Section 194M of the Income Tax Act, 1961 is a provision that deals with Tax Deducted at Source (TDS) on payments made to resident contractors and professionals. It was introduced as a part of the 2019 Budget with the intention of ensuring tax compliance by deducting TDS on specific payments made to individuals and Hindu undivided families (HUFs) who are exempt from having their books of accounts audited.
The section is applicable if a resident person receives more than Rs. 50, 00,000 in a financial year for performing any contractual work or rendering professional services. A resident contractor or professional will receive 1% of the total payment as TDS under Section 194M. In contrast, the TDS rate would be 2% if the payee was running a call centre.
Aiming to improve tax compliance, especially in situations where payments were previously evading TDS because of specific exemptions, TDS Section 194M was introduced to broaden the scope of TDS. The government aims to bring more payments made to resident contractors and professionals under the tax net by deducting TDS at the rates set forth in this section. This reduces the possibility of tax evasion and fosters financial transaction transparency.
Section 194M of the Income Tax Act, 1961 mandates that individuals and HUFs withhold TDS from payments made to resident contractors and professionals when the total payment exceeds Rs. 50,00,000 in a financial year at a rate of 1% (or 2% for payees engaged in the call centre business). This clause was added to help with tax compliance and stop tax evasion on large payments for professional and contractual services.
Prior to the introduction of the 194M TDS Section, neither individuals nor HUFs were required to deduct TDS from payments made for either personal or business-related purposes. Only individuals or HUFs are required to do an audit of their books of accounts under section 44AB of the Income Tax Act, 1961 (Gross turnover from business exceeding Rs. 1 Cr or gross receipts exceeding Rs. 50 lakhs from the profession) are covered under Section 194C and 194J. As a result, there was room for tax evasion because a sizable portion of payments made for professional services and contract work were not subject to TDS. In order to resolve this problem, TDS 194M Section was introduced to make sure that TDS is taken out at a predetermined rate on payments that exceed the established threshold.
It is important to note that individuals and HUFs do not need to deduct tax at source under Section 194M if they are already doing so under Section 194C (TDS on payment to a contractor) and Section 194J (TDS on payment of professional fees).
When services are rendered to a resident contractor for personal use, Section 194M of the Finance Bill of 2019 allows for the tax to be deducted at source from any payments made by an individual or HUF to the resident contractor. Therefore, both personal and business-related payments are covered by this section.
Even when payments were made for business or professional purposes, individuals or HUFs operating a business or profession (who were not subject to an audit) did not deduct any tax at the source. Due to this exemption, a significant portion of payments made for professional services and contractual work were exempt from TDS, opening the door for tax evasion.
The term "work" in this section would refer to the following:
In this section, the following would be considered professional services:
According to the Union Budget 2019, on or after September 1, 2019, if anyone paying a resident more than Rs 50,00,000 annually for any work (including the supply of labour) must deduct TDS at a rate of 5%, under any contract or by way of fees for professional services rendered during the financial year.
If an individual or HUF needs to pay a resident for work on a contract they completed or any professional services they rendered, they must withhold tax at the source in accordance with section 194M.
TDS must be withheld at the time of crediting the amount or at the time of payment (whether the amount is paid in cash, when a cheque or draft is issued, or when it is paid using any other method), whichever is earlier basis.
TDS must only be withheld when a single sum, or in aggregate, exceeds fifty lakh rupees per year. However, it is suggested that these individuals or HUFs deposit the tax deducted using their PAN and not be required to obtain a TAN in order to compliance section 194M.
When payment is made by or on behalf of the Government
When payment is made other than by or on behalf of the Government
|The amount credited or payment made for the month other than March.||On or before the 7th of the subsequent month.|
|The amount credited or payment made for the month of March.||On or before the 30th of the subsequent month|
The person who has deducted tax under Section 194M, will be required to issue a TDS certificate to the deductee in Form 16D within 15 days from the due date of furnishing the challan cum statement in Form 26QD for TDS under Section 194 M.
The deductee may claim a TDS credit in their income tax return. Additionally, Form 26AS on the income tax department website contains information about the tax deducted in accordance with section 194M.
The person who has deducted tax under Section 194M, is required to submit TDS reports in accordance with Section 194M of the Income Tax Act. As a result, they must file a Challan- cum statement in Form 26QD within 30 days from the last day of the month in which TDS was deducted.
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