TDS on payment to resident contractors and professionals – Section 194M

Last Updated at: April 07, 2020
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Latest Update

A new law has come into effect from September 1st, 2019.

From September 1, 2019, an individual or HUF paying any sum to a contractor or a professional or commission or brokerage more than Rs 50 lakh in a financial year would be required to deduct tax at source (TDS).

TDS On Payment To Resident Contractors And Professionals - Section 194M

As per rules laid down in Section 194C and Section 194J of the Income Tax Act, any individual who didn’t have to pay tax as per Sections 44AB(a,b) was not liable to deduct tax (TDS) for the same. Hence, no tax was necessary for payments which were made to builders, contractors or professionals in some instances.

These included personal expenses and money received for business activities which were exempt from Sections 44AB(a and b). Therefore, it gave several contractors and professionals a loophole to avoid paying tax and get away with it quickly. The new Union Budget, which was announced on July 5th has decided to stop this practice once and for all. A new Section named 194M has been charted to take care of this scope for tax evasion. Here’s a look at everything you need to know about 194C.

Amendment Proposed

Section 194M will make it legal to levy a 5% TDS on amounts accumulated in a year for contractual work, which includes both supplying labour and undertaking projects. This will be made mandatory for every individual and HUF, excluding only ones who are eligible for laws mentioned in Section 194 C&J.

The 5% tax will be levied if financial transactions cross a Rs 50 lakh limit. However, to make it easier for such professionals, the Centre has decided that the payment of this TDS may be made via PAN. Thereby, such contractors will not have to create a TAN for themselves.

Definitions related to 194M

To further clarify things related to the new amendment, here are specific descriptions that you need to be clear.

    • The word ‘contract’ will have the same definition that it holds in Section 194C, clause 3.
    • The term ‘professional services’ will also retain the meaning it was given in Section 194J, clause a.
    • Similarly, ‘work’ will continue to hold the same meaning that it did when it was defined in Section 194C, clause 4.

Start Your Tax Return

Purpose of Amendment

  1. To widen existing IT regulations
  2. Increase financial liability
  3. To increase the scope of IT regulations
  4. To help with revenue generation for the government
  5. Reduce chances of tax evasion
  6. Removal of loopholes that existed in the IT-related laws
  7. Increase tax regularity

 

Payments Included in Section 194M

Contractual payment more than Rs. 50 lakh/annum

The fees under this bracket include:

  1. Development of any land
  2. Construction of residential/commercial buildings
  3. Catering, decoration and transportation services availed during a ceremony such as marriage
  4. Event Management fees and expenses
  5. Fee for lawyers and other legal staff
  6. Gardening and Masonry expenses
  7. Maintenance expenses for both assets and properties
  8. Healthcare and hospital bills

Types of fee Payments exceeding Rs 50 lakhs/annum

These include:

  • Purchasing a home
  • Car park dues
  • Maintenance charges
  • Electricity, gas and water bills
  • Club membership expenses
Rent payment exceeding Rs 50,000/month

The penalty if the tenant does not pay 5% TDS, is 1% interest on rent every month, which if left unpaid, will increase to 1.5%. Tenants will have to deposit TDS via Form 26QC, deposit filing via Form 16C which, can also be submitted as a proof of having paid the rent.

Procedural Changes as per 194M

  • To deposit TDS amounts that exceed Rs 50,000 per month, Form 26QC must be submitted.
  • To deposit TDS to transfer any immovable property worth more than 50 lacs, Form 26QB will be mandatory. This cannot include agricultural land. The TDS should be equipped in Form 16B and filed at least by the 15th day of filing Form 26QB.
  • 194M will also require challan-cum-statement for the deposition of TDS.
  • If liability pleads no reduction of tax,  the payee can ask the Assessing Officer to issue certificate signifying lower TDS.
  • Due dates for the deposition of tax shall remain the same.
  • Section 194M will be regarding TDS payments that fall under the following categories:
  1. Section 194C
  2. Sec. 194H
  3. Section 194J

Section 194M shall not be applicable for:

  1. Association of Persons
  2. Body of individuals
  3. NRIs
  4. Non-contract basis services
  5. Commissions
  6. Salary
  7. Interest earned or paid
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TDS on payment to resident contractors and professionals – Section 194M

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As per rules laid down in Section 194C and Section 194J of the Income Tax Act, any individual who didn’t have to pay tax as per Sections 44AB(a,b) was not liable to deduct tax (TDS) for the same. Hence, no tax was necessary for payments which were made to builders, contractors or professionals in some instances.

