Section 194M: TDS in Relation to Contract Services and Professional Services

Budget Introduction

 In every new budget, the government makes certain amendments in the present law to pull out the loophole or make certain additions in the law with the objective to increase the tax revenue in a transparent manner. With the view of the above, In Budget, the 2019 government has proposed a new section 194 M in the chapter of deduction of tax at source under Income Tax act, 1961. Here also, the objective of the government to bring this section is to remove the loophole which was there before. 

Section 194 M

Applicability of Section 194M

This Section shall be applicable from 01.09.2019.

Meaning of Section 194M

This section provides that 

  • Every Individual or HUF (Other than those people who are liable for the deduction of TDS under section 194C and 194J) 
  • Shall deduct the TDS at the rate of 5% on the sum, or the aggregate of sums, paid or credited in a year 
  • On account of contractual work or professional fees 
  • If such sum, or aggregate of such sums, exceeds fifty lakh rupees in a year.

Note: Individual or HUF shall deduct the TDS under section 194C or 194J, only when they were liable to get their accounts audited. Other than this case, all individual and HUF were required to deduct the TDS under section 194M if the payment were related to contractual work or Professional Fees.

In Simple words, This section shall not be applicable to the individual or HUF if they were required to deduct the TDS under section 194C or 194J.

Note: The meaning of contractual work and professional service under section 194M shall be the same as defined under section 194C and 194J.

Note: For the applicability of this section, the payee must be the individual.

Timing for the deduction of TDS under this section

 The Individual and HUF shall be liable to deduct the TDS at the earlier of the following:

  • When such sum has been credited or
  • At the time of the making of payment

Note: Once the TDS has been deducted then the individual and HUF shall be required to deposit such TDS within 7 days from the end of the month in which they had deducted the TDS under section 194M.

Reason to bring Section 194M in the Act

 If in relation to contractual services and professional services, deduction of TDS has already been specified under section 194C for contractual work and 194J for Professional fees, then why this section was introduced. 

Actually, before the application of this section, there was no liability on an individual or Hindu undivided family (HUF) to deduct TDS on any payment made to a resident contractor or professional when it is for personal use.

Also, if an individual or HUF is carrying on business or profession on which TAX Audit was not applicable then there was no obligation to them to deduct TDS on such payment to a resident, even if such payment is made for the purpose of business or profession. 

And due to this exemption, Individual and HUF were not required to deduct the TDS on the substantial amount in respect of contractual work or for professional service and it results in the loophole for possible tax evasion. 

Hence, to plug this loophole, the government has proposed this section and from 01.09.2019, Individual and HUF are now required to deduct the TDS on such Payments or a credited amount if such amount exceeds Rs.50 Lakhs during the year.

No need of Tax deduction Account Number (TAN)

However, It is also been taken care that this section is applicable for individual and HUF and it might be possible that they do not have the TAN number hence, in order to reduce the burden related to compliance of laws and regulations, it has been proposed that such individuals or HUFs shall be able to deposit such TDS using their Permanent Account Number (PAN) and they were not be required to obtain Tax deduction Account Number (TAN).

Case Studies

For better understanding, let’s understand it with some simple cases in which the payee is providing the contractual services or professional services to the payer:

S.No. Payer Payee Consideration Per Annum TDS U/s 194C/194J TDS U/s 194M Remarks
1 Individual/HUF Any Resident 5,00,000 🗴 The consideration amount is not more than Rs.50 Lakhs
2 Individual/HUF Any Resident 25,000 🗴 🗴 Section 194C/194J shall not be applicable since the consideration amount is within the limit for deduction of TDS
3 Individual/HUF Non Resident 52,00,000 🗴 🗴 In this case, the payee was Non-Resident, hence section 195 shall be applied for deduction of TDS
4 Individual/HUF Any Resident 52,00,000 🗴 With the assumption that such individual or HUF were not required to get audited their account, all condition of Section 194M are satisfied, hence the TDS shall be deducted under this section
5 Partnership Firm Any Resident 52,00,000 🗴 Since the payer is nor the individual neither the HUF, hence the TDS shall be deducted U/s 194C/194J and not under section 194M

Summary

Section 194M shall apply from 01.09.2019 when

Payer: Individual or HUF (Not covered under section 194C or 194J)

Payee: Any Resident

Services: Contractual work or professional services

Rate: 5% of the amount credited or payment

Consideration: More than Rs.50 Lakhs

Time: At the time of credit or payment, whichever is earlier. 

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