The Law and Procedure of TDS Payment Challan and Returns under section 194M of the Income Tax Act, 1961: The newly introduced section 194M in the Income Tax Act, 1961 requires an Individual to deduct tax or TDS on payments to contractors and professionals under certain circumstances. The tax so deducted shall be required to be paid to the central government by in Challan-cum statement Form No. 26QD and the deductor is also required to issue TDS Certificate in Form No. 16D in the prescribed manner.
Introduction
With effect from September 1, 2019, it has become mandatory for an individual or Hindu Undivided Family (HUF) to deduct tax at the rate of 5 percent on payments made to a contractor or a professional, totaling more than Rs. 50 lakh in a financial year.
It is also provided that such a person deducting tax shall be able to deposit TDS on the basis of his Permanent Account Number (PAN) only without requiring to obtain TAN.
Legal Provisions for TDS under section 194M
A new section 194M is introduced in the Income Tax Act, 1961 by the Finance (No. 2) Act, 2019 which reads as follows-
Payment of certain sums by certain individuals or Hindu undivided family.
194M. (1) Any person, being an individual or a Hindu undivided family (other than those who are required to deduct income-tax as per the provisions of section 194C, section 194H or section 194J) responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract, by way of commission (not being insurance commission referred to in section 194D) or brokerage or by way of fees for professional services during the financial year, shall, at the time of credit of such sum or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent of such sum as income-tax thereon:
Provided that no such deduction under this section shall be made if such sum or, as the case may be, aggregate of such sums, credited or paid to a resident during a financial year does not exceed fifty lakh rupees.
(2) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.
Explanation.—For the purposes of this section,—
(a) "contract" shall have the meaning assigned to it in clause (iii) of the Explanation to section 194C;
(b) "commission or brokerage" shall have the meaning assigned to it in clause (i) of the Explanation to section 194H;
(c) "professional services" shall have the meaning assigned to it in clause (a) of the Explanation to section 194J;
(d) "work" shall have the meaning assigned to it in clause (iv) of the Explanation to section 194C.
The 'Notes on Clauses' states that "Clause 46 of the Bill seeks to insert new sections 194M relating to the payment of certain sums by certain individuals or Hindu undivided family in the Income-tax Act.
Sub-section (1) of the proposed new section 194M seeks to provide for levy of tax deduction at source at the rate of five percent. on any sum, or aggregate of sums, paid by an individual or a Hindu undivided family (other than those who are required to deduct income-tax as per the provisions of section 194C or section 194J) to a resident for carrying out any work (including supply of labour for carrying out any work) or by way of fees for professional services at the time of credit to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.
The proviso to the said sub-section provides that no income tax referred to in sub-section (1) shall be deducted, if such sum or aggregate of such sums paid to a resident does not exceed fifty lakh rupees during the financial year.
Sub-section (2) of the proposed new section 194M seeks to provide that the provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.
The Explanation to the proposed new section also defines the expressions "contract", "professional services" and "work".
In simple words, it is proposed to insert a new provision making it obligatory for an individual or HUF, who is not subject to tax audit, to deduct tax at source at the rate of five percent, if the annual payment made to a contractor or professional exceeds Rs. 50 lakh. It is also proposed that a person deducting tax under this section shall be able to deposit TDS on the basis of the Permanent Account Number (PAN) only. It is also proposed to enable filing of an application for issue of a certificate for nil or lower rate of TDS."
The Memorandum Explaining the Provisions in the Finance (No. 2) Bill, 2019 explains section 194M in the following words-
At present, there is no liability on an individual or Hindu undivided family (HUF) to deduct tax at source on any payment made to a resident contractor or professional when it is for personal use. Further, if the individual or HUF is carrying on business or profession which is not subjected to tax-audit, there is no obligation to deduct tax at source on such payment to a resident, even if the payment is for the purpose of business or profession. Due to this exemption, substantial amount by way of payments made by individuals or HUFs in respect of contractual work or for professional service is escaping the levy of TDS, leaving a loophole for possible tax evasion.
To plug this loophole, it is proposed to insert a new section 194M in the Act to provide for levy of TDS at the rate of five per cent. on the sum, or the aggregate of sums, paid or credited in a year on account of contractual work or professional fees by an individual or a Hindu undivided family, not required to deduct tax at source under section 194C and 194J of the Act, if such sum, or aggregate of such sums, exceeds fifty lakh rupees in a year. However, in order to reduce the compliance burden, it is proposed that such individuals or HUFs shall be able to deposit the tax deducted using their Permanent Account Number (PAN) and shall not be required to obtain Tax deduction Account Number (TAN).
To plug this loophole, it is proposed to insert a new section 194M in the Act to provide for levy of TDS at the rate of five per cent. on the sum, or the aggregate of sums, paid or credited in a year on account of contractual work or professional fees by an individual or a Hindu undivided family, not required to deduct tax at source under section 194C and 194J of the Act, if such sum, or aggregate of such sums, exceeds fifty lakh rupees in a year. However, in order to reduce the compliance burden, it is proposed that such individuals or HUFs shall be able to deposit the tax deducted using their Permanent Account Number (PAN) and shall not be required to obtain Tax deduction Account Number (TAN).
