Sections 194C and 194J of the Income Tax Act do not require deduction of tax (TDS) for any person who does not have to pay tax under Sections 44AB(a) or (b). As a result, there were some instances in which builders, contractors, or specialists did not have to pay taxes on their payments. Through this article, let's explore this in depth.
A new Section 194M in TDS has been proposed in the 2019 budget to allow individuals or HUFs to deduct taxes on services obtained from local experts or contractors. Starting on September 1st, 2019, Section 194M will be in force.
Definition of Section 194M
To expand and develop a complex structure for income tax laws, and to make people more financially liable. If a payment is made for services received for personal use or if a payment is made for services for a business or profession under Section 44AB(a) or Section 44AB(b), the subject is exempt from a tax audit in accordance with Section 194C and Section 194J. The Government of India (GoI) added Section 194M to monitor high-value payments and transactions of contractors and professionals in response to numerous reports of misusing Section 194C and Section 194J.
When the account transactions are audited, Section 194M is relevant if the category of payments falls under Section 194C, 194H, or 194J. It does not apply to associations of people, bodies of people, or non-residents, and it does not include other services or payments like commission, interest, or salary.
According to Section 194M, if an individual or HUF uses contractual services or professional services and the total amount due exceeds Rs. 50 lakh during the current fiscal year, the payer must deduct TDS at 5%. Adding this component was to make HUF citizens more accountable for their financial accounting and tax compliance.
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 labor 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 about.
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.
Purpose of Amendment
- To widen existing IT regulations
- Increase financial liability
- To increase the scope of IT regulations
- To help with revenue generation for the government
- Reduce chances of tax evasion
- Removal of loopholes that existed in the IT-related laws
- Increase tax regularity
Reason for the Introduction of Section 194M
Section 194M was introduced in the Union Budget 2019 to widen the tax net and bring more people under the ambit of TDS. The section was introduced to ensure that individuals and HUFs (Hindu Undivided Families) who are not required to get their accounts audited but are making payments to contractors or professionals, deduct TDS at the source.
What is the meaning of ‘work’, ‘contract’, and ‘professional services’ in Section 194M?
In Section 194M, the term ‘work’ refers to any work carried out by a contractor, including supply of labour for carrying out any work. The term ‘contract’ refers to any contract for carrying out any work, including a contract for the supply of labour for carrying out any work.
| The term ‘professional services’ refers to any services rendered by a professional, including legal, medical, engineering, architectural, accounting, technical consultancy, or interior decoration services. |
Who has to Deduct TDS U/S 194M?
As per Section 194M, any individual or HUF (Hindu Undivided Family) who is not required to get their accounts audited under Section 44AB of the Income Tax Act, 1961 and is making payment to a contractor or professional exceeding Rs. 50 lakh in a financial year, is required to deduct TDS at the rate of 5%.
When Can one Deduct Tax at Source Under 194M?
TDS under Section 194M can be deducted at the time of credit of the sum to the account of the contractor or professional or at the time of payment, whichever is earlier. If the payment is made in advance, TDS should be deducted at the time of advance payment.
Rate of TDS Under Section 194M
The rate of TDS under Section 194M is 5% of the sum paid or credited to the contractor or professional. However, if the contractor or professional does not provide their PAN details, the TDS rate increases to 20%.
What is the Time Limit on Depositing TDS?
The TDS deducted under Section 194M must be deposited to the government within 30 days from the end of the month in which the TDS was deducted. The TDS amount can be deposited online through the government’s e-payment portal or through authorized banks. Once the TDS is deposited, the deductor must issue a TDS certificate in Form 16D to the contractor or professional within 15 days from the due date of depositing the TDS.
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Contractual Payment of More than ₹ 50 lakh/annum
The fees under this bracket include:
- Development of any land
- Construction of residential/commercial buildings
- Catering, decoration, and transportation services are availed during a ceremony such as a marriage
- Event Management fees and expenses
- Fee for lawyers and other legal staff
- Gardening and Masonry expenses
- Maintenance expenses for both assets and properties
- Healthcare and hospital bills
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Types of fee Payments exceeding ₹50 lakhs/annum
These include:
- Purchasing a home
- Car park dues
- Maintenance charges
- Electricity, gas, and water bills
- Club membership expenses
Rent Payments Exceeding ₹ 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 and deposit filing via Form 16C which, can also be submitted as proof of having paid the rent.
