Clause 393 Tax to be deducted at source.

Income Tax Bill, 2025

Legal Commentary on Clause 393(1)[Table: S.No. 1(ii)] and Clause 393(4)[Table: S.No. 1] of the  Income Tax Bill, 2025   Section 194H of Income-tax Act, 1961

Introduction

The taxation of commission and brokerage income through the mechanism of Tax Deducted at Source (TDS) has long been a cornerstone of the Indian direct tax regime. Section 194H of the Income-tax Act, 1961, established the framework for deduction of tax at source on commission or brokerage payments, aiming to plug revenue leakages and ensure tax compliance at the point of payment. With the introduction of the Income Tax Bill, 2025, a comprehensive overhaul of TDS provisions is proposed, encapsulated within Clause 393. Specifically, Clause 393(1)[Table: S.No. 1(ii)] and Clause 393(4)[Table: S.No. 1] address TDS on commission and brokerage, introducing nuanced changes in scope, coverage, and compliance requirements. This commentary undertakes a detailed legal analysis of these new provisions, compares them with the extant Section 194H, and evaluates their implications for stakeholders.

Objective and Purpose

The legislative intent behind TDS provisions on commission and brokerage is to ensure early collection of tax, minimize tax evasion, and facilitate the tracking of financial transactions. The rationale is rooted in the recognition that commission and brokerage income, by its nature, is often susceptible to underreporting. By obligating the payer to deduct tax at the point of payment or credit, the law seeks to create an audit trail and bring such income within the tax net, thereby advancing the policy goal of tax base broadening. The Income Tax Bill, 2025, seeks to harmonize, rationalize, and modernize these provisions, aligning them with contemporary business practices and technological advancements, while also addressing practical challenges encountered under the current regime.

Detailed Analysis of Clause 393(1)[Table: S.No. 1(ii)] and Clause 393(4)[Table: S.No. 1] of the  Income Tax Bill, 2025 

1. Clause 393(1)[Table: S.No. 1(ii)] - TDS on Commission or Brokerage

This clause is the direct successor to Section 194H. It mandates that a "specified person" deduct tax at source at the rate of 2% on payments to residents by way of commission or brokerage (excluding insurance commission, which is separately covered). The deduction obligation arises when the amount or aggregate of such payments exceeds Rs. 20,000 in a tax year. The deduction is to be made at the earlier of credit or payment.

• Scope and Coverage: The provision targets commission or brokerage payments other than insurance commission. The term "specified person" is critical and, though not defined in the excerpt, generally refers to non-individuals or individuals/HUFs crossing specified turnover thresholds, in line with the existing Section 194H framework.
• Threshold and Rate: The threshold of Rs. 20,000 mirrors the amended threshold u/s 194H (as per the Finance Act, 2025). The rate of 2% is identical to the current Section 194H rate.
• Timing of Deduction: The obligation to deduct at the earlier of credit or payment ensures that TDS is not circumvented by deferring payment or using suspense accounts, reinforcing the anti-avoidance objective.
• Exclusions: Insurance commission is carved out and separately addressed under S.No. 1(i), maintaining the distinction present under the 1961 Act (Section 194D for insurance commission).

2. Clause 393(4)[Table: S.No. 1] - Exemption for Certain Commission or Brokerage Payments

This clause, through its tabular listing, provides for cases where no TDS is required on commission or brokerage, specifically referencing payments by Bharat Sanchar Nigam Limited (BSNL) or Mahanagar Telephone Nigam Limited (MTNL) to their public call office (PCO) franchisees.

• Targeted Exemption: This mirrors the specific exemption in the third proviso to Section 194H, recognizing the unique nature of PCO franchise arrangements and the administrative impracticality of TDS in such cases.
• Legislative Continuity: By codifying this exemption in the new regime, the Bill ensures continuity and certainty for affected parties, avoiding disruption to existing business models.

Comparative Analysis with Section 194H of Income-tax Act, 1961

Scope and Definitions

Both the new and old provisions focus on "commission or brokerage" but the definition in Section 194H is explicit and inclusive, covering various forms of agency and intermediary relationships except for professional services and securities. The Bill, while not reproducing the definition verbatim in the provided extract, is presumed to carry forward this broad approach, especially in the absence of a contrary indication.

The exclusion of insurance commission continues, with such payments governed by separate, dedicated TDS provisions (Section 194D under the 1961 Act and S.No. 1(i) under the Bill).