This amendment will take effect from 1st September 2019.
Salient features of section 194M
The salient features of section 194M are as follows-
1. This provision is applicable only to an Individual or a HUF. Thus AoP, BoI, a Society, etc. are excluded.
2. This provision shall apply whether or not such an Individual or HUF has any business or not. Payments made for personal use is also covered. Thus it will even apply to a salaried individual.
3. An Individual or HUF who is subject to tax audit can't deduct TDS under this section.
4. This will apply only if the payment is made to a contractor, broker/agent and professional as defined in section 194C, section 194H or section 194J.
5. The payee must be a resident. This section will not apply if the payee is a non-resident. In that a case, section 195 will apply.
6. This provision shall apply if the payment to a single contractor or a single broker/agent or a single professional exceeds Rs. 50 Lakh in a financial year.
7. The rate of TDS is 5%. No surcharge or health and education cess is required to be added to the basic rate.
8. No TAN is required to be taken by the deductor. The deductor can deposit the TDS with his PAN.
9. This will cover cases where the payment is made to a contractor for carrying out any contractual work or to a professional for rendering any professional services. If the payment is made for any other matter, even to such a contractor or professional, such payments will not be subject to TDS.
To illustrate, suppose an Individual has paid Rs.45 lakh to a doctor in a financial year for rendering professional services to him or his family. Since the payment of Rs. 45 Lakh is within the limit of Rs. 50 Lakh, no TDS is required.
Suppose, in the same financial year, if the Individual pays Rs. 7 Lakh for purchasing the doctor's car, then also no TDS obligation arises even the payment is made for Rs. 52 Lakh in the financial year. This is because out of Rs. 52 Lakh, only Rs. 45 Lakh was paid for professional services and Rs. 7 Lakh was paid for not for professional services and hence, this payment of Rs. 7 Lakh is out of the purview of section 194M.
To illustrate, suppose an Individual has paid Rs.45 lakh to a doctor in a financial year for rendering professional services to him or his family. Since the payment of Rs. 45 Lakh is within the limit of Rs. 50 Lakh, no TDS is required.
Suppose, in the same financial year, if the Individual pays Rs. 7 Lakh for purchasing the doctor's car, then also no TDS obligation arises even the payment is made for Rs. 52 Lakh in the financial year. This is because out of Rs. 52 Lakh, only Rs. 45 Lakh was paid for professional services and Rs. 7 Lakh was paid for not for professional services and hence, this payment of Rs. 7 Lakh is out of the purview of section 194M.
10. The aggregate of the sum paid during a financial year to a single contractor or a single broker/agent or a single professional must exceed Rs. 50 Lakh to attract the provisions of this section. For example, if an Individual pays Rs. 25 Lakh to a professional for certain professional services in September 2019. since at this time the payment is less than Rs. 50 Lakh, no TDS is required under this section. Now again in February 2020, he makes a payment of Rs. 30 Lakhs to the same professional for professional services. In February, the aggregate payment exceeds Rs. 50 Lakh. Therefore, the individual shall deduct TDS @ 5% on Rs 55 Lakh in February 2020. The TDS amount comes to Rs. 2.75 Lakh. Therefore, the individual shall pay Rs. 27.25 Lakh to the professional in February after the deduction of TDS.
11. This provision shall come into effect from 1st September 2019. thus if any payment is made for any contractual work or professional services on or after 1st September 2019 then the Individual or HUF is required to deduct TDS therefrom. If the payment is made up to 31st August 2019 even for more than Rs. 50 Lakh, no tax is required to be deducted from such payments.
Section 104M intends to substitute section 194C, section 194H and section 194J on individuals and HUFs who are not business assessees. Section 194C, section 194H and section 194J applies to a business assessee; though it covers non-business assessees in certain cases excluding Individuals and HUFs.
Section 194C defines the term 'work' as -
but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.Section 104M intends to substitute section 194C, section 194H and section 194J on individuals and HUFs who are not business assessees. Section 194C, section 194H and section 194J applies to a business assessee; though it covers non-business assessees in certain cases excluding Individuals and HUFs.
Meaning of 'Contract' for section 194M
The explanation to section 194M states that the term 'contract' shall have the same meaning as assigned to it in clause(iii) of the Explanation to section 194C.
Section 194C defines the term contract as "contract" shall include sub-contract.
Therefore, any contract of work under a sub-contract shall also be subject to deduction of tax under section 194M.
It is clear from the language of section 194M that the provisions of TDS under this section shall apply to a contractor and a sub-contractor who are residents.
Payment to a non-resident contractor will come under the purview of section 195.
Meaning of 'Work' for section 194M
The explanation to section 194M states that the term 'work' shall have the same meaning as assigned to it in clause(iv) of the Explanation to section 194C.Section 194C defines the term 'work' as -
(iv) "work" shall include—
(a) advertising;
(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) carriage of goods or passengers by any mode of transport other than by railways;
(d) catering;
(e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer,
To understand the term 'work' and 'contract', it is necessary to read the Circular No. 681 dated 08.03.1994 issued by the CBDT for section 194C which shall equally apply to section 194M.
