Section 194H of the Income Tax Act: TDS on Commission or Brokerage

Tax Deducted at Source (TDS) is a method used by the government to collect taxes at the source of income. It ensures the collection of revenue at the time the income is generated, thereby reducing the chances of tax evasion. Under the Income Tax Act, 1961, various provisions govern the deduction of TDS on different types of payments. One such provision is Section 194H, which deals with the TDS on commission or brokerage. This article delves into the intricacies of Section 194H, covering its applicability, rates, exemptions, and compliance requirements.

1. Overview of Section 194H

Section 194H of the Income Tax Act, 1961, mandates the deduction of TDS on any income arising from commission or brokerage payments. The section was introduced to widen the tax base by bringing under its ambit the income earned by agents, brokers, and other intermediaries. The TDS under this section is required to be deducted at the time of crediting such income to the payee's account or at the time of payment, whichever is earlier.

2. Definition of Commission or Brokerage

The term "commission or brokerage" under Section 194H has a broad meaning and includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person. This could be:

For Services Rendered: The provision of services, whether professional or otherwise, can fall under commission or brokerage. This includes services like securing orders for goods, dealing with the sale or purchase of goods, or transactions relating to any asset or valuable article.

For Services in Connection with Any Transaction: This could include payments related to transactions like insurance, stocks, shares, or even real estate, where an intermediary acts on behalf of another person.

For Acting as an Agent: When a person acts on behalf of another in the procurement or supply of goods, or in other dealings, the income earned is considered commission or brokerage.

3. Applicability of Section 194H

Section 194H applies to any person, except an individual or a Hindu Undivided Family (HUF), responsible for paying commission or brokerage to a resident person. However, individuals or HUFs are also required to deduct TDS under this section if they are liable to audit under Section 44AB of the Income Tax Act for the financial year immediately preceding the year in which the commission or brokerage is paid or credited.

2. TDS Rate under Section 194H

The rate of TDS under Section 194H is 5%. However, this rate is subject to change through amendments or notifications issued by the government from time to time.

Applicability of Surcharge and Cess

As of the current provisions, there is no surcharge or health and education cess applicable on the TDS deducted under Section 194H. Therefore, the TDS should be deducted solely at the rate of 5%.

3. Threshold Limit for TDS Deduction

TDS under Section 194H is required to be deducted only if the aggregate amount of commission or brokerage credited or paid to a resident during a financial year exceeds INR 15,000. If the amount does not exceed this threshold, no TDS is required to be deducted.

4. Exemptions under Section 194H

There are specific scenarios where TDS under Section 194H is not applicable:

Commission or Brokerage Paid by Banks: Commission or brokerage paid by banks to their employees is not subject to TDS under this section. However, if a bank pays commission or brokerage to non-employee agents, TDS is applicable.

Non-residents: Section 194H applies only to payments made to resident individuals. Therefore, if commission or brokerage is paid to a non-resident, Section 194H will not be applicable, and instead, TDS provisions under Section 195 will apply.

Payments Below Threshold Limit: As mentioned earlier, if the commission or brokerage payment during the financial year does not exceed INR 15,000, no TDS needs to be deducted under Section 194H.

5. Compliance and Procedures for TDS Deduction

To ensure compliance with Section 194H, the deductor must follow specific procedures:

TDS Deduction at the Time of Payment or Credit

The deductor is required to deduct TDS at the time of crediting the commission or brokerage to the payee’s account or at the time of payment, whichever is earlier. The TDS must be deducted even if the income is credited to a suspense account or any other account by any name.

Depositing TDS with the Government

The TDS deducted under Section 194H must be deposited with the government by the 7th of the following month in which the deduction is made. For example, if TDS is deducted in April, it should be deposited by the 7th of May. In the case of TDS deducted in March, the deposit deadline is April 30th.

Filing TDS Returns

After deducting and depositing the TDS, the deductor is required to file quarterly TDS returns in Form 26Q. The due dates for filing TDS returns are as follows:

Q1 (April to June): July 31

Q2 (July to September): October 31

Q3 (October to December): January 31

Q4 (January to March): May 31

Issuance of TDS Certificates

The deductor must issue a TDS certificate in Form 16A to the payee within 15 days from the due date of filing the TDS return. This certificate serves as proof of the TDS deducted and can be used by the payee while filing their income tax return.

6. Consequences of Non-compliance

Failure to comply with the provisions of Section 194H can lead to several consequences, including:

Interest on Late Deduction or Non-deduction

If the deductor fails to deduct TDS or deducts it late, interest is levied at the following rates:

For Non-deduction or Short Deduction: 1% per month or part thereof from the date on which the TDS was deductible to the actual date of deduction.

For Late Payment of TDS: 1.5% per month or part thereof from the date on which the TDS was deducted to the actual date of payment.

Penalty for Non-deduction or Non-payment of TDS

The deductor may also be subject to penalties under Section 271C of the Income Tax Act. The penalty can be up to the amount of TDS that was not deducted or not paid.

Disallowance of Expenses

If TDS is not deducted or paid as required under Section 194H, the expense related to the commission or brokerage may be disallowed under Section 40(a)(ia) of the Income Tax Act while computing the deductor's taxable income.

7. Practical Examples and Case Studies

To better understand the application of Section 194H, let's explore a few practical examples and case studies:

Example 1: Commission Payment by a Manufacturing Company

ABC Ltd., a manufacturing company, appoints XYZ, a marketing agency, to promote its products. For the services rendered, ABC Ltd. agrees to pay a commission of INR 20,000 to XYZ. In this case, ABC Ltd. is required to deduct TDS at the rate of 5% on the commission of INR 20,000 since the payment exceeds the threshold limit of INR 15,000. The TDS amount will be INR 1,000, and ABC Ltd. must deposit this amount with the government by the due date.

Example 2: Brokerage Payment by a Real Estate Firm

A real estate firm, RealHomes Pvt. Ltd., hires an agent to facilitate the sale of properties. The firm agrees to pay a brokerage of INR 50,000 to the agent. RealHomes Pvt. Ltd. must deduct TDS at 5% on the brokerage amount, resulting in a TDS of INR 2,500. This amount should be deposited with the government, and the firm must issue a TDS certificate to the agent.

Case Study: Non-deduction of TDS and Consequences

In a real-life case, a company failed to deduct TDS on the commission paid to its agents. During an income tax assessment, the assessing officer disallowed the commission expense under Section 40(a)(ia) and imposed interest and penalties. The company argued that the agents had already paid taxes on the commission received, but the court upheld the disallowance, stating that the responsibility to deduct TDS lay with the company. This case highlights the importance of compliance with TDS provisions.

8. Common Misconceptions and Clarifications

There are several misconceptions regarding Section 194H, which can lead to confusion or non-compliance. Let's address a few common misconceptions:

Misconception 1: TDS is Not Required if the Payee is a Non-resident

Clarification: Section 194H applies only to payments made to resident individuals. If the payee is a non-resident, TDS provisions under Section 195 will apply, not Section 194H.

Misconception 2: TDS is Not Required if the Payment is Made in Cash

Clarification: The mode of payment does not affect the applicability of TDS under Section 194H. Whether the payment is made in cash, cheque, or electronic transfer, TDS must be deducted if the payment exceeds the threshold limit.