TDS deductions on payment under specified agreements  

Introduction

The Indian government has introduced the concept of TDS (Tax Deducted at Source) to ensure a regular flow of income tax revenue. TDS is a tax that is deducted at the source of income. It is a mechanism to collect tax in advance, and the amount so collected is then credited to the taxpayer’s account. This system ensures a regular and consistent flow of revenue to the government.

Section 194M of the Income Tax Act, 1961, is one such provision that mandates TDS on payment made under specified agreements. In this blog, we will go deeper into the details of Section 194M, its applicability, and what procedures a taxpayer has to go through.

What is Section 194M?

Section 194M of the Income Tax Act, 1961, deals with the deduction of TDS on payment made under specified agreements. As per this section, any person, other than an individual or a Hindu Undivided Family (HUF), responsible for paying any sum to a resident for carrying out any work in pursuance of a contract, or by way of fees for professional services shall deduct tax at source at the rate of 5% at the time of credit or payment of the sum to the payee.

What is the applicability of Section 194M?

The provision of Section 194M is applicable to payments made under the following specified agreements:

1. Payment made for contractual work or professional services carried out by a resident.
2. Payment made for contractual work or professional services carried out by a non-resident, but where the payment is deemed to accrue or arise in India.

Note: It is important to note that the provision of Section 194M is not applicable to the following:

1. Payment made to an individual or HUF.
2. Payment made to a non-resident other than the payment deemed to accrue or arise in India.
3. Payment made for personal purposes.

Procedure for TDS under Section 194M

The procedure for TDS under Section 194M is as follows:

1. Any taxpayer, other than an individual or HUF, responsible for paying any sum to a resident for carrying out any work in pursuance of a contract or by way of fees for professional services shall deduct tax at source at the rate of 5% at the time of credit or payment of the sum to the payee.

2. The deducted TDS shall be deposited to the credit of the Central Government within thirty days from the end of the month in which the deduction is made.

3. The taxpayer responsible for deducting the TDS shall issue a certificate of deduction of tax at source in Form No. 16C to the payee within fifteen days from the due date for furnishing the statement of TDS under Rule 31A(4)(a).

4. The payee can claim credit for the TDS deducted while filing their income tax return.

What is the Penalty for Non-Compliance?

Non-compliance with the provisions of Section 194M may attract a penalty under Section 271C of the Income Tax Act, 1961. As per this section, if a person fails to deduct TDS or deducts TDS but fails to deposit the same to the credit of the Central Government, then they may be liable to pay a penalty equal to the amount of tax that was required to be deducted or collected.

Conclusion

Section 194M of the Income Tax Act, 1961, mandates TDS on payment made under specified agreements. It is applicable to any person, other than an individual or HUF, responsible for paying any sum to a resident for carrying out any work in pursuance of a contract, or by way of fees for professional services. The TDS rate is 5%, and the TDS so deducted shall be deposited to the credit of the Central Government within thirty days from the end of the month in which the deduction is made.