The said circular in para 7 has prescribed the following guidelines in regard to the applicability of the provisions of section 194C - in this case, section 194M -
(i) The provisions of section 194C shall apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, materials contracts and works contracts.
(ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).
(iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.
(iv) The provisions of section 194C would not apply in relation to payments made to banks for discounting bills, collecting/receiving payments through cheques/drafts, opening and negotiating letters of credit and transactions in negotiable instruments.
(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.
(vi) The provisions of this section will not cover contracts for sale of goods.
(a) Since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by the Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of this section.
(c) In State of Himachal Pradesh v. Associated Hotels of India Ltd. [1972] 29 STC 474, the Supreme Court observed that where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land, where the intention plainly is not to sell, the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt, whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above-mentioned case.
(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.
(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.
(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.
Note: In respect of section 194M, the threshold limit should be read as Rs. 50 lakh in place of Rs. 10,000.
(x) The percentage deduction prescribed in law is with reference to the amount of payment and not "income comprised in the payment". The person responsible for making payment, therefore, is not required to estimate the income comprised in the payment.
(xi) In a case where advance payments are made during the execution of a contract and such payments are to be adjusted at the time of final settlement of accounts, tax will have to be deducted at the time of making advance payments if the total payment is likely to exceed Rs. 10,000. (Rs. 50 Lakh in case of section 194M)
(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.
(xiii) Every contractor, other than an individual or a HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1 per cent. of such sum.
Para 8 of the aforesaid circular further states -
Para 8 of the aforesaid circular further states -
8. It may be noted that–
(i) The term "service contracts" would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income "A. Salaries" in Chapter IV of the Income-tax Act, 1961, shall not be covered by section 194C.
(ii) The term "transport contracts" would, in addition to contracts for transportation and loading/unloading of goods, also cover contracts for plying of buses, ferries, etc., along with staff (e.g., driver, conductor, cleaner, etc.). Reference in this regard is also invited to Board’s Circular No. 558, dated 28th March, 1990.
(iii) The term "materials contracts" in the context of section 194C would mean contracts for supply of materials where the principal contract is for work and labour and not a contract for sale of materials.
Further, CBDT vide its Circular No. 13/2006 dated 13.12.2006 clarified that the provisions of section 194C would apply in respect of a contract for supply of any article or thing as per prescribed specifications only if it is a contract for work and not a contract for sale as per the principles in this regard laid down in para 7(vi) of Circular No. 681, dated 8-3-1994.
For example, Mr. Rakesh is a salaried individual. He has purchased a new flat and furniture work is pending. For this purpose, he has purchased woods and ply of various kinds and make from a timber merchant worth Rs. 75 Lakh. He has engaged a carpenter to finish the furniture work for which he has paid Rs. 60 Lakh as labour charges.
In this case, no TDS is required from the payment made to the timber merchant even though the payment exceeds the threshold limit of Rs. 50 lakh. This is because section 194M does not apply to a contract for sale of goods.
In case of payment to the carpenter, since the payment is related to a labour contract and exceeds the threshold limit of Rs. 50 Lakh, tax is required to be deducted @ 5 per cent on Rs. 60 Lakh.
Consider a case, if the payment to the carpenter is only Rs. 40 Lakh, then no tax deduction is required even though it is a labour contract because the payment does not exceed the threshold limit of Rs. 50 Lakh.
Remember, the threshold limit is applicable on the aggregate of payments to the carpenter in a year even though the single payments are below Rs. 50 Lakh.
Applicability of section 194C in case of tickets sold by airlines and travel agents to customers:
CBDT in its Circular No. 713, dated 2-8-1995 clarified queries as to whether tax has to be deducted at source from payments to travel agents or the airlines for purchase of tickets for travel by air.
In para 3 and 4 of the even circular, it is stated as-
The matter has been examined by the Board. It is clarified that the provisions of section 194C do not apply to the payments made to the airlines or the travel agents for purchase of tickets for air travel of individuals. The provisions shall, however, apply when payments are made for chartering an aircraft for carriage of passengers of good.
The above clarification shall apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also.
The same principle shall apply in section 194M. If an individual pays for airline tickets, directly to the airline or to a travel agent, exceeding Rs. 50 lakh in a financial year then no TDS shall apply to such payments.
Contract for Services: A service contract also comes within the purview deduction of tax under section 194M. For example, a contract to render professional service is a service contract.
Certain professions are covered by section 194J. Those who are not covered by section 194J falls under section 194C. Section 194M covers both.
For example, a Chartered Accountant is considered as a 'professional' for section 194J but an 'Accountant' is not a professional. Any payment made to an accountant, who is not a professional Chartered Accountant, comes under the purview of section 194C.
However, for section 194M no such distinction is necessary as both are covered in one section and the rate of TDS is the same at 5 per cent.
Similarly, a fine-art artist is not defined as professional for section 194J. Any payment to such an artist is covered under section 194C.
