Section 194M – Rationale & Brief Analysis

A new section 194M has been proposed in the Budget of 2019 wherein an individual or an HUF (those not covered in TDS), is now required to deduct TDS @ 5% for payments exceeding Rs. 50 Lakhs in a year to a resident contractor or to a professional (as defined u/s Section 194C and Section 194J respectively).

Currently, there was no liability on an individual or HUF to deduct tax at source on payments made to a contractor or professional when it is for personal use or business use (if not mandated). 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. To plug this loophole, Section 194M has been proposed in the Income Tax Act to to provide for levy of TDS.

Briefly, it is analysed below –

Definition of Payer and Recipient

Payer: Individual or HUF, irrespective whether in business / profession or not. However, it excludes those who are already mandated to deduct tax u/s 194C or 194J. Recipient: Should be resident. Implies that this section does not apply to non-residents recipients.

Nature of Work / Services Performed

It covers all work and / or services as defined u/s 194C (payment to contractors and sub-contractors) & 194J (payment to professionals)

When to Deduct the Tax

As usual, either at the time of providing credit of the amount or at the time of payment (in whatever mode), whichever is earlier.

TDS Rate & Threshold Limit

Tax to be deducted is @ 5%. This amount is to be deducted only if the aggregate sum exceeds Rs. 50 lakhs to one recipient (payment falling within the provisions u/s 194C or 194J or both together) in one financial year.

This amendment will take effect from 1st September, 2019

Section 194M – Deduction of TDS by Individual and HUF from payments to contractors and professionals