These included personal expenses and money received for business activities which were exempt from Sections 44AB(a and b). Therefore, it gave several contractors and professionals a loophole to avoid paying tax and get away with it quickly. The new Union Budget, which was announced on July 5th has decided to stop this practice once and for all. A new Section named 194M has been charted to take care of this scope for tax evasion. Here’s a look at everything you need to know about 194C.

Amendment Proposed

Section 194M will make it legal to levy a 5% TDS on amounts accumulated in a year for contractual work, which includes both supplying labour and undertaking projects. This will be made mandatory for every individual and HUF, excluding only ones who are eligible for laws mentioned in Section 194 C&J.

The 5% tax will be levied if financial transactions cross a Rs 50 lakh limit. However, to make it easier for such professionals, the Centre has decided that the payment of this TDS may be made via PAN. Thereby, such contractors will not have to create a TAN for themselves.

Definitions related to 194M

To further clarify things related to the new amendment, here are specific descriptions that you need to be clear.

    • The word ‘contract’ will have the same definition that it holds in Section 194C, clause 3.
    • The term ‘professional services’ will also retain the meaning it was given in Section 194J, clause a.
    • Similarly, ‘work’ will continue to hold the same meaning that it did when it was defined in Section 194C, clause 4.

Start Your Tax Return

Purpose of Amendment

  1. To widen existing IT regulations
  2. Increase financial liability
  3. To increase the scope of IT regulations
  4. To help with revenue generation for the government
  5. Reduce chances of tax evasion
  6. Removal of loopholes that existed in the IT-related laws
  7. Increase tax regularity

 

Payments Included in Section 194M

Contractual payment more than Rs. 50 lakh/annum

The fees under this bracket include:

  1. Development of any land
  2. Construction of residential/commercial buildings
  3. Catering, decoration and transportation services availed during a ceremony such as marriage
  4. Event Management fees and expenses
  5. Fee for lawyers and other legal staff
  6. Gardening and Masonry expenses
  7. Maintenance expenses for both assets and properties
  8. Healthcare and hospital bills

Types of fee Payments exceeding Rs 50 lakhs/annum

These include:

  • Purchasing a home
  • Car park dues
  • Maintenance charges
  • Electricity, gas and water bills
  • Club membership expenses
Rent payment exceeding Rs 50,000/month

The penalty if the tenant does not pay 5% TDS, is 1% interest on rent every month, which if left unpaid, will increase to 1.5%. Tenants will have to deposit TDS via Form 26QC, deposit filing via Form 16C which, can also be submitted as a proof of having paid the rent.

Procedural Changes as per 194M

  • To deposit TDS amounts that exceed Rs 50,000 per month, Form 26QC must be submitted.
  • To deposit TDS to transfer any immovable property worth more than 50 lacs, Form 26QB will be mandatory. This cannot include agricultural land. The TDS should be equipped in Form 16B and filed at least by the 15th day of filing Form 26QB.
  • 194M will also require challan-cum-statement for the deposition of TDS.
  • If liability pleads no reduction of tax,  the payee can ask the Assessing Officer to issue certificate signifying lower TDS.
  • Due dates for the deposition of tax shall remain the same.
  • Section 194M will be regarding TDS payments that fall under the following categories:
  1. Section 194C
  2. Sec. 194H
  3. Section 194J

Section 194M shall not be applicable for:

  1. Association of Persons
  2. Body of individuals
  3. NRIs
  4. Non-contract basis services
  5. Commissions
  6. Salary
  7. Interest earned or paid
0

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A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.