However, for section 194M no such distinction is necessary as both the contracts - with a professional or a non-professional are covered in section 194M and the rate of TDS is the same at 5 per cent.
Immunity to transporters not available under section 194M
As stated, goods carriages by transporter is a 'contract' and are subject to TDS under section 194C as well as section 194M.
However, in the case of section 194C, immunity from the tax deduction is given to a transporter who owns 10 or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number to the payer. In such a case, the payer will not deduct TDS from the payments to such a transporter.
No such immunity is provided under section 194M. The Individual or HUF has to deduct TDS from the carriage charges being paid to such transporter if the payment exceeds Rs. 50 Lakh in a year.
Payment to the courier agencies: As per Circular No. 715 dated 8-8-1995, carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers. Consequently, section 194M would also apply.
Mode of payment: Section 194M is applicable if the conditions specified therein are satisfied irrespective of the mode of payment whether in cash or otherwise. The provisions shall be complied with even in case of payment by cheque, etc.
Meaning of 'commission or brokerage' for section 194M
Section 194M will apply to payments made by an Individual or a HUF for commission or brokerage paid to a person for any work done on his behalf.
The other person must act on behalf of the payer as an agent and the payer must act as a Principal.
The other person must act on behalf of the payer as an agent and the payer must act as a Principal.
As stated earlier, section 194M casts an obligation to an Individual or HUF who are otherwise not required to deduct tax under section 194C or section 194H or section 194J.
The Finance (No. 2) Bill,2019 only included two sections - 194C and 194J. Section 194H is inserted by the Finance (No. 2) Act, 2019.
The Finance (No. 2) Bill,2019 only included two sections - 194C and 194J. Section 194H is inserted by the Finance (No. 2) Act, 2019.
TDS on Commission and brokerage is covered by section 194H and not by section 194C or section 194J.
Clause (i) to the Explanation to section 194H, defines the term 'commission or brokerage' in inclusive manner. According to the said clause,
"Commission or Brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities;
Following are the essential elements of "commission or brokerage"-
1. Any payment shall qualify for "commission or brokerage" only if the same is paid to other person for doing an act on behalf of the payer. The relationship of principal and agent must be there.
2. The other person must render services to the payer.
3. The services must not be in the nature of professional service. This is irrelevant here since section 194M covers both the services under one roof.
4. The services rendered covers services for buying or selling of any goods, assets, article or things.
5. The goods or assets does not include securities. Securities includes shares, debentures, bonds, etc.
Thus brokerage paid for buying or selling of shares etc does not fall in the ambit of section 194M.
In other words, no tax is required to be deducted from brokerage paid to a share broker.
1. Any payment shall qualify for "commission or brokerage" only if the same is paid to other person for doing an act on behalf of the payer. The relationship of principal and agent must be there.
2. The other person must render services to the payer.
3. The services must not be in the nature of professional service. This is irrelevant here since section 194M covers both the services under one roof.
4. The services rendered covers services for buying or selling of any goods, assets, article or things.
5. The goods or assets does not include securities. Securities includes shares, debentures, bonds, etc.
Thus brokerage paid for buying or selling of shares etc does not fall in the ambit of section 194M.
In other words, no tax is required to be deducted from brokerage paid to a share broker.
Meaning of 'professional services' for section 194M
According to clause (a) to the Explanation to section 194J, the term 'professional services' means-
"services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section."
Following professions are covered u/s 194J of the Income Tax Act, 1961:-
1. Legal
2. Medical
3. Engineering
4. Architecture
5. Accountancy
6. Technical consultancy
7. Interior decoration
8. Other notified professionals:-
a) Authorized Representatives
b) Film Artists
c) Certain sports-activities related persons
d) Company Secretaries
e) Information technology
f) Certain Sports personnel (Sports Persons, Umpires and Referees, Coaches and Trainers, Team Physicians and Physiotherapists, Event Managers, Commentators, Anchors and Sports Columnists) vide Notification No. 88/2008 dated 21-08-2008
Due Date or Time Limit to Deposit TDS under section 194M
The tax deducted by an Individual or a HUF under section 194M from the payments made to a contractor or a professional shall be required to be deposited into the account of the central government within the prescribed time limit which is known as the 'due date' to deposit the TDS.
CBDT vide its Notification No. 98/2019 dated 18.11.2019 has amended the Income Tax Rules, 1962 to provide for 'due date' for depositing the TDS under section 194M into the account of the central government.
According to Rule 30(2C), any sum deducted under section 194M shall be paid to the credit of the Central Government within a period of thirty days from the end of the month in which the deduction is made and shall be accompanied by a challan-cum-statement in Form No. 26QD.
Hence, the tax deducted by a person in a month is required to be deposited by 30th day of the next month.
For example, if the tax is deducted under section 194M in the month of September 2019, the due date to deposit the TDS is 30th day of next month which is October 30, 2019.
Remember, though the due date is 30th October 2019, the deductor may deposit the TDS at any time on or before the due date. Say, the depositor may wish to deposit the TDS on 1st October itself.
