a resident in respect of the following, is liable to deduct TDS –

• For carrying out any work (which includes supplying of labor for carrying out any work) in pursuance of any contract,
• Brokerage or Commission (however insurance commission referred in section 194D is not included),
• Fees for professional services.

Important points related to Section 194M

♠ It should be noted here that the section 194M covers within its ambit the individual / HUF who are not liable to get their accounts audited. However, the individual / HUF requiring to get their account audited are already covered under respective section 194C, section 194H and section 194J and hence they are not included here. Explaining the situation in tabular format –

♠ TDS under section 194M is not to be deducted if the aggregate of sum credited or paid to a resident during the Financial Year doesn’t exceed INR 50 Lakhs.

♠ Further section 194M (2) states that the provisions of section 203A of the Income Tax Act, 1961 doesn’t apply to the Deductor. Meaning thereby that the Deductor liable to deduct TDS under 194M is not mandatorily required to obtain TAN (Tax Deduction and Collection Account Number).

Understanding the meaning of various important terms

1. Contract – As per explanation (a) to section 194M, the contract has the same meaning as contained in Explanation (iii) to section 194C which says –Contract includes sub-contract.

2. Commission or brokerage – As per explanation (b) to section 194M, the commission or brokerage has the same meaning as contained in Explanation (i) to section 194H which includes –

• Payment received / receivable (directly or indirectly) by a person acting on behalf of another person for –
  • Services rendered (not professional services), or
  • Services in the course of buying / selling of goods, or any transaction in relation to asset / valuable article / thing (not being securities).

3. Professional Services – As per explanation (c) the professional services has the same meaning as contained in Explanation (a) to section 194J which means – Services rendered by a person carrying on –

• Legal, or
• Engineering, or
• Medical, or
• Architectural profession, or
• Accountancy profession, or
• Interior decoration, or
• Technical consultancy, or
• Advertising, or
• Any other profession notified by the Board for the purpose of section 44AA.

4. Work – As per explanation (d) the work has the same meaning as contained in Explanation (iv) to section 194C which includes –

• Advertising;
• Carriage of passengers / goods by any mode of transport (except railways);
• Catering;
• Broadcasting and telecasting (including the production of programmes for broadcasting and telecasting);
• Manufacturing / supplying a product according to specification / requirement of a customer by using material purchased from the customer.

The time when TDS is to be deducted under Section 194M

The Individual / HUF covered under section 194M are required to deduct TDS within earlier of the following dates –

• At the time of credit of the sum; or
• At the time of payment of the sum in cash / draft / cheque or any other payment mode.

The rate at which TDS is to be deducted under Section 194M

As per section 194M, the Deductor is liable to deduct TDS at the rate of 5%. However, in case, the Deductee fails to submit the Permanent Account Number (PAN), then, the Deductor is required to deduct TDS at Maximum Marginal Rate of 20%.

Effective Date of Applicability of TDS provisions under Section 194M

The provisions of newly inserted section 194M of the Income Tax Act, 1961 shall be effective from 1^st September 2019.

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