Tax Deducted at Source is a system instituted by the Government of India, under the Income Tax Act, 1961, to collect tax at the point of generation of income. This method allows uninterrupted revenue streams for the Government and develops taxpayer compliance. Under TDS, the payer or deductor withholds a certain percentage of tax while making specified payments, such as salaries, interest, rent, professional fees, and commissions, to the payee or deductee. The deducted tax is deposited with the Central Government in the case of the payee. TDS curbs tax evasion and assures regular collection of tax and timely filing of returns. In addition, from the deductee’s perspective, TDS is an advance payment of tax against his total income tax liability, under which he claims credit at the time of filing his income tax return. The rates and applicability of TDS vary depending on the nature of the payment and the status of the recipient. With the onset of technology, the modes of operation of TDS were also changed, thus allowing for online filing of returns along with the issuance of TDS certificates. The process has now become more transparent, and the compliance is simpler.
What is Commission and Brokerage?
Commissions and brokerage are means of compensation given for bringing about or completing transactions, largely in the fields of sales and finance. A commission is a charge given to a person or entity for successfully concluding a sale or service, often as a percentage of the entire transaction amount. For example, a salesperson can be given a commission for the sale of a product or for winning a client. On the other hand, brokerage refers to fees charged by brokers who serve as middlemen between buyers and sellers in different industries, including real estate, stock exchanges, and insurance. Brokers receive brokerage by facilitating transactions or negotiating for their clients. Though both terms refer to compensation on a performance basis, commission is general in application and applies to various service sectors, whereas brokerage applies more specifically to intermediary services in professional sectors. Both types of compensation are liable for TDS under Section 194H of the Income Tax Act of India.
Section 194H of the Income Tax Act, 1961
As per Section 194H of the Income Tax Act, 1961, TDS is deducted when any payment is made in respect of commission or brokerage. Any individual (except an individual or Hindu Undivided Family, totally exempt from tax audit) who makes a payment to a resident of any brokerage or commission of Rs.15,000 or more in a financial year must deduct TDS at 5% while crediting such amount or at the time of payment, whichever is earlier. According to subsection (2), neither brokerage nor commission will contain any remuneration, either directly or indirectly, for service rendered in connection with the sale or purchase of goods or services or asset or service transactions. In case of an individual or an HUF whose turnover for the financial year does not cross the prescribed threshold for tax audit, the provisions regarding deduction of tax at source will not come into play. Apart from that, the deductor also has to provide TDS certificates and make quarterly returns for compliance.
TDS on Commission and Brokerage
Section 194H of the Income Tax Act, 1961 regulates the provisions for TDS for commission and brokerage. Under this section, any company, apart from an individual and a Hindu Undivided Family not liable for tax audit under Section 44AB, paying more than Rs. 15,000 as commission or brokerage to a resident during a fiscal year has to deduct TDS at a rate of 5%.
The expression commission or brokerage means any remuneration paid or payable, either directly or indirectly, for services rendered in connection with the sale or purchase of goods, or any transaction involving an asset, valuable item, or service. But it specifically excludes insurance commissions, which are dealt with under Section 194D. TDS must be deducted at the time of credit or payment, whichever is earlier, without any extra surcharge for health and education cess, and is levied on the total amount. Additionally, the persons responsible for deduction have to pay TDS to the government, file quarterly TDS returns, and furnish Form 16A to the deductee as evidence of the tax deduction. Failure to comply may lead to penalties and the disallowance of expenses.
TDS Rate on Commission and Brokerage
Under Section 194H of the Income Tax Act, 1961, a 5% TDS is to be deducted in payments of brokerage or commission. The rate is charged when the payment exceeds Rs. 15,000 during a financial year if the payee has a valid PAN. In situations where the payee does not provide a PAN, Section 206AA requires a higher TDS of 20%. It is notable that no cess or surcharge is charged, and the deduction is made on the credited or paid amount in full.
Circumstances Under Which TDS on Commission and Brokerage is Deductible
TDS on brokerage and commission under Section 194H of the Income Tax Act, 1961, is imposed under the following circumstances:
- Nature of Payment: The payment shall be of a nature of brokerage or commission and such payment, which includes an allowance for compensation on account of services in respect of sale or purchase of any goods, or selling or purchasing any asset, article, or service other than a professional nature.
- Recipient: The commission or brokerage should be payable to a resident individual or company, since non-residents are not subject to Section 194H.
- Threshold Limit: TDS will only apply when the total commission or brokerage paid exceeds Rs. 15,000 during a financial year.
- Payer Status: Any entity (firm, company, individual, etc.) obliged to make such payments shall deduct TDS. The individuals or HUFs who were not required to undergo a tax audit under Section 44AB during the previous year do not have to deduct TDS under this section.
- Date of Deduction: TDS shall be deducted at the time of crediting the income in the account of the payee or payment made, whichever is earlier.
