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

Section 194H of the Income Tax Act, 1961, mandates the deduction of Tax Deducted at Source (TDS) on income by way of commission or brokerage. This section is designed to capture tax at the point of origin for payments made to agents, brokers, or any person receiving a commission for services rendered, playing a crucial role in the government's direct tax collection mechanism across various sectors.

Applicability of Section 194H

This section applies when any person, not being an individual or a Hindu Undivided Family (HUF), is responsible for paying to a resident any income by way of commission or brokerage.

What Constitutes 'Commission' or 'Brokerage'?

For the purpose of this section, "commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person:

• For services rendered (not being professional services).
• For any services in the course of buying or selling of goods.
• For services in relation to any transaction relating to any asset, valuable article, or thing (not being securities).
• In relation to the business of the person paying such income.

Exclusions: Commission received for the sale or distribution of financial products like mutual funds or insurance policies generally falls under this section. However, certain payments like 'discount' on sale of products to dealers (e.g., SIM cards) might be excluded if it's genuinely a trade discount and not a commission.

TDS Rate and Threshold Limit

TDS Rate: The rate of TDS under Section 194H is **5%**.

Threshold Limit: TDS is required only if the aggregate amount of such commission or brokerage paid or credited to the payee during the financial year **exceeds ₹15,000**.

• Higher Rate for Non-PAN: If the payee does not furnish a valid Permanent Account Number (PAN), TDS will be deducted at a higher rate of **20%**, as per Section 206AA, regardless of the usual 5% rate.
• No Surcharge or Health & Education Cess is applicable on this TDS rate.

Time of Tax Deduction

The deductor must deduct TDS under Section 194H at the earliest of the following two events:

• At the time of credit of such income to the account of the payee.
• At the time of payment of such income in cash, by cheque, draft, or by any other mode.

If the amount is credited to a "suspense account" or any other account in the books of the person liable to make the payment, it is still considered as credited to the payee's account, and the TDS provisions will apply.

Who is Exempt from Deduction (Deductor's Side)

As mentioned, the deductor must be "any person, not being an individual or a Hindu Undivided Family (HUF)."

• This means that **individuals and HUFs are generally not required to deduct TDS under Section 194H** unless their books of account are subject to tax audit under Section 44AB in the immediately preceding financial year.
• Therefore, if an individual or HUF, whose accounts are not audited, pays commission or brokerage, they are not obligated to deduct TDS under this section.

Exemptions from TDS (Payee's Side)

TDS is not required in the following cases for the payee:

• If the aggregate amount of commission or brokerage paid or credited during the financial year does not exceed the threshold of **₹15,000**.
• Payments made by the Central Government or a State Government to their agents/brokers.
• Where the payee obtains a certificate from the Assessing Officer (AO) for lower or nil deduction of TDS under Section 197, and submits it to the deductor.
• Commission payments that are in the nature of "trade discount" or "volume incentives" which are purely deductions from the invoice value and not a separate payment for services (though this is often a contentious area requiring careful review of facts and judicial precedents).

Responsibilities of the Deductor

The person responsible for deducting TDS under Section 194H has several compliance obligations:

• Deduction of Tax: Deduct TDS at the correct rate and at the appropriate time.
• Deposit of Tax: Deposit the deducted TDS to the credit of the Central Government within the prescribed due dates.
  • For tax deducted in March: By April 30 of the immediately following financial year.
  • For tax deducted in any other month: By the 7th day of the next month.
• Filing of TDS Returns: File quarterly TDS returns in Form 26Q within the specified due dates.
• Issuance of TDS Certificates: Provide a TDS certificate in Form 16A to the payee within the stipulated time, detailing the amount of tax deducted and deposited.

Penalties for Non-Compliance: Failure to comply with the provisions of Section 194H (e.g., not deducting TDS, late deduction, late deposit, or non-filing of returns) can lead to penalties, interest, and disallowance of expenses as per the relevant sections of the Income Tax Act. Notably, under Section 40(a)(ia), 30% of the expenditure on which TDS was not deducted or deposited can be disallowed.

Taxability for the Payee

The commission or brokerage received, even after TDS deduction, remains taxable income in the hands of the payee. This income is generally taxable under the head "Profits and Gains from Business or Profession." The payee must report this income when filing their Income Tax Return (ITR). The TDS deducted can then be claimed as a credit against their final tax liability, preventing double taxation.

Conclusion

Section 194H is a cornerstone of the TDS regime, ensuring tax collection on commission and brokerage payments across diverse sectors. Its broad definition of commission and brokerage necessitates careful review by businesses and individuals making such payments. Adherence to the prescribed rates, thresholds, and compliance procedures is vital for deductors to avoid interest, penalties, and disallowance of expenses. Similarly, payees should ensure their PAN is updated and correctly claim the TDS credit when filing their ITR.