Per section 139(1) of Income Tax Act, every person, other than a company or a firm, is required to file return of his income if his total income exceeds the maximum amount which is not chargeable to income-tax. Every person is required to pay self-assessment tax on his total income after the end of the previous year along with the return of income. For the effective cash flow for government, there are three different ways in which government collects this tax liability during the previous year itself, under pay as you earn mechanism.
One of this mechanism is known as Tax deducted at source (TDS). TDS acts as a source of timely flow of tax money to the government instead of receiving all the tax at the time of return filing. Originally, this tool has been used to effectively manage the cash flow for the government, however, now a days, this is also used for picking up leakage in taxes.
As per the Income Tax Act, any company or person making a payment is required to deduct tax at source if the payment exceeds certain threshold limits. There are around 30 items of income/payment from which tax is deductible at source. Given the complexity involved in the process, TDS is deducted only by the persons who are liable to audit as per relevant laws.
Individuals/HUFs who are not liable to have their accounts audited as per Income Tax Act are considered small businesses/professionals and hence are not liable for complex compliances of the income tax act related to TDS.
However, there are a few TDS related sections applicable to Individuals/HUFs even when they are not liable to audit. These are
1. Section 194IA – TDS on transfer of certain immovable property
2. Section 194IB – TDS on rent more than Rs. 50,000 for a month.
3. Section 194IC – TDS on payment under specified agreement u/s 45(5A)
4. Section 195 – TDS on payment to Non-resident
Earlier, only individuals and HUFs who were mandatorily required to have their accounts audited as per the tax laws were required to deduct tax at source (TDS) on contractual, professional and commission or brokerage payments under sections 194C, 194J and 194H of the Act, respectively.
Now, a new section 194M has been inserted whereby Individuals/HUFs (not covered under section 194C, 194H & 194J) shall deduct TDS @5% at the time of payment or credit in the books to any resident for:
A. Carrying out any work (including supply of labour for carrying out any work) as per contract
B. Commission (other than insurance commission) or brokerage
C. Fees for professional services
Here are the key takeaways under this new provision:
1. This section is applicable from 1st September 2019
2. Payment is made by individuals/HUFs (not covered under section 194C, 194H & 194J)
3. Payment made to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract, or, payment is in nature of commission or brokerage or fees for professional services
4. Both personal use and business use payments are covered under this section
5. TDS to be deducted and paid @ 5% of such payment
6. TDS to be deducted only if the total payment to payee exceeds fifty lakh rupees during the financial year
7. TDS to be deposited in Form No. 26QD within 30 days from the end of the month in which deduction is made
8. Deductor to furnish TDS certificate in Form No. 16D within 15 days of the due date of furnishing Form No. 26QD
9. Deductor is not required to obtain TAN under section 203A
Though this section was inserted as part of Finance (No. 2) Act, 2019 on 1st August 2019, income tax department took its own time to deploy the utility for payment of TDS on its website. TDS utility for Section 194M was deployed on 17th December 2019 and by that time, the due date for Form No. 26QD for the month of September and October have already passed and therefore CBDT extended the due dates to submit Form No. 26QD for these two months to 31st December 2019 thereby due date for furnishing Form No. 16D is extended to 15th January 2020.
Since this section will certainly bring new assessees in the TDS bracket, it is important to cover some related provisions of TDS as follows:
1. Lower/Nil rate of TDS is allowed for which the deductee can make an application (Form No.13) to the assessing officer under section 197 and provide this certificate to deductor at the time of credit/payment.
2. In case PAN of deductee is not available, then TDS will be deducted at 20% instead of 5%
3. If TDS is not deducted, the individual/HUF will be treated as assessee-in-default
4. Assessee-in-default to pay interest @ 1% per month of delay in deducting TDS
5. Higher interest @ 1.5% per month if the TDS has been deducted but not deposited on time
6. Penalty of an amount equal to tax not deducted or paid could be imposed under section 271C
7. The expenditure will be disallowed under section 40(a)(ia) if TDS provisions are not complied
8. However, the same expenditure will be allowed as deduction in subsequent year, if tax is deducted or deposited in subsequent year
While the government’s aim is to widen/deepen the tax base and to fix the loophole for possible tax evasion, it increases the financial accounting and tax compliances for individuals and HUFs impacted by Section 194M.