Unraveling Section 194M: TDS on Payments to Resident Contractors

Section 194M of the Income Tax Act

Section 194M of the Income Tax Act is a crucial provision that extends the scope of tax deducted at source (TDS) on payments made to resident contractors and professionals. Introduced in 2019, this section aims to capture high-value transactions that were previously outside the ambit of TDS regulations.

What is Section 194M?

Section 194M mandates individuals and Hindu Undivided Families (HUFs) who are not required to get their accounts audited under Section 44AB to deduct TDS on payments made to resident contractors and professionals exceeding ₹50 lakh in a financial year.

The key aspects of Section 194M are:

• Applicable Payments: This section covers payments made for carrying out any work, providing professional services, or by way of commission or brokerage.
• Threshold Limit: TDS is applicable if the aggregate of such payments exceeds ₹50 lakh in a financial year.
• TDS Rate: The TDS rate is 5% of the payment amount. If the payee's PAN is not provided, the rate is 20%.
• Time of TDS Deduction: TDS must be deducted at the time of credit of the amount or at the time of payment, whichever is earlier.

Reasons for Introduction of Section 194M

Prior to the introduction of Section 194M, individuals and HUFs not subject to tax audits were not required to deduct TDS on payments made to resident contractors and professionals. This created a gap in the tax framework, as significant financial transactions could avoid formal tax scrutiny.

The rationale behind Section 194M is to ensure a more inclusive mechanism for tax compliance, especially with the expansion of the economy and an increase in high-value transactions by non-audited entities.

Compliance Requirements for Payers

Individuals and HUFs liable under Section 194M must adhere to the following compliance requirements:

• Deduct TDS: Deduct TDS at the applicable rate (5% or 20%) at the time of credit or payment, whichever is earlier.
• Obtain Payee's PAN: Collect and verify the permanent account number (PAN) of the payee.
• File TDS Returns: File quarterly TDS returns in Form 26QD within the due dates.
• Issue TDS Certificates: Download and issue TDS certificates in Form 16D to the payees within 15 days of the due date for filing Form 26QD.

Compliance Requirements for Payees

Payees receiving payments subject to Section 194M TDS must:

• Provide PAN: Furnish their PAN to the payer to ensure accurate TDS reporting.
• Verify TDS in Form 26AS: Check the TDS details in their annual tax statement (Form 26AS).
• Obtain TDS Certificates: Insist on receiving the TDS certificate (Form 16D) from the payer.
• Apply for Lower TDS: Apply to the Assessing Officer under Section 197 to obtain a lower or nil TDS certificate, if eligible.

In conclusion

Section 194M is a significant addition to the Income Tax Act, aimed at expanding the tax base and ensuring compliance for high-value transactions involving resident contractors and professionals. Adherence to the compliance requirements by both payers and payees is crucial to avoid any adverse consequences.

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