Manner or Mode of payment of TDS under section 194M
Tax deducted or TDS under section 194M shall be mandatorily required to be deposited into the account of the central government within the due date electronically. In other words, TDS is required to be deposited by online/internet banking or Debit card only through NSDL web portal.(www.tin-nsdl.com)
Such online deposit of TDS shall be made by using the Challan-cum-Statement in Form 26QD. Payment of TDS on NSDL portal can be made without any registration.
Issue of TDS Certificate to the Deductee
The duty of deductor of TDS does not end on deposit of the TDS into the account of the central government.
After the deposit of the TDS, the deductor of TDS under section 194M must issue the TDS Certificate in Form 16D within 15 days from the due date of depositing the TDS into the account of the central government. [Rule 31(3C)].
The TDS certificate in Form 16D must be generated and downloaded online from the designated web portal.
The TDS certificate so issued in Form 16D shall contain the either manual or digital signature of the deductor.
For example, if the tax is deducted under section 194M in the month of September 2019, the due date to deposit the TDS is 30th day of next month which is October 30, 2019.
The due date for issue of TDS certificate is 15 days from the due date of deposit of TDS which falls on November 14, 2019. The TDS certificate in Form 16D must be issued (after generating and downloading from the designated web portal) within 14.11.2019 for the tax deducted in September 2019.
The due date is the last date by which the deductor must issue the TDS certificate to the deductee. the due date will remain same irrespective of the actual date of TDS deposit date.
For example, if the deductor deposits the TDS on 1st October 2019 the due date to issue the TDS certificate in Form 16D shall remain 14th November 2019.
The deductor may issue the certificate on any day on or before the deadline prescribed in the Rules.
To sum up, the position is as follows-
Obligations of
Deductor
|
Due Date or Time-Limit
|
Prescribed Forms
|
Deposit
of TDS into the account of the central government
|
Within
30 days of the next month
|
Form No. 26QD
|
Issue of
TDS certificates
|
Within
15 days of Due Date for deposit of TDS
|
Form No. 16D
|
The designated web portal to download TDS certificate in Form 16D is known as TRACES portal. (www.tdscpc.gov.in). For this purpose, the deductor needs to be registered himself on the portal and then download the certificates.
Requirement of Deductee's PAN
The deductor must obtain the PAN of the deductee or payee. As per section 206AA, if the deductee fails to provide a valid PAN to the deductor then deductor should deduct TDS at the rate of 20 per cent instead of 5 per cent prescribed in section 194M.
The deductor must ensure that the PAN provided to the deductor must be of the deductee i.e. of the same contractor or professional to whom he is making the payment beyond the threshold limit of Rs. 50 Lakh.
If the deductor fails to obtain the correct and valid PAN of the deductee, the deductor will be liable for short deduction of income-tax and all the provisions of the Act for short deduction of TDS will apply to the deductor.
For this purpose, the deductor shall ensure to get a copy of the PAN card of the deductee.
Consequences of delay in TDS deposit
If a person fails to deposit the TDS in due date then he is subject to pay -
a) Interest for delay in deposit of TDS within the due date
b) Penalty for delay in deposit of TDS within the due date
c) Prosecution for delay in deposit of TDS within the due date
a) Interest for delay in deposit of TDS
As stated earlier, the tax deducted from the payments to a contractor or a professional under section 194M shall be required to be deposited within 30 days of the next month, the deductor shall be liable to pay interest for delay in the deposit of TDS.
According to section 201(1A)(ii), if there is any delay in deposit of TDS then simple interest shall be payable @ 1.5 per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid.
Remember, the interest shall be payable from the month in which tax is deducted till the date of payment of TDS. In calculating the month, a part of the month is taken as a full month.
For example, if the tax is deducted under section 194M in the month of September 2019, the due date to deposit the TDS is 30th day of next month which is October 30, 2019.
If the tax is deposited on November 1, 2019, there is a delay of 3 (three) months from the month of September (in which tax is deducted) and November (the month in which tax is actually paid or deposited). Hence, the interest of 4.5 per cent ( 1.5% x 3 months) is payable by the deductor.
In other words, a single day delay will cost 4.5 per cent interest to the deductor.
Example showing the calculation of interest with a numerical example-
Mr Rakesh is a salaried individual. He has purchased a new flat and furniture work is pending. For this purpose, he has purchased woods and ply of various kinds and make from a timber merchant worth Rs. 75 Lakh. He has engaged a carpenter to finish the furniture work for which he has paid Rs. 60 Lakh as labour charges on 29.12.2019. He has deducted TDS of Rs. 3 Lakh u/s 194M from the payment to the carpenter. He has deposited the TDS through Form 26QD on 10th March 2020.
Calculate the amount of interest payable by Mr Rakesh.
Computation of interest
Computation of interest
Amount
of TDS
|
Rs. 3,00,000
|
Date of
deduction
|
29-12-2019
|
Due Date
of TDS deposit
|
30-01-2020
|
Actual
Date of Deposit
|
10-03-2020
|
Delay in
Period
(From Dec.’ 19 to Mar’ 20)
|
4 months
|
Rate of
Interest (p.m.)
|
1.5%
|
Amount
of Interest
(On TDS amount of Rs. 3,00,000 * 1.5% * 4
months)
|
Rs. 18,000
|
On 10.03.2020, Mr Rakesh has to deposit Rs. 3,18,000 through the challan including Rs. 18,000 interest.
b) Penalty for delay in deposit of TDS
Where a person after deducting the tax fails to deposit the tax or TDS into the account of the government then such a person is deemed to be an assessee in default in respect of such tax.
