Under the provisions of Section 194C and Section 194J, an individual or HUF is not liable to pay tax if they are not liable to get the tax audited under Section 44AB(a)/44AB(b).
So, an individual or HUF need not get the tax deducted from the payment which they made to a contractor or professional for the services received exclusively for personal benefits and for the business/profession if the payer is not subject to tax audit under section 44AB(a)/(b).
Latest Update
- Budget 2024: Payment of certain sums by certain individuals or Hindu undivided family under section 194M is reduced from 5% to 2% effective from October 1, 2024.
This exemption led to substantial payments, which were made by individuals or HUFs for contractual work or professional services, out of the TDS ambit which further led to the loophole for tax evasion.
There are various revisions held in the existing section of the income tax laws by the Budget 2019. Including the revisions, the same budget would indeed launch certain new sections for TDS like 194M and 194N.
- 194M – TDS on payment to resident contractors and professionals
- 194N – TDS on cash withdrawal in excess of Rs 1 Crore
A Brief Description of TDS 194-M?
Prior to the creation of this provision, neither an individual nor a HUF was required to withhold tax at the source in the aforementioned circumstance.
Additionally, even when the payment was made for commercial or professional purposes, individuals or HUFs carrying on a company or profession (not subject to any audit) were not deducting any tax at source.
A significant portion of payments made for contractual services and professional fees avoid the requirement of Tax Deducted at Source (TDS) due to this exemption, leading to a potential for evading taxes.
Who Must Deduct TDS U/S 194M?
Any individual or HUF who must pay a resident for work accomplished under a contract or any professional service must deduct tax at the source in accordance with Section 194M.
Any individual or HUF who pays any sum to the resident under the Union Budget 2019 to perform any work containing the labour supply beneath any contract or through the way of fees for the professional services furnished in the fiscal year of more than Rs 50,00,000 in a year would be required to deduct the 5% TDS. For the transactions from 14 May 2020, there is a 3.75% TDS rate till March 31, 2021.
Wef 1st September 2019 the same section would be applicable. Even if the contract was in place before this date, TDS would be levied from any payment made after that date if it exceeds Rs 50,00,000.
It should be noted that it excludes the individuals who need to get the tax deducted as per the provisions of section 194C or section 194J. However, to abbreviate the compliance burden, an amendment is proposed which states that such individuals or HUFs can deposit the tax deducted using their PAN and will not have to mandatorily obtain the TAN.
Meaning of Work, Contract and Professional Services for the Purpose of this Section
Cause (iii) and Clause (iv) of the Explanation to Section 194C define the meaning of “contract” and “work” for the purpose of TDS deduction, while clause (a) of the Explanation to section 194J defines the meaning of professional services for the same purpose.
Work: The expression, “work” in this section would contain:
- Advertising
- Broadcasting and telecasting comprise the production of programs for broadcasting or telecasting
- Transporting goods and passengers besides railways, using any means of conveyance
- Catering
- Employing materials acquired from a client to produce or provide a good in accordance with their requirements or specifications. However, it excludes producing or supplying a product utilizing raw materials bought from someone other than the customer in question in accordance with their needs or specifications
Professional services: The phrase, professional services in this section comprises of:
- Professional fees
- Fees for technical services
- Remuneration paid to directors other than salary (For instance, sitting fees to attend board meetings)
- Royalty
- Compensation for refraining from engaging in any business or profession for a specific duration and within particular geographical limits, or remuneration for withholding technical knowledge and expertise
Contract: Sub-contract would have contained in this expression.
Time Period of a Person Can Deduct Tax U/S 194M?
On the earlier of the mentioned below dates, the TDS amount shall get deducted.
- During credit of the amount
- During the payment via cash or through issuing a cheque or draft
Procedural Aspects of TDS Section 194M
Let’s have a look at the procedural aspects of TDS section 194M given below:
Challan-cum-statement for TDS Payment u/s 194M
Under section 194IB, there is challan-cum-statement in Form 26QC for the payment of TDS by individual or HUF paying a monthly rent of more than Rs 50,000.
Under section 194IA, there is challan-cum-statement in Form 26QB for the payment of TDS by a person paying consideration for the transfer of immovable property of 50 lacs or above.
Similarly, Govt. may prescribe challan-cum-statement for the payment of TDS under the new section 194M.
Nil / Lower TDS Certificate Under Section TDS 194M
Under Section 197, a deductee can apply for nil or lower TDS certificate if his estimated tax liability approves no or tax deduction. The scope of Section 197 has been extended to this provision. So a payee can make an appeal to the Assessing Officer regarding obtaining such certificate for the amount paid or payable which are subject to TDS u/s 194M.
TDS Rate Under Section 194M
If the total amount filed to the resident is more than Rs 50,00,000 for the specific fiscal year then there will be a 5% TDS deduction under 194M. From 14th May 2020, the rate of TDS will be 3.75% for the transactions till March 31, 2021.
There will be a 20% TDS deduction when the PAN of the deductee is not available.
Due Date Under TDS Section 194M
Under section 194M, no due date has been prescribed separately for depositing the tax deducted. So, the due dates for the TDS payment under the new Section 194M shall remain the same, i.e., the timeframe of 30 days from the end of the month in which tax is deducted.
Note: Liability for tax audit and purpose of maying payment plays an insignificant role in TDS payment under section 194M
Tax Deducted Certificate U/S 194M
Within 15 days after the deadline for submitting the challan cum statement in Form 26QD, the person who deducts tax pursuant to Section 194M shall provide the payee with a certificate under Form No. 16D.