Procedural Changes As Per 194M
- To deposit TDS amounts that exceed ₹ 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 a 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:
- Section 194C
- Sec. 194H
- Section 194J
Section 194M Shall Not be Applicable For:
- Association of Persons
- Body of individuals
- NRIs
- Non-contract basis services
- Commissions
- Salary
- Interest earned or paid
Conclusion
The person who deducts tax under section 194M must give the payee a certificate in Form No. 16D within 15 days of the due date for submitting the challan cum statement in Form 26QD. Taxes that must be withheld by individuals or HUFs can be paid to the government using just their PAN. To deduct TDS, one does not require a tax deduction account number (TAN). The payments given to non-residents are not covered by this condition. In case you require more information about these legal processes or are seeking legal assistance, you should contact a legal expert like Vakilsearch since they are an Indian legal service provider.
FAQs
What is Section 194M in TDS?
Section 194M is a provision under the Income Tax Act, 1961, which requires individuals and HUFs (Hindu Undivided Families) who are not required to get their accounts audited, but are making payments to contractors or professionals exceeding Rs. 50 lakh in a financial year, to deduct TDS at the rate of 5%.
What is the difference between 194M and 194IA?
Section 194M and Section 194IA are both provisions under the Income Tax Act, 1961, related to TDS on payments made to residents. However, Section 194IA applies to TDS on payment of rent exceeding Rs. 50,000 per month, while Section 194M applies to TDS on payments made to contractors or professionals exceeding Rs. 50 lakh in a financial year.
What is Section 194IA?
Section 194IA is a provision under the Income Tax Act, 1961, which requires individuals and HUFs (Hindu Undivided Families) to deduct TDS at the rate of 5% on rent payments exceeding Rs. 50,000 per month. The TDS must be deducted at the time of credit of rent to the account of the payee or at the time of payment, whichever is earlier.
What is Section 194IB?
Section 194IB is a provision under the Income Tax Act, 1961, which requires individuals and HUFs (Hindu Undivided Families) who are not required to get their accounts audited, but are making payments to non-individuals (such as companies, firms and LLPs) exceeding Rs. 50,000 per month, to deduct TDS.
Is Section 194S taxable?
Yes, Section 194S is taxable. It is a provision under the Income Tax Act, 1961, which requires individuals and HUFs (Hindu Undivided Families) to deduct TDS at the rate of 1% on payment of any sum to a resident person for winning from lotteries, crossword puzzles, card games, and other games of any sort.
Who is required to deduct TDS under Section 194M?
As per Section 194M, any individual or HUF (Hindu Undivided Family) who is not required to get their accounts audited under Section 44AB of the Income Tax Act, 1961, and is making payment to a resident contractor or professional exceeding Rs. 50 lakh in a financial year, is required to deduct TDS at the rate of 5%.
What are the specified payments under Section 194M?
The specified payments under Section 194M are payments made to a resident contractor or professional for carrying out any work, including supply of labour for carrying out any work, or for rendering any professional services, such as legal, medical, engineering, architectural, accounting, technical consultancy, or interior decoration services.
What is the TDS rate under Section 194M?
The TDS rate under Section 194M is 5% of the sum paid or credited to the contractor or professional. However, if the contractor or professional does not provide their PAN details, the TDS rate increases to 20%.
Are there any exemptions or thresholds for TDS under Section 194IA?
Yes, there is an exemption threshold for TDS under Section 194IA. TDS is not required to be deducted if the annual rent paid is less than Rs. 6,00,000. However, if the rent paid exceeds Rs. 6,00,000 in a financial year, TDS must be deducted at the rate of 5%.
What are the consequences of not deducting TDS under these sections?
If TDS is not deducted under these sections, the deductor may be liable to pay interest, penalty, and other consequences as per the Income Tax Act, 1961. The interest rate for the delay in depositing TDS is 1.5% per month or part of the month, and the penalty for non-deduction or non-payment of TDS can be up to the amount of TDS. Additionally, the deductor may also face prosecution under the Income Tax Act, 1961.
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