According to section 221, where a person is an assessee in default, he shall, in addition to the amount of the tax in arrears and the amount of interest payable, be liable to pay a penalty of such amount as may be directed by the Assessing Officer. However, the penalty amount cannot exceed the amount of tax in arrears.
Before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard.
Where the assessee proves to the satisfaction of the Assessing Officer that the default was for good and sufficient reasons, no penalty shall be levied under this section.
It is clarified that an assessee shall not cease to be liable to any penalty under this sub-section merely by reason of the fact that before the levy of such penalty he has paid the tax.
In the given example of Mr Rakesh, a maximum of Rs. 3,00,000 can be levied as a penalty. Remember, delay in payment or deposit of TDS even by a single day will make the deductor as assessee in default.
c) Prosecution for delay in deposit of TDS within the due date
According to section 276B, if a person fails to pay to the credit of the Central Government, the tax deducted at source as required under section 194M then he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.
Payment of TDS to the credit of central government after the due date is considered as a failure to pay the TDS hence prosecution may be launched against the deductor.
Not each and every case is taken for prosecution. Recently, CBDT has issued guidelines for identification and processing of cases to initiate prosecution in certain cases vide Circular No. 24/2019 dated 09.09.2019.
The synopsis of the guidelines related to default in payment of TDS is given below-
1. Normally, cases where the default amount of tax is less than Rs. 25 lakh shall not be taken for prosecution.
2. The delay in deposit should also be less than 60 days from the due date of payment of TDS. Thus, a two-month window or grace period is granted.
3. However, in exceptional cases like habitual defaulters prosecution may be initiated even if the amount is less than Rs. 25 Lakh and delay is less than 60 days.
The guidelines were issued to initiate prosecution in deserving cases without causing harassment to the honest tax payers for minor and procedural lapses.
According to section 221, where a person is an assessee in default, he shall, in addition to the amount of the tax in arrears and the amount of interest payable, be liable to pay a penalty of such amount as may be directed by the Assessing Officer. However, the penalty amount cannot exceed the amount of tax in arrears.
Before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard.
Where the assessee proves to the satisfaction of the Assessing Officer that the default was for good and sufficient reasons, no penalty shall be levied under this section.
It is clarified that an assessee shall not cease to be liable to any penalty under this sub-section merely by reason of the fact that before the levy of such penalty he has paid the tax.
In the given example of Mr Rakesh, a maximum of Rs. 3,00,000 can be levied as a penalty. Remember, delay in payment or deposit of TDS even by a single day will make the deductor as assessee in default.
c) Prosecution for delay in deposit of TDS within the due date
According to section 276B, if a person fails to pay to the credit of the Central Government, the tax deducted at source as required under section 194M then he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.
Payment of TDS to the credit of central government after the due date is considered as a failure to pay the TDS hence prosecution may be launched against the deductor.
Not each and every case is taken for prosecution. Recently, CBDT has issued guidelines for identification and processing of cases to initiate prosecution in certain cases vide Circular No. 24/2019 dated 09.09.2019.
The synopsis of the guidelines related to default in payment of TDS is given below-
1. Normally, cases where the default amount of tax is less than Rs. 25 lakh shall not be taken for prosecution.
2. The delay in deposit should also be less than 60 days from the due date of payment of TDS. Thus, a two-month window or grace period is granted.
3. However, in exceptional cases like habitual defaulters prosecution may be initiated even if the amount is less than Rs. 25 Lakh and delay is less than 60 days.
The guidelines were issued to initiate prosecution in deserving cases without causing harassment to the honest tax payers for minor and procedural lapses.
Consequences of Delay in issue of TDS Certificates
If a person fails to issue the TDS certificates within the prescribed time limit, then he shall be liable to pay a penalty to the government.
Penalty for the delay in issue of TDS certificates
Section 203 of the Income Tax Act, 1961 casts an obligation on the deductor to issue a TDS certificate to the deductee in respect of tax deducted at source.
As per Rule 31(3C), the deductor of TDS under section 194M must issue the TDS Certificate in Form 16D within 15 days from the due date of depositing the TDS into the account of the central government.
Failure to issue TDS certificates within the due date attracts penalty under the Income Tax Act, 1961.
According to section 272A(2)(g), failure to issue the TDS certificates within the due date will attract a penalty of Rs. 100 per day for each day of default.
Computation of interest payable for delay in deduction of tax
Since the tax is deducted on 10-03-2020 the due date to deposit the TDS will be 30-04-2020. Mr Rakesh should deposit Rs. 3,12,000 including interest of Rs. 12,000 through challan on or before 30-04-2020.
According to section 272A(2)(g), failure to issue the TDS certificates within the due date will attract a penalty of Rs. 100 per day for each day of default.