- Rate of TDS: 5% will be deducted where the deductee provides a valid Permanent Account Number (PAN). Without PAN, a surcharge of 20% is charged under Section 206AA.
- Payment Mode: TDS will be levied on all modes of payment, such as cash, cheque, and others. Moreover, the deductor should also conform to allied duties like depositing TDS, making TDS returns, and issuing Form 16A to the payee.
Circumstances Under Which TDS on Commission and Brokerage is Not Deductible
As per Section 194H of the Income Tax Act, 1961, TDS is payable on payments for brokerage and commission, subject to certain exceptions. In below situations, appropriate documentation and awareness of the payment nature are important to ascertain TDS applicability and compliance.
- Payment amount under Rs. 15000: Where the aggregate brokerage or commission paid or credited to a resident in a fiscal year is not more than Rs. 15,000, TDS under Section 194H does not apply since this amount is less than the exemption limit.
- Payer is an individual or HUF, not liable to tax audit: If the payment is made by an individual or a Hindu Undivided Family (HUF) who was not required to get their accounts audited under Section 44AB in the previous year, TDS under Section 194H is not required.
- Payments to Non-residents: It should be appreciated that Section 194H applies only for payment to resident payees; payment to non-resident payees comes under the ambit of Section 195 for purposes of TDS.
- Commission on Insurance Policies: Commissions for procuring or obtaining insurance business are not covered under Section 194H and are regulated by Section 194D, which has separate provisions and rates.
- Discounts Versus Commission: In certain business situations (like trade or quantity discounts), if the payment is regarded as a discount and not as a commission, TDS under Section 194H might not be required. This is based on the essence of the transaction, and courts have made judgments to distinguish between the two.
- Payment Regulated by Other Sections: In the event that the payment of commission or brokerage is already liable under TDS under another section (e.g., professional fees under Section 194J), then Section 194H does not come into play to avoid duplication.
- Certificate for Nil or Lower Deduction: Where the deductee has obtained a proper certificate under Section 197 from the Assessing Officer for nil or lower TDS deduction, the deductor has to follow this direction and can either abstain from deduction of TDS or deduct TDS at a lower rate.
Exemptions Under Section 194H
Section 194H of the Income Tax Act, 1961 mandates deduction of TDS on commissions or brokerage payable to residents. However, the law specifies certain exemptions where TDS is not required. Such exemptions are provided to ease compliance for small-value transactions and small taxpayers while, at the same time, assuring proper collection of taxes in the case of large or service based payments.
- Threshold Limit (Rs. 15,000): TDS is not needed if the aggregate commission or brokerage paid or credited to a resident does not exceed Rs. 15,000 during the financial year.
- Payer Exemption (Individual/HUF not subject to Tax Audit): In case the payer is an individual or a Hindu Undivided Family (HUF) and is not required to get their accounts audited under Section 44AB of the previous year, they are exempt from TDS deduction under Section 194H.
- Non-Resident Payees: Section 194H applies only to residents. Payment to non-residents is kept out of this section and controlled under Section 195.
- Commission Under Other Special Sections: When the commission comes under other particular sections, for instance, Section 194D (commission for insurance) or Section 194J (professional fees), then Section 194H would not apply so as not to cause duplication.
- Lower or Nil Deduction Certificate (Section 197): If the recipient has obtained a certificate from the Assessing Officer for lower or nil deduction of TDS, the deductor should comply with this directive and deduct the tax accordingly.
- Trade Discounts Not Considered as Commission: In some cases, trade discounts or incentives extended to distributors or dealers (unrelated to services) are not considered as commission and thus exempt from TDS under Section 194H. But this conclusion is subject to the true nature and documentation of the transaction.
Time Limit for Depositing TDS
Tax Deducted at Source (TDS) on brokerage or commission under Section 194H must be paid by the government within the specified time limits. In case TDS is deducted during the month of March, it must be paid prior to April 30 of the same financial year. In case TDS is deducted during any other month, the payment must be made 7 days from the last date of the month in which the deduction has been made. Delayed remittance of TDS results in interest and penalties under the Income Tax Act, 1961. On-time deposit makes one compliant and prevents potential legal consequences.
Consequences of Non-compliance with Section 194H
A default in complying with Section 194H of the Income Tax Act of 1961, such as not deducting or depositing TDS on commission or brokerage, can result in serious consequences. The deductor may be liable for interest of 1% per month in case of non-dedication and 1.5% per month in case of late deposits. Moreover, any expense on which TDS was not deducted can be disallowed under Section 40(a)(ia), thus boosting taxable income. There could also be a fine equal to the TDS due, along with Rs. 200 per day of delay in filing TDS returns. Persistent non-compliance may lead to legal proceedings.
Conclusion
Section 194H is essential for ensuring tax compliance in the form of commission and brokerage payments. The timely deduction and remittance of TDS not only comply with legal provisions but also avoid the risk of penalty. Proper knowledge of its provisions ensures smooth transactions and promotes responsible tax behavior among businesses and individuals alike.
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