Controversy in newly proposed section 194M – Issue to be resolved before it becomes Act

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Controversy in newly proposed section 194M –  Issue  to be resolved before it becomes Act

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

Presently, 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.

Income tax department believes that 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 tax evasion it is proposed to insert a new section 194M in the Act to provide for levy of TDS at the rate of 5% 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 Rs. 50 Lakh 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).

New section is proposed to be introduced in the Income Tax Act-1961 which provides for TDS @ 5% if the payment or aggregate payment to contractors or fees for professional services exceeds Rs. 50 Lakh.

The section 194M reads as under:

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 5% 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.

The question arises, whether the limit of Rs. 50 Lakh is limit per payer or per payee.

Let us see it by example. Mr. X person decides to constructs his house property on the land already purchased by him. If the total cost of construction is Rs. 1.50 Cr which is payable as under:

  1. Material Cost                                              : Rs. 90 Lakh
  2. Labour for slab work to Mr. A                : Rs. 30 Lakh
  3. Labor for Tiles, POP, etc to Mr. B           : Rs.  25 Lakh
  4. Payment Plumber/ Painter etc               : Rs. 5 Lakh

Now, the cost of works contract is exceeding Rs. 50 Lakh in the hands of Mr. X whereas it is not exceeding so in the hands of Mr. A, Mr. B and others. If the limit is taken as per payee, it may not be in accordance with the spirit of the law as the recipient could divide the amount in multiple name. If it is per payer then the compliance would be voluminous as the payment of even Rs. 100/- for cleaning the site to one time employee would be subject to TDS.

It may be noted that section 194C, 194J and like operates on ‘per payee’ basis whereas section 194-IA, 194-IB apparently are operated on ‘per payer’ basis.

Drafting of newly proposed section 194M apparently creates confusing scnerio as to use of the word  “aggregate”- Whether it is used as referring to “payer” or “payee”.

It would be more appropriate if the section is drafted suitably so as to avoid mis-interpretation & future litigation.

In above example, Mr. X payment to

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 5% 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.

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