Analysis of new TDS provisions applicable on payment made to resident contractors/professionals : 17-07-2019

The Finance Minister with the view of widening and deepening of tax base proposed to bring in new provision for deduction of tax at source by Individuals and HUFs.

Extract of the Memorandum of objects and reasoning reads as follows:

B. WIDENING AND DEEPENDING OF TAX BASE

Tax Deduction at Source (TDS) on payment by Individual/HUF to contractors and professionals:

At present there is no liability on an individual or Hindu undivided family (HUF) to deduct tax at source on any payment made to a resident contractor or professional when it is for personal use. Further, if the individual or HUF is carrying on business or profession which is not subjected to audit, there is no obligation to deduct tax at source on such payment to a resident, even if the payment is for the purpose of business or profession. 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, leaving a loophole for possible tax evasion. To plug this loophole, it is proposed to insert a new section 194M in the Act to provide for levy of TDS at the rate of five per cent. on the sum, or the aggregate of sums, paid or credited in a year on account of contractual work or professional fees by an individual or a Hindu undivided family, not required to deduct tax at source under section 194C and 194J of the Act, if such sum, or aggregate of such sums, exceeds fifty lakh rupees in a year. However, in order to reduce the compliance burden, it is proposed that such individuals or HUFs shall be able to deposit the tax deducted using their Permanent Account Number (PAN) and shall not be required to obtain Tax deduction Account Number (TAN).

This amendment will take effect from 1st September, 2019.

The provisions of proposed section are extracted hereunder:

194M. (1) Any person, being an individual or a Hindu undivided family (other than those who are required to deduct income-tax as per the provisions of section 194C or section 194J) responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract or by way of fees for professional services during the financial year, shall, at the time of credit of such sum or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent. of such sum as income -tax thereon:

Provided that no such deduction under this section shall be made if such sum or, as the case may be, aggregate of such sums, credited or paid to a resident during a financial year does not exceed fifty lakh rupees.

(2) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.

Explanation.––For the purposes of this section,––

(a) “contract” shall have the meaning assigned to it in clause (iii) of the Explanation to section 194C;
(b) “professional services” shall have the meaning assigned to it in clause (a) of the Explanation to section 194J;
(c) “work” shall have the meaning assigned to it in clause (iv) of the Explanation to section 194C.

A fine reading of the provision gives raise to the following questions and implications.

1. The provisions of Chapter XVII – B related to payments made to residents are normally applicable to business categories of all status and Individuals and HUFs not carrying on business or those who carryon the business but the threshold is below Tax Audit Limit are exempted from the purview of TDS provisions. By an Amendment Act of 2017, Section 194IB was brought in with effect from 01/06/2017 for deduction of tax at source from the rent payable.
2. The proposed section covers payments made by Individuals / HUFs only. All other categories of assesses which are otherwise not covered under the Chapter XVII B such as AOPs, BOIs are not applicable.
3. Sub section 4 of Section 194C provides that no Individual or HUF shall be liable to deduct Income Tax on the sum credited or payed to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individuals or any member of the HUF. The provisions of Section 194M negates the above said subsection 4 of 194C.
4. The threshold limit under Section 194M is independent of threshold limits laid down under Section 194C or 194J. 194M is applicable only of the nature of payments referred to in Section 194C or 194J and excludes all other services or payments such as commission, interest, salaries etc.
5. It is always a vexed matter whether a particular payment falls under 194J or 194H or 194C. As long as one establishes that the nature of payment is outside the scope of 194C or 194J, the provisions of 194M are not applicable.
6. It is to be clarified by the Government whether the aggregate of such sums credited or paid to a resident during a financial year exceeding Rs. 50 Lakhs is applicable for each resident or aggregate of all sums paid to all residents. From the language of the Section, it is abundantly clear that the threshold limit of Rs 50 lakhs per Annum is applicable per person.
7. The Individuals and HUFs have to be cautious in making payments such as land development, construction of houses, expenses on marriage for catering, flower decoration, event management, advocate fee, gardening, property maintenance services, asset management fees, work for harvesting of crops, painting, healthcare and payments made to hospitals. All lumpsum contracts for multiple objects and multiple elements fall under this section.
8. No class of payments are provided as exempted categories under the statute. There is no provision for the Board to specify any category of payments as exempted.
9. The provision is equally applicable for agriculturists who are not required to have PAN Number and not required to file the tax returns. There have been a large number of large farmers who make payments for which the provisions of section 194M of the Act are applicable.
10. The provision is equally applicable for payments made by resident and non-resident. Non-residents who visit India for celebration of marriages of their kith and kin need to be specially careful about it.
11. Such category of persons deducting tax are exempted from the provisions of Section 203A to apply and get TAN Number.
12. There have been plethora of cases in a continues manner saying whether a particular work is contract for service or contract for supply. As long as it is a contract for supply, the provisions of Section 194M are not applicable. The Board has clarified the same in several circulars. It has been a vexed matter and frustrating the assesses whether a particular payment falls under Contract for Work or Contract for Supply.
13. The said provision is applicable from 1st day of Sept 2019 meaning that for the purpose of aggregating the limit of Rs 50 lakhs, the question for consideration is whether the cap of Rs 50 lakhs is for the payments made from 1st Sept 2019 to 31st March 2020 (interim period of FY 2019-20) in the Previous year 2019-20 or for all the payments starting 1st April 2019 to March 2020. If it is interpreted that it is applicable for all the payments made from 1st Sept 2019 the question for consideration is whether the limit of Rs 50 lakhs is for the interim period or for all the payments from 1st April 2019 to 31-3-2020 need to be aggregated.
14. Another question for consideration is if the threshold of payment to a person crosses Rs 50 lakhs on any date in a year, the TDS of 5% is applicable for the entire payments made in the year including all the payments made prior to the threshold limit of Rs 50 lakhs. For example if the payment made for a person without TDS was Rs 49,00,000 and further payment of Rs 2,00,000 is to be made, then the TDS of 5% is applicable for the entire Rs 51,00,000 (Rs 49,00,000+2,00,000). The TDS amounts to Rs 2,55,000 which exceeds the amount itself. There is no scope for marginal relief as provided else where in the Schedules to the Finance Act.
15. The statue provides that TDS needs to be done at the time of credit of such sum or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent. of such sum as income -tax thereon. The Finance Minister should have appreciated that most section of the individuals and HUFs who are anticipated under this category do not maintain the books of accounts for crediting such sum or are not required to maintain the books of accounts. Hence the Finance Minister should have made it applicable only for the payments made but not for the payments due.
16. The Provisions of section 194M is not applicable for the non-Hindu HUFs under other religions such as Christians, Muslims, Jains etc., thus the Finance Minister did not look at the aspect of equality and such provision leads to discrimination between the sections of the society.

Source : Economic Times