Section 194M – TDS on Payment to Resident Contractors and Professionals

What is section 194M?

Usually, the TDS provisions need to be complied with if any individual or HUF is engaged in business or any profession and the gross receipts are more than one crore and 50 lakh, respectively. However, individuals or HUFs need to comply with these provisions even if their gross receipts do not exceed the threshold mentioned above. And that’s where Section 194M comes into the spotlight. Section 194M applies if an individual or HUF makes a payment of more than 50 lakh in a financial year toward a resident individual for carrying out contractual work, brokerage/commission paid (not insurance commission), or for rendering professional service.

If individuals or HUFs have gross receipts from business or profession exceeding Rs. 1 crore or Rs. 50 lakhs, respectively, TDS deduction becomes applicable under Sections 194C, 194H, and 194J. However, individuals or HUFs required to deduct TDS under Section 194C (payment to contractors), Section 194H (commission or brokerage), or Section 194J (professional fees) are exempt from deducting tax at source under Section 194M.

Such individuals or HUFs can remit the tax to the government by quoting their PAN. They are not required to obtain a tax deduction account number (TAN) for this purpose.

Note: Payments made to non-residents are not covered under the provisions of Section 194M.

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Nature of payments under section 194M

The nature of payment under Section 194M is divided into three key parts, as mentioned below:

• Contract: The term "contract" is defined under Section 194C of the Income Tax Act.
• Commission or Brokerage: This is specified in Section 194H of the Income Tax Act.
• Professional Services: The meaning of professional services is provided in Section 194J of the Income Tax Act.
• Work: The term "work" is also explained under Section 194C of the Income Tax Act.

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Understanding the Definitions of ‘Work,’ ‘Contract,’ and ‘Professional Services’ Under Section 194M :

Payment to a resident contractor by an individual or HUF for carrying out work in the nature of personal purpose, and “work” here means:

• Advertising
• Broadcasting and telecasting (including the production of programs)
• Carriage of goods and passengers using any mode of transport (but not railways)
• Catering
• Manufacturing or supply of a product as per the customer’s specifications by using material purchased from him/her. But does not include manufacturing or supplying a product according to the specification of a customer by using material purchased from other than such customer

Payment to a resident professional for giving professional services by an individual or HUF for carrying out work in the nature of personal purpose and “professional services” here means :

• Fees for professional service,
• Fees for technical services,
• Remuneration or fee or commission to a director of a company (which is not liable to TDS u/s 192).
• Royalty
• Non-compete fees, which means payment made for not carrying out any business or profession

Payment to a resident individual or HUF by way of commission.

As per clause (iii) of section 194 C, the Contract shall include sub-contracts.

One point needs to be noted the insurance commission does not get covered under section 194M.

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What is the rate of TDS u/s 194M & when TDS is required to be deducted?

As per the provisions of this new section, TDS will be deducted at the rate of five percent (5%) if the aggregate amount of payment exceeds Rs. 50 Lakh in a particular financial year.

In case, PAN is not available, TDS will be deducted at the rate of twenty percent (20%).

TDS is required to be deducted at the time of:

• Credit of the amount.
• Payment by cash or by the issue of a cheque or draft.

whichever is earlier.

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Who is responsible for deducting TDS?

The following persons are liable to deduct TDS under this section :

1. Any individual or
2. HUF

If any payment is made to a resident contractor or a resident professional for carrying out any work in nature of personal purpose

If any payment is made to a resident by way of commission or brokerage by an individual or HUF who is not required to get their books of accounts audited.

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Some important points

• This section is not applicable to non-resident contractors.
• A lower TDS certificate can be submitted under this section.
• Quote PAN in place of TAN: The government has given relaxation under this section; individuals or HUF can deposit TDS to the government using PAN in place of TAN, and TAN is not required to be obtained.
• This section is applicable from 01 September 2019.

If the contract is entered before 01 September 2019 and payment is made after this date, TDS will be deducted subject to the amount of payments exceeding Rs. 50 lakh.

Example :
Lets say, a contract was entered on 05 July 2019, but payment was made on 05 September 2019 of Rs. 52 Lakh.
In the above case, TDS will be deducted on Rs. 52 Lakh @ 5%.

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