Consequences of non-deduction of TDS
If a person fails to deduct the TDS either in full or in part then he is subject to pay -
a) Interest for non-deduction or short deduction of TDS
b) Penalty for non-deduction or short deduction of TDS
a) Interest for non-deduction or short deduction of TDS
Where a person fails to deduct the whole or any part of the tax as required under section 194M, he shall be liable to pay simple interest @ 1 per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted.
In computing the period, any part of a month shall be taken as a full month.
This is provided in section 201(1A)(i) of the Income Tax Act, 1961.
In the above example. suppose Mr Rakesh fails to deduct the TDS on 29-12-2019 and deducts the TDS on 10-03-2020.
Calculate the amount of interest payable.
Where a person fails to deduct the whole or any part of the tax as required under section 194M, he shall be liable to pay simple interest @ 1 per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted.
In computing the period, any part of a month shall be taken as a full month.
This is provided in section 201(1A)(i) of the Income Tax Act, 1961.
In the above example. suppose Mr Rakesh fails to deduct the TDS on 29-12-2019 and deducts the TDS on 10-03-2020.
Calculate the amount of interest payable.
Computation of interest payable for delay in deduction of tax
Amount of TDS
|
Rs.
3,00,000
|
Date on which tax is deductible
|
29-12-2019
|
Date on which tax is actually
deducted
|
10-03-2020
|
Delay in Period
(From Dec.’ 19 to Mar’ 20)
|
4
months
|
Rate of Interest (p.m.)
|
1%
|
Amount of Interest
(On TDS amount of Rs. 3,00,000 * 1%
* 4 months)
|
Rs.
12,000
|
Since the tax is deducted on 10-03-2020 the due date to deposit the TDS will be 30-04-2020. Mr Rakesh should deposit Rs. 3,12,000 including interest of Rs. 12,000 through challan on or before 30-04-2020.
b) Penalty for non-deduction or short deduction of TDS
According to section 271C, if any person fails to deduct the whole or any part of the tax as required under section 194M then, such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid.
Hence, the penalty is equal to 100 per cent of the tax amount which the deductor has failed to deduct.
In the above example of Mr Rakesh, he will be liable to pay a penalty of Rs. 3,00,000 in addition to Tax and Interest of Rs. 3,12,000.
Any penalty order shall be imposed by the Joint Commissioner.
It must be remembered that the penalty is required to be paid by the deductor only after an order to impose the penalty is passed. A penalty order is preceded by a show-cause notice to the deductor and an opportunity of being heard is given to the deductor to put his contention about the reasons for his failure to deduct the TDS.
If the reasons are valid enough, the penalty may not be imposed.
It must be remembered that the penalty is required to be paid by the deductor only after an order to impose the penalty is passed. A penalty order is preceded by a show-cause notice to the deductor and an opportunity of being heard is given to the deductor to put his contention about the reasons for his failure to deduct the TDS.
If the reasons are valid enough, the penalty may not be imposed.
b) Prosecution for non-deduction or short deduction of TDS
It must be remembered that there is no provision for initiating any prosecution for non-deduction or short deduction of TDS.
The provisions related to prosecution prevails where there is deduction of tax and there is a failure on the part of the deductor to deposit the tax to the credit of the central government.
Can the payee request the payer not to deduct tax at source and to pay the amount without deduction of tax at source?
If the payee approaches the deductor and requests for non-deduction of tax or to deduct tax at a lower rate since his income will be lower or for any other reason, the deductor cannot entertain his request. The deductor cannot accept the request of the payee and is duty-bound to deduct the tax at the specified rate of 5 per cent.
There is no provision in the Act to accept Form No. 15G or Form No. 15H from the payee by the deductor in respect of deduction of tax under section 194M. Hence, the deductor cannot accept any Form 15G or Form 15H from the payeee.
However, section 197 is amended to include section 194M to qualify for obtaining lower or nil rate of TDS certificate. In this case, the payee will apply to his Assessing Officer for the issue of lower or Nil TDS certificate to the deductor with his (deductor's) TAN/PAN. On receipt of such certificate from the income-tax department, the deductor can only deduct the taxes at the rate specified in the certificate issued to the deductor u/s 197.
Only in this case, the deductor can deduct the tax under section 194M at a rate lower than the prescribed rate of 5 per cent which may be nil rate also.
An Important Update on Extension of Due Date
CBDT, in exercise of the powers conferred under Section 119 of The Act, extends the Due date for payment of tax deducted at source as per the provisions of Section 194M of the Act due to delay in deploying the utility for the payment of TDS on 17.12.2019 vide Circular No. 31/2019 dated 19.12.2019.
Considering this practical issue, the Due Date for payment of TDS and issue of TDS certificates has been extended as mentioned below-
a) Late Fees under section 234E
b) Penalty under section 271H
a) Late Fees under section 234E
Hence, the payment of TDS and submission of the TDS returns go simultaneously.
Any delay in deposit of TDS will also lead to delay in filing of TDS Returns.
