The Finance Minister presented the Union Budget for the Financial Year 2019-2020 on 5th July 2019 and on 1st 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 –

Type of payment Section under which TDS is deductible
Individual / HUF liable to get their accounts audited Individual / HUF not liable to get their accounts audited
Carrying out any work (which includes supplying of labor for carrying out any work) in pursuance of any contract Section 194C Section 194M
Commissioner or brokerage Section 194H Section 194M
Fees for professional service Section 194J Section 194M

♠ 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 1st September 2019.

Also Read-

TCS – Tax Collection at Source – A Complete Guide
TDS Rate Chart for Financial Year 2019-2020
Section 192 – TDS on Salary
Section 192A – TDS on Premature withdrawal from EPF
Section 193: TDS on Interest on Securities
Section 194 – TDS on dividend
Section 194A: TDS on interest other than interest on securities
Section 194B and Section 194BB – TDS
Section 194C – TDS on Contractors
Section 194D – TDS on insurance commission
Section 194DA – TDS in respect of Life Insurance Policy
Section 194E – TDS on payment to Non-resident Sportsmen or Sports Association
TDS under Section 194EE and Section 194F
Section 194G TDS on Commission on Sale of Lottery Tickets
Section 194H – TDS on Commission or Brokerage
Section 194I of Income Tax Act, 1961 – TDS on Rent
Section 194IA TDS on transfer of immovable property
Section 194IB – TDS on Rent paid by Individual / HUF
Section 194LA: Payment of Compensation on acquisition of certain immovable property
TDS under Section 194LB, 194LBA, 194LBB and 194LBC
Section 194LC: TDS on income by way of interest from an Indian Company or a business trust
Section 194LD TDS on income by way of interest on certain bonds and Government Securities
Section 194J TDS on Fees for Professional or Technical Services
Section 194N – TDS on Cash Withdrawals
Section 195 TDS on payment of any other sum to a non-resident

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