Unwanted Compliance Burden of TDS on payment by Partnership firm to Partners: Section 194T
The Government has proposed new section for withholding of Tax u/s. 194T of the Income Tax Act,1961 @10% on payment made to partners of any nature except profit sharing by the firm, which will effective from 1st April 2025 i.e., FY 2024-25. [Some of the views that the provision is applicable from the 01.04.2025 and will be applicable from FY 2025-26. In my view, this is not correct. The dates normally mentioned in the Finance Bill and explanatory bill are of the Assessment year and not financial year.
The Government has not addressed the proper intention behind the introduction of this section but it can be presumed that the Government may have such strategic forecast which will be planted through this section. If it is true, then we all have to sit in wait and watch situation and if nothing to be result out then it is surely the additional compliance in the hands of the firm as well as partners. However, what are the potential challenges arising from this new section. Few of this is as under:
1. Difficulty to ascertain the figure as on 31st March for doing TDS compliancee:
Whereas the enhancement of the limit of deduction U/s 40(b) is appreciable, the additional burden of TDS on payment to partners poses a practical challenge & without considering the ground reality of the business. The liability to do TDS in most of the cases would arise on the last day of the financial year as the relevant entry has to be passed in the books on or before 31st March. It is often done by making a back dated entry as computation of remuneration is dependent on “Book Profit” which may not be finalized until the time of filing the ITR. It can be worked out after verifying expenses including deduction u/s 43B, 43B(h) 40(a)(ia) disallowance, etc.
Due to such expenses, the amount of remuneration in majority of the cases gets crystallized only at the time of filing the ITR. In short, computation of exact amount of remuneration may not be feasible as on 31st March even by strong efforts.
2. Deduction on entire amount paid or credited & not on allowable amount:
Section 194T provides for TDS on the actual amount paid or credited to the partners account and not on the remuneration/interest deductible in the hands of the firm. It may happen that the entire amount credited to the partner capital account may not be deductible U/s 40(b). For example, deduction U/s 40(b) towards interest is admissible at the rate not exceeding 12% even if the firm is paying interest @15%. Strict interpretation of section 194T would require TDS on the entire interest calculated @15% whereas the amount deductible in the hands of the firms and thereafter taxable in the hands of the partner shall be @ 12% only. In view of poor drafting of section 194T, the litigation and compliance burden would increase further.
In my view, the law is very ill drafted and it may not stand the test of time. Ideally a law once implemented should require no amendment or minimal amendments or revisions in subsequent years. It should emanate after thorough deliberation and discussion with all relevant stakeholders so that diverse perspectives & ground realities are considered before implementing it.
Section 194T is drafted in such a way that it will add to another round of litigation and complexity in the near future.
One of the purposes of TDS is to ensure the income trail which was already there in the case of firms / LLP as they are otherwise also required to report the payment to the partners in their ITR. As such, imposing additional compliance burden of TDS on such payment would not result in additional tax benefit to the revenue & is very much against the concept of ease of business. There are various micro entities in the form of partnership firms, prescribing TDS compliance in respect of payment to partners seems to be a rigid measure. The threshold limit of Rs. 20,000/- is too low. TDS @ 10% is going to result in the blockage of additional funds of the partner & the firms.