Person Responsible to Deduct

Section 194H applies to all persons other than individuals/HUFs with turnover below the prescribed threshold. The Bill introduces the term "specified person," which, based on the context and legislative history, likely encompasses a similar class of payers. However, clarity on the precise definition of "specified person" in the Bill is essential for full alignment.

The extension of TDS liability to certain individuals/HUFs with higher turnover is a progressive measure, ensuring that large business/professional entities cannot escape TDS obligations merely due to their organizational form.

Thresholds and Rates

Both regimes set a Rs. 20,000 threshold for TDS applicability and a deduction rate of 2%. This harmonization reflects legislative intent to maintain continuity and avoid unnecessary compliance burdens for small-value transactions.

Timing of Deduction

The requirement to deduct at the earlier of credit or payment is retained. This is crucial to prevent avoidance through accounting practices such as crediting to suspense accounts, as further reinforced by the deeming provision present in both the Bill and Section 194H.

Exemptions

The exemption for commission/brokerage paid by BSNL/MTNL to PCO franchisees is preserved in both legal frameworks. This targeted relief addresses sector-specific realities and administrative convenience.

Practical Implications and Compliance

• For Payers: The obligation to deduct TDS at the time of credit/payment necessitates robust accounting and payment systems. The continuity in threshold and rate eases the transition to the new law.
• For Payees: Recipients of commission/brokerage must ensure proper documentation of TDS for credit in their tax returns. The Rs. 20,000 threshold provides relief for small agents/brokers.
• For BSNL/MTNL and PCO Franchisees: The explicit exemption removes compliance burdens and cash flow issues for small franchisees, supporting financial inclusion and rural telephony objectives.

Comparative Table 

Ambiguities and Potential Issues

While the Bill appears to carry forward the established framework, several interpretative and practical questions may arise:

• Definition of "Specified Person": The lack of an explicit definition in the extract may lead to disputes regarding the scope of TDS liability, especially for individuals/HUFs near the turnover threshold.
• Overlap with Other Provisions: As new business models emerge (e.g., e-commerce, gig economy), the distinction between commission, professional fees, and other payments may blur, leading to potential classification disputes.
• Aggregation of Payments: The threshold applies to the aggregate of payments in a year, necessitating careful tracking and reconciliation by payers.
• Suspense Account Treatment: The deeming provision for credits to suspense accounts is critical to prevent deferral of TDS but may require system changes for compliance.

Practical Implications

1. Businesses and Payers

Businesses must ensure that their accounting systems are updated to track commission/brokerage payments, aggregate them for threshold purposes, and deduct TDS at the correct rate and time. The preservation of the Rs. 20,000 threshold and 2% rate means that existing systems and processes can largely continue, minimizing transition costs.

2. Small Agents and Brokers

For small agents and brokers whose income from commission/brokerage does not exceed Rs. 20,000 in a tax year, the non-deduction of TDS avoids cash flow issues and administrative burdens. However, those crossing the threshold must be vigilant in claiming TDS credit and maintaining documentation.

3. Telecommunication Sector

The specific exemption for BSNL/MTNL's PCO franchisees is a pragmatic measure, recognizing the low-margin, high-volume nature of such businesses and avoiding unnecessary compliance costs.

4. Revenue Administration

From the tax administration perspective, the continuity and clarity in TDS provisions facilitate monitoring and enforcement. The anti-avoidance provisions (e.g., suspense account deeming) close common loopholes.

Conclusion

Clause 393(1)[Table: S.No. 1(ii)] and Clause 393(4)[Table: S.No. 1] of the  Income Tax Bill, 2025, represent a largely faithful continuation of the TDS regime on commission and brokerage as established under Section 194H of Income-tax Act, 1961. The preservation of key parameters-applicability, threshold, rate, timing, and exemptions-reflects legislative intent to maintain stability and certainty for taxpayers while updating the statutory framework for a modern tax environment. The explicit retention of sector-specific exemptions underscores a pragmatic approach to compliance and administration.

However, certain aspects, such as the precise definition of "specified person" and the handling of emerging business models, merit further clarification, either through subordinate legislation or administrative guidance. The overall structure supports the policy objectives of early tax collection, reduced evasion, and administrative efficiency, while balancing the compliance burden for small-value transactions. As the new law is operationalized, continued stakeholder engagement and responsive rule-making will be essential to address interpretative and practical challenges.

Full Text:

Clause 393 Tax to be deducted at source.