Summary: The introduction of Section 194T, effective from April 1, 2025, mandates a 20% tax deduction at source (TDS) on salary, interest, bonus, or commission exceeding ₹20,000 annually, payable to a partner in a partnership firm. While intended to streamline taxation, the provision poses practical challenges. Firstly, throughout the financial year, partners may draw or contribute varying amounts to the firm. If the firm credits salary or interest only at year-end, TDS applied on interim withdrawals might misalign with the final credited income, leading to discrepancies. In cases where no salary or interest is credited due to losses or insufficient profits, TDS deductions made during the year result in tax paid without corresponding income, complicating compliance with Form 26AS reporting and TDS certificate issuance. Secondly, the “credit or payment, whichever is earlier” clause requires TDS on all partner withdrawals during the year, assuming they are payments towards salary or interest. This results in an overly burdensome procedure, requiring constant monitoring and adjustments by firms. Critics argue that such provisions not only complicate compliance but also unnecessarily withhold partners’ funds, which could be used productively. The Ministry of Finance (MOF) and the Central Board of Direct Taxes (CBDT) have indicated plans to simplify tax procedures, including reducing the 71 existing TDS provisions. Advocates for repeal argue that Section 194 T should be scrapped before implementation to prevent administrative inefficiencies and undue taxpayer burden, ensuring a smoother taxation process.
The Income Tax Department is now proud in awarding speedy refunds and the CBDT is even more proud in announcing that more than Rupees Two Lakh Crores have been refunded. But this is not an issue to rejoice because so much of money has been collected from where it is not due. In refunding such a huge amount the sources of the department are wasted and the assessee’s money is withheld for non-productive purposes, which could have been avoided if tax is not deducted where it is not actually due.
This new section 194 stipulates that 20% tax is to be deducted at source from 01.04.2025 if the same exceeds Rs. 20,000/- in a year from the interest, salary, bonus commission etc., payable to the partner of a Partnership Firm at the time of credit or payment whichever is earlier.
The following are the practical problems in implementing this new TDS provision:
1. Total amount outstanding to the credit of a partner in the Firm’s Books of Account is Rs. 10,00,000/-. He has been drawing money throughout the year and whenever there is shortage in the firm’s hand he brings in money. At the end of the year if the credit balance is more than Rs. 10,00,000/-, then it means that he has brought in fresh capital and hence no TDS is required. The interest and salary are credited at the end of the year. In my opinion, it is sufficient to deduct TDS at the end of the year since there are no drawings towards salary/interest during the year. But if ultimately if the credit balance at the yearend is below Rs. 10,00,000/- (before credit of salary/interest), Tax should have been deducted during withdrawals because such drawings may be termed a drawing towards salary/interest. But it is a cumbersome affair. The Partnership firm may not know whether they are going to give salary/interest till the year end.
2. The section says credit or payment whichever is earlier and each and every payment to the partner may be subject to TDS even though the salary and interest are credited at the year end because drawings made during the year will be treated as payments towards salary/interest. At the yearend due to paucity of profits or due to losses if salary/interest is not credited there will be TDS against which there won’t be any income in the form of salary or interest if 10% was deducted and paid during the year from the drawings. Then how to issue TDS certificate and how can it be reported in Form No. 26AS, where there will be TDS and NIL Income.
Recently it is informed by the MOF/CBDT that they are in the process of simplifying the entire Income Tax procedures and the incidence of TDS is in 71 sections, which they want to reduce.
Let us hope that this new section which is going to be operative from 01.04.2025 (F.Y. 2025-26) will be dropped so that the taxpayer have a sigh of relief from this cumbersome procedure.
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