What is Section 194H of Income Tax Act
Section 194H of the Income Tax Act, 1961, is a crucial provision that deals with Tax Deducted at Source (TDS) on income by way of commission or brokerage. The primary objective of this section is to ensure that tax is deducted at the source when specified payments are made, helping streamline the taxation process and prevent tax evasion. In this article, we will delve into the purpose, applicability, key provisions, entities involved, and recent amendments in Section 194H.
Purpose of Section 194H
The fundamental purpose of Section 194H is to curb tax evasion by ensuring that tax is deducted at the source itself. By mandating the deduction of TDS on payments related to commission or brokerage, the government can efficiently collect taxes and discourage the concealment of income.
Applicability of Section 194H in taxation
Section 194H is applicable to a wide range of transactions involving the payment of commission or brokerage. It covers various entities engaged in such transactions, including individuals, firms, companies, and other associations of persons.
Key provisions of Section 194H
1. Covered payments, thresholds, and TDS rates:
- Covered payments: Section 194H applies to payments made by a person to another person for services related to commission or brokerage.
- Thresholds: The TDS provisions of this section are triggered when the aggregate amount of such payments exceeds a specified threshold.
- TDS rates: The TDS is deducted at a prescribed rate on the gross amount paid, and the payer is responsible for deducting and remitting the TDS to the government.
2. Entities and transactions:
- Entities: Section 194H encompasses a broad spectrum of entities involved in commission or brokerage transactions, including individuals, firms, companies, and associations of persons.
- Transactions: Payments made for services that involve commission or brokerage are subject to TDS under this section.
3. Payer and payee criteria:
- Payer: Any person responsible for making payments related to commission or brokerage is considered the payer.
- Payee: The recipient of the commission or brokerage payments is referred to as the payee.
4. Types of transactions subject to TDS:
- Commission on sales.
- Brokerage fees.
- Any payment for professional services rendered in connection with the above.
Exceptions and exemptions
While Section 194H is broad in its scope, certain exceptions and exemptions exist. Payments made to certain categories of payees or for specific types of transactions may be exempt from TDS under certain conditions.
Threshold limits and exempted categories
The applicability of TDS under Section 194H is contingent on the aggregate amount of payments made during a financial year. If the total amount is below the prescribed threshold, TDS may not be applicable.
Responsibilities of the payer
The payer holds the responsibility of deducting TDS, depositing it with the government within the stipulated time frame, and issuing TDS certificates to the payees. Failure to comply with these responsibilities can lead to penalties and legal consequences.
TDS deduction, timely payment, and certificates
Payers must deduct TDS at the time of credit or payment, whichever is earlier. The deducted amount must be paid to the government within the specified time frame. Additionally, TDS certificates must be issued to the payees, providing details of the deduction.
Consequences of non-compliance
Non-compliance with the provisions of Section 194H can lead to severe consequences, including penalties and legal actions. It is crucial for payers to adhere to the requirements of this section to avoid legal complications.
Penalties and legal consequences
Penalties for non-compliance can include interest on the delayed deposit of TDS, penalties for failure to deduct TDS, and prosecution for wilful evasion.
Recent amendments
The Income Tax Act undergoes periodic amendments to align with the evolving economic landscape. It is essential for taxpayers to stay updated on any recent changes to ensure compliance with the law.
Changes in Section 194H and implications
Recent amendments to Section 194H may impact the taxation landscape, and taxpayers should be aware of these changes to avoid unintended non-compliance.
Example: To better understand the application of Section 194H, let us consider a few practical examples illustrating scenarios where TDS would be applicable.
Scenarios illustrating Section 194H
- A company paying commissions to its sales agents.
- An individual paying brokerage fee to a real estate agent.
- A partnership firm compensating a consultant for procuring business.
Section 194H plays a crucial role in ensuring the fair and transparent taxation of income related to commission or brokerage. Understanding its provisions, applicability, and recent amendments are vital for both payers and payees to navigate the complex landscape of tax regulations and avoid potential penalties. Compliance with Section 194H not only facilitates the smooth functioning of the taxation system but also contributes to the overall economic integrity of the country.
Meaning of commission & brokerage
Commission: Commission is a fee or compensation paid for services rendered, commonly as a percentage of the transaction value. It applies to various industries, such as sales, real estate, stock trading, insurance, travel, and art sales.
Brokerage: Brokerage is the compensation or fee charged by a broker for facilitating transactions between parties. Brokers act as intermediaries in industries like stock trading, real estate, insurance, shipping, customs, and forex, earning fees for their facilitation services.
TDS deduction on commissions and brokerages exemption explained
Tax Deducted at Source (TDS) is a mechanism by which the government collects tax at the source of income. In the context of commissions and brokerages, TDS is applicable, and certain exemptions exist. Here is an explanation of TDS deduction on commissions and brokerages, along with relevant exemptions:
1. TDS on commissions and brokerages:
- When an individual or entity pays commissions or brokerages, they are required to deduct TDS at the applicable rate before making the payment to the recipient. This ensures that the government receives tax revenue directly from the income earned.
2. Applicable TDS rates:
- The TDS rates on commissions and brokerages can vary based on the nature of the payment and the relevant provisions of the Income Tax Act. As of my last knowledge update in January 2022, the standard TDS rate on professional fees, including commissions, is 10%. However, rates may change, and it's essential to refer to the latest tax regulations.
3. Exemption limit for TDS deduction:
- The Income Tax Act provides an exemption limit for TDS deduction. As of my last update, if the total commission or brokerage paid does not exceed a specified threshold (which may vary), TDS may not be deducted. This exemption limit aims to reduce the compliance burden on small payments.
4. Submission of PAN:
- To avail of lower TDS rates or exemptions, the recipient of commissions or brokerages is usually required to provide their Permanent Account Number (PAN). Failure to provide PAN may result in higher TDS deductions.
5. Section 194H – TDS on commission and brokerage:
- Payments made in the form of commission or brokerage are covered under Section 194H of the Income Tax Act. This section specifies the TDS provisions for such payments and outlines the rates and conditions for deduction.
6. Threshold limit for TDS deduction:
- The specific threshold limit for TDS deduction on commissions and brokerages depends on the provisions of the Income Tax Act. Amounts below this threshold may be exempt from TDS.
7. Filing TDS returns:
- The entity deducting TDS is required to file TDS returns, providing details of the TDS deducted and remitted to the government. This ensures transparency and compliance with tax regulations.
8. Changes in TDS rates and thresholds:
- It is crucial to stay updated with changes in TDS rates and threshold limits, as these can be amended by the government through budgetary announcements or notifications.
Related Income Tax sections
Category |
Relevant URLs |
Income Tax Deductions |
Section 80CCD(2), Section 80CCD(1B), Section 80CCD1, Section 80CCE, Section 80DD, Section 80DDB, Section 80E, Section 80EEA, Section 80G, Section 80GG, Section 80GGC, Section 80RRB, Section 80TTA, Section 80U |
Salary & Allowance Related Sections |
Section 16(ia), Section 16(ii), Section 17, Section 17(1), Section 10(13A), Section 89 |
Property & Capital Gains Tax |
Section 24B, Section 54B, Section 54GB, Section 54F, Section 54 |
TDS & Withholding Tax |
|
Income Tax Compliance & Notices |
Section 139(9), Section 143(1), Section 148, Section 179, Section 56(2)(x) |
SARFAESI Act (Loan Recovery & Security Enforcement) |
