Basic Understanding on TDS on Payments to Resident Contractors & Professionals: Section 194M, Form 26QD, and FORM 16D
TDS on Payments to Resident Contractors
A new section 194 M has been introduced by the Finance Act, 2019. Pursuant to this clause, if the individual makes payments to contractors and practitioners above Rs. 50 Lakhs, the individual is allowed to subtract TDS at a rate of 5% from the amount payable to the resident deductee/payee. This provision applies to individuals and to HUFs who are not liable for tax audits. As announced by the Finance Minister on 14 May 2020 for FY 2020-21, the person is liable for the deduction of TDS at a rate of 3.75 percent.
TDS on payments to residential contractors and Professional Consultants
Under the new law of the TDS, i.e. Section 194J (TDS on Technical and Medical Services) and Section 194C (TDS on Contractors) Persons or HUFs not subject to audit were not entitled to deduct TDS irrespective of the volume of payment. This was the main reason for the introduction of section 194 M to cover non-audited individuals under the TDS.
Reason for the implementation of Section 194M
- Section 194 M of the Finance Bill, 2019, allows for a tax-deductible at source on any money paid by an employee or HUF to a local contractor where the services are rendered for personal use. Therefore, this section refers both to personal and company payments.
- Prior to the introduction of this section, there was no liability on the part of an individual or HUF to deduct tax at source in the situation referred to above.
- Nor did the people or HUFs carrying on business or the practice (not subject to any audit) subtract any tax at source, even though the charge was made for commercial or technical purposes.
- As a result of this loophole, a large amount of payment for contracted activities and consulting fees avoided the TDS levy, providing room for tax avoidance.
TDS rate under Section 194 M
- The 5 percent TDS will be deducted under 194 M if the total amount paid to a resident exceeds Rs 50.00000 in a particular financial year.
- In the case that the deductee’s PAN is not eligible, the TDS will be deducted at 20%.
What then is the time frame for depositing the TDS?
- When any payment is made by or on behalf of the Government – the amount of the TDS will have to be paid to the Department on the day of payment.
- Where any payment is made by any other person other than the government:
The TDS would have to be paid for:
- If payment is rendered in March – on or before April 30 of the next financial year. For example, if the amount was paid in March 2020, the TDS will be deposited with the Department by 30 April 2020.
- For every other month – within seven days from the end of the month in which the reduction is made. For example, if the payment had been charged in the month of September 2019, then the TDS would
The accompanying are the requirements for the deduction of TDS for payment to resident contractors and professionals above Rs. 50,00,000:
- It is applicable to all individuals or HUFs who make payments to resident contractors and professionals above Rs. 50,00,000.
- As per section 194 M, the individual or HUF that is required to have his books audited pursuant to section 44AD is not required to deduct tax under section 194M, they are covered by section 194J (TDS on Technical and Professional Services) and section 194C (TDS on Contractors)
- The payee must subtract TDS at the rate of 5 percent of the amount charged, in the event that no PAN is covered by the recipient, otherwise TDS is deductible at the rate of 20 percent up to the overall rent cap payable for the month of March or the last month of the lease, as the case may be. As announced by the Finance Minister on 14 May 2020 for FY 2020-21, the person is liable for the deduction of TDS at a rate of 3.75 percent.
- TDS shall be deducted only at the earliest of the following dates:
- At the time of the payment of the sum, or
- At the time of payment by cash or cheque or draft
- No TAN is required for that person to deduct and deposit the TDS to the Government
- The transaction is to be made by the individual using form 26QD, which is a call cum statement:
- If the contractor’s work is not finished at the end of the financial year, apply Form 26QD within 30 days from the end of the fiscal year.
- If the contractor work is between the financial year, file Form 26QD within 30 days from the end of the month when the contract/service is completed or terminated.
- If a person pays Rs. 50.00000 to more than one resident contractor or professional, then form 26QD shall be made twice a year for each contractor or professional, in other words, the tenant must submit form 26QB for each contractor or professional.