As per section 234E, if the deductor fails to submit the TDS returns within the prescribed time limit, then late fees of Rs. 200 is payable for each day of default.
However, the total amount of late fees cannot exceed the tax amount.
In the above example, where Mr Rakesh has deposited the tax on 10-03-2020, there is a delay of 40 days. So Late fees u/s 234E @ Rs. 200 per day comes to Rs. 8,000 ( Rs. 200 * 40 days).
Since Tax amount is Rs. 3,00,000, the late fees u/s 234E is Rs. 8,000.
If the Tax amount is Rs. 6,000, then late fees u/s 234E cannot exceed Rs. 6,000, being the maximum amount of tax.
b) Penalty under section 271H
Penalty under this section shall be imposed by the Assessing Officer.
The minimum amount of penalty is Rs. 10,000 and the maximum amount is Rs. 1,00,000. Therefore, the penalty under section 271H may range from Rs. 10,000 to Rs. 1,00,000.
In case (a) above, no penalty will be imposed if the following conditions are satisfied-
1. The deductor has paid the TDS or tax to the credit of the central government.
2. The tax was paid along with the interest and late fees u/s 234E.
3. The TDS return is filed before the expiry of a period of one year from the prescribed due date.
Please note that the immunity is given only for case (a) where the TDS return is filed belatedly.
It may be noted that the relief from the penalty is not available for the case (b) where the deductor furnishes incorrect information in the TDS returns.
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There is no provision in the Act to accept Form No. 15G or Form No. 15H from the payee by the deductor in respect of deduction of tax under section 194M. Hence, the deductor cannot accept any Form 15G or Form 15H from the payeee.
However, section 197 is amended to include section 194M to qualify for obtaining lower or nil rate of TDS certificate. In this case, the payee will apply to his Assessing Officer for the issue of lower or Nil TDS certificate to the deductor with his (deductor's) TAN/PAN. On receipt of such certificate from the income-tax department, the deductor can only deduct the taxes at the rate specified in the certificate issued to the deductor u/s 197.
Only in this case, the deductor can deduct the tax under section 194M at a rate lower than the prescribed rate of 5 per cent which may be nil rate also.
An Important Update on Extension of Due Date
CBDT, in exercise of the powers conferred under Section 119 of The Act, extends the Due date for payment of tax deducted at source as per the provisions of Section 194M of the Act due to delay in deploying the utility for the payment of TDS on 17.12.2019 vide Circular No. 31/2019 dated 19.12.2019.
Considering this practical issue, the Due Date for payment of TDS and issue of TDS certificates has been extended as mentioned below-
For
Tax Deducted in the month of September 2019 u/s 194M
|
For Payment of TDS by Form 26QD |
Extended
Up to 31.12.2019
|
For
Issue of TDS Certificates in Form 16D
|
Extended
up to 15.01.2020
|
|
For
Tax Deducted in the month of September 2019 u/s 194M
|
For Payment of TDS by Form 26QD |
Extended
Up to 31.12.2019
|
For
Issue of TDS Certificates in Form 16D
|
Extended
up to 15.01.2020
|
Consequences for Late Filing or non-filing of TDS Returns
For failure to file TDS returns or statement within the prescribed time limit attracts two nature of penalty-a) Late Fees under section 234E
b) Penalty under section 271H
a) Late Fees under section 234E
Remember, Form 26QD is a Challan-cum-Statement which means it is a challan as well as TDS Returns. Challans is used to pay the government tax etc. whereas returns (statement) is used to inform the government about the person with whom transactions were entered on which tax was deducted.
Hence, the payment of TDS and submission of the TDS returns go simultaneously.
Any delay in deposit of TDS will also lead to delay in filing of TDS Returns.
As per section 234E, if the deductor fails to submit the TDS returns within the prescribed time limit, then late fees of Rs. 200 is payable for each day of default.
However, the total amount of late fees cannot exceed the tax amount.
In the above example, where Mr Rakesh has deposited the tax on 10-03-2020, there is a delay of 40 days. So Late fees u/s 234E @ Rs. 200 per day comes to Rs. 8,000 ( Rs. 200 * 40 days).
Since Tax amount is Rs. 3,00,000, the late fees u/s 234E is Rs. 8,000.
If the Tax amount is Rs. 6,000, then late fees u/s 234E cannot exceed Rs. 6,000, being the maximum amount of tax.
b) Penalty under section 271H
Penalty under this section shall be imposed by the Assessing Officer.
According to section 271H, if a person-
(a) fails to furnish TDS returns within the prescribed time limit, or
(b) furnishes incorrect information in the TDS returns filed (whether timely or belated)
then he shall be liable to pay a penalty.
In case (a) above, no penalty will be imposed if the following conditions are satisfied-
1. The deductor has paid the TDS or tax to the credit of the central government.
2. The tax was paid along with the interest and late fees u/s 234E.
3. The TDS return is filed before the expiry of a period of one year from the prescribed due date.
Please note that the immunity is given only for case (a) where the TDS return is filed belatedly.
It may be noted that the relief from the penalty is not available for the case (b) where the deductor furnishes incorrect information in the TDS returns.
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