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Implications of Newly Introduced Section 194M

Siddharth Gambhir
29 Jul, 2019 29 Jul, 2019
section 194M

A new section 194M is inserted in the Finance Bill 2019 in the Union Budget 2019 to avoid tax evasion. This section has been inserted in case of transaction of personal nature related to contractors and professionals. This section also seeks to avoid tax evasion in cases when business or profession payments are made by an individual or HUF to resident individuals. In this blog, we will discuss this newly introduction Section 194M in detail;

Discussions Made

  1. Meaning of Section 194M.
  2. Why Section 194M is inserted?
  3. Meaning of ‘work’, ‘contract’ and professional services.
  4. The person is responsible for deduction of tax under section 194M
  5. When Tax is to be deducted under section 194M?
  6. Rate of Tax Deduction?
  7. Time limit to make the payment.

Meaning of Section 194M

  • The tax has to be deducted by an individual and/or Hindu undivided family under Section 194M. Also, they are not required to audit their books of accounts. The audit is mandatory if total turnover exceeds Rs 1 Crore in case of business and receipt exceeds Rs 50 Lakhs in case of Profession.
  • It is applicable when payment of Rs 50 lakhs or more is made to the resident individual who carries contractual work or provides any professional service.
  • In case audit of Books of accounts is mandatory, they need to deduct TDS under section 194M but regular provisions of section 194 C and 194 J will apply. If they are required to get Books of Accounts audited, TDS deduction is applicable as per Section 194C and 194J.
  • No requirement to obtain TAN for deduction of TDS under section 194M. Tax can be paid by quoting PAN only.
  • In case payments are made to Non-residents, such payment shall not be covered under section 194M.
READ  Tax Implication of ‘Income and Expenditure’ before the Commencement of Business

Also, Read: How to Change GST Registration details of a business.

Why section 194M is inserted?

  • To avoid the scope of Tax Evasion in case of payments of personal nature to contractor and professional, this section has been introduced.
  • Earlier when payments were made by Individuals or HUF who were not subjected to an audit, no Tax deduction was not made. Also when payments were made by resident individuals for their personal use, tax deduction was not made.

Therefore to avoid tax evasion related to the above-mentioned transactions, this section has been introduced.

Meaning of ‘Work’, ‘Contract’, and ‘Professional Services’

Work: The expression, “work” in this section would include:

  • Advertising
  • Broadcasting and telecasting including production of programs for such broadcasting or telecasting.
  • Carriage of goods and passengers by any mode of transportation, other than railways.
  • Catering.
  • Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. But does not include manufacturing or supplying a product according to the requirements or specifications of a customer by using material purchased from a person, other than such a customer.

Professional services: The phrase, professional services in this section would include:

  • Professional fees
  • Fees for technical services
  • Remuneration paid to directors excluding salary (For example, sitting fees to attend board meetings)
  • Royalty
  • Payments in the nature of non-compete fees (i.e., fees paid to not carry on any business or profession for a specified time and within certain geographical boundaries) or fees paid to not share any technical knowledge or know-how.

Contract: This expression includes sub-contract.

Person Responsible for Deduction of Tax under section 194M

  • The person (Individual or HUF) making the payment to a resident individual for contract work or professional service received has to deduct tax under section 194M.
  • The rate of TDS under this section is 5%.
  • The effective date of applicability of this section is 1st September 2019. In case the contract is entered before this date and payment are made after 1st September 2019, the tax will be deducted provided payment exceeds Rs 50Lakhs.
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When Tax is to be deducted under Section 194M?

TDS is required to be deducted earlier of:

  • When the credit of amount is made in the books or at the time of credit of the amount.
  • When payment is made by cash or cheque or draft.

Rate of Tax Deduction

As mentioned above, Tax will be deducted at the rate of 5% in case the payment in a financial year exceeds Rs 50 Lakhs.

In case NO PAN is provided by the deductee, rate of TDS will be 20%

Time Limit to make the Payment of Tax Deducted

  • TDS amount will be paid on the date of payment in case of payment by or on behalf of the Government.
  • In case of any other person than Government:

The TDS is required to be paid:

  1. If payment is made in March – on or before 30th April i.e. April 30 of Next month.
  2. If payment is made in any other month – on or before 7th of the next month in which the deduction is made.

Also, Read: What are The Provisions of Audit Under GST.

Conclusion

Therefore with the insertion of Section 194M, an effort is made by the government to erase the scope of tax evasion. Transactions of personal nature related to contract or professional service will come under scanner now.  

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