- In the case that the form needs to be submitted more than once, the invoice must also be made more than once, as a separate payment is to be made by each consultant or practitioner by their respective fees.
- If payment is made to a non-resident, the TDS is deductible under section 195.
- The entity deducting the TDS must apply the TDS certificate to the resident contractor or practitioners in Form 16B.
CBDT Has notified New TDS Return Filing Forms 26QD & 16D :
- Tax enforcement may be one of the most important factors for any form of business organization. It is also recommended that persons and corporations shall comply fully with the requirements of the Income Tax Act 1961. It is necessary to observe due dates for the payment of income tax deduction tax at source (TDS) in addition to the ITR filing as well as the TDS return filing. In this regard, 2 new TDS Return Filing e-forms have been introduced by the Income Tax Department, viz. Type 26QD and Type 16D.
- Two New TDS Return Filing e-forms have been introduced by the Central Board of Direct Taxes, viz. Type 26QD and Type 16D.
What’s FORM 26QD?
- Form 26QD is the TDS return reporting form for payments to resident contractors and practitioners 194M.
- According to the CBDT notification, any tax deducted at source 194 M must be paid to the Central Government within 30 days from the end of the month in which the deduction was made. This deduction must be stated in the form 26QD of the Challan-cum-statement.
What is FORM 16D?
- Form 16D is the TDS credential for reimbursement of the TDS u / s 194M.
- According to the CBDT notification, from now on, all individuals who have to deduct tax u / s 194 M shall send a TDS certificate to the payer in Form 16D within 15 days from the due date for the TDS report filed in Form 26QD.
Details Required for Form 26QD: The CBDT had stated that individuals / HUFs making contractual or professional payments will be allowed to deduct TDS under section 194 M from the financial year 2019-20 (September 1st, 2019). TDS is deducted at 5% if the payment exceeds Rs. 50,000,000. And the TDS return for the same needs to be filed in Form 26QD. The payee will receive Form 16D as proof of the TDS deduction
- Deductor / Payer PAN
- Deductee / Paye PAN
- Form of payment (work under contract/commission/brokerage or technical service charges)
- Date of agreement/contract
- Amount of payment
- Number of certificates provided by the Assessment Officer pursuant to section 197 for non-deduction or lower deduction
- Credit date
- The TDS Rate
- Payment details for TDS
Steps-How to fill out the form 26QD
- Go to www.incometaxindiafiling.gov.in\
- Click on the ‘E-Pay Tax’ button.
- Click on ‘Continue to the NSDL website’
- The next page will appear.
- On Tab TDS on Contractor Payment Form 26QD.
- Click the Proceed button.
- Fill out the details.
- Submit it.
Points to be recalled by the payer/deductor:
- All individuals or HUFs (except those subject to audit pursuant to paragraph a and b of section 44AB) making payments to residents greater than 50.000.000 are liable to deduct TDS pursuant to section 194M.
- Tax @ 5 percent to be deducted from the payment made to the payer.
- Collect the Payee / Deductee Permanent Account Number (PAN) and verify the same with the original PAN card.
- The Payee / Deductee PAN as well as the Payer / Deductor PAN should be made mandatory in the online form used to provide payment information.
- Do not commit any mistake by citing the PAN or any other information in the online form. You will notify the Income Tax Department for the purpose of error correction.
- Download and supply the TDS certificate in Form 16D from TRACES and give it to the Payee / Deductee within 15 days from the due date of receipt of the voucher in Form 26QD.
Points to be understood by the payer/deductee
- Provide the Payer/Deductor with PAN to provide the Income Tax Department with information on TDS.
- Verify the amount of taxes paid by the payer/deductor in the Form 26AS Annual Tax Declaration.
- Insist on obtaining Form 16D from the Payer / Deductor that has been downloaded from the TRACES website only.
- The Payee / Deductee may apply to the Assessing Officer under Section 197 to obtain a Nil or Lower TDS certificate in respect of the amount paid or payable to TDS under Section 194 M if his estimated tax liability is justified to the satisfaction of the Assessing Officer in issuing such a certificate.