Clause 393 Tax to be deducted at source.

Income Tax Bill, 2025

Legal Commentary on

Introduction

The mechanism of Tax Deduction at Source (TDS) is a cornerstone of the Indian income tax regime, ensuring steady revenue inflow to the government and promoting tax compliance at the source of income generation. Over the years, the scope and application of TDS provisions have evolved, adapting to changing economic realities and policy objectives. Two such provisions - Clause 393(1)[Table: S.No. 6(ii)] of the Income Tax Bill, 2025 and Section 194M of the Income-tax Act, 1961-are particularly significant for individuals and Hindu Undivided Families (HUFs) making substantial payments for contractual work, professional services, or commissions/brokerages. This commentary provides a comprehensive analysis of Clause 393(1)[Table: S.No. 6(ii)], explores its legislative intent, practical implications, and potential ambiguities, and juxtaposes it with the existing Section 194M to elucidate continuities, changes, and implications for stakeholders.

Objective and Purpose

The legislative intent behind introducing specific TDS provisions for individuals and HUFs not engaged in business or professional activities, or not otherwise liable to deduct TDS under the main business provisions (such as Sections 194C, 194H, or 194J), is to widen the tax base and plug potential revenue leakages. Historically, individuals and HUFs making high-value payments for personal or non-business purposes could escape the TDS net, creating a compliance gap and facilitating tax evasion or under-reporting by recipients. Section 194M, inserted by the Finance (No. 2) Act, 2019, addressed this gap by mandating TDS on certain payments by individuals/HUFs exceeding a prescribed threshold. The Income Tax Bill, 2025, through Clause 393(1)[Table: S.No. 6(ii)], seeks to continue and rationalize this regime, possibly with refinements in scope, definitions, and compliance requirements, as part of a broader overhaul of the TDS framework.

Detailed Analysis of Clause 393(1)[Table: S.No. 6(ii)] of the Income Tax Bill, 2025

1. Structure and Scope of the Provision

Clause 393(1) lays down the general rule for TDS, specifying that where any income or sum of the nature specified in the accompanying Table is credited or paid by the person specified, to a resident, the payer shall deduct income-tax at the specified rate, subject to threshold limits and timing rules. The Table is organized by serial numbers, each corresponding to a category of payment or income.

Serial No. 6(ii) reads as follows:

• Nature of Payment: Any sum-
  • (a) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract; or
  • (b) by way of fees for professional services; or
  • (c) by way of commission [not being insurance commission referred to in serial number 1(i)] or brokerage.
• Payer: Any person, being an individual or Hindu undivided family [other than those required to deduct income-tax as per Sl. No. 6(i) and (iii) or Sl. No. 1(ii)].
• Rate: 2%.
• Threshold limit: Rs. 50,00,000.

This provision essentially covers high-value payments by individuals or HUFs (not otherwise required to deduct tax under the main business/professional TDS provisions) for contractual work, professional services, commission, or brokerage, with a threshold of Rs. 50 lakh per financial year, and a TDS rate of 2%.

2. Definitions and Exclusions

• Payer: The provision applies to individuals or HUFs who are not required to deduct TDS under:
  • Sl. No. 6(i): Payments by a "designated person" (typically those in business/profession with turnover above a threshold, akin to the main TDS provisions under the 1961 Act such as 194C, 194H, or 194J).
  • Sl. No. 6(iii): Payments by a "specified person" (possibly companies, firms, etc. as defined elsewhere).
  • Sl. No. 1(ii): Commission or brokerage by a "specified person".
• Nature of Payments: The terms "work", "professional services", "commission", and "brokerage" are not defined in the extract, but are likely to adopt definitions similar to those in the current 1961 Act:
  • "Work" (as per 194C Explanation): Includes advertising, broadcasting, carriage of goods/passengers, catering, manufacturing/supplying product as per customer specification, etc.
  • "Professional services" (as per 194J Explanation): Includes services rendered by legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, etc.
  • "Commission or brokerage" (as per 194H Explanation): Any payment received/directly/indirectly for services rendered in the course of buying/selling goods, transactions relating to any asset, valuable article, or thing, excluding insurance commission.
• Threshold Limit: No TDS is required if the sum, or aggregate of sums, paid to a resident during the financial year does not exceed Rs. 50,00,000. This is a significant threshold, ensuring that only high-value transactions are covered, thus balancing compliance burden with revenue interests.
• Rate: The TDS rate is 2% of the sum paid or credited.
• Timing: TDS is to be deducted at the time of credit or payment, whichever is earlier.

3. Procedural Aspects and Compliance

• Exemption from Main TDS Provisions: The provision applies only if the payer is not otherwise liable to deduct tax under the main TDS sections (i.e., not in business/profession above prescribed turnover, not a company/firm, etc.). This ensures that there is no overlap or double deduction.
• Aggregation: The threshold applies on an aggregate basis for payments to each payee during the financial year, requiring payers to monitor cumulative payments for compliance.
• Rate and Nature of Deduction: The flat 2% rate applies regardless of the nature of underlying service (work, professional, commission), simplifying compliance.
• Documentation and Reporting: The provision does not specify PAN requirements, TDS certificate issuance, or return filing, but these may be detailed in rules or subsequent sections. Under the current Section 194M, there is no requirement to obtain a TAN (Tax Deduction Account Number), easing compliance for individuals/HUFs-whether this continues under the new provision would depend on subordinate legislation.
• Exclusions: Payments for personal purposes are not explicitly excluded in the main text, but under the "No Deduction at Source" Table, payments by individuals/HUFs exclusively for personal purposes are exempt-this aligns with the policy of not burdening personal/non-commercial transactions with TDS compliance.

4. Interplay with Other Provisions and Ambiguities

• Overlap with Other TDS Provisions: The clause is carefully drafted to avoid overlap with Sl. No. 6(i) (business/profession payers) and 6(iii) (specified persons). However, practical issues may arise if the status of the payer changes during the year, or if there is ambiguity in classification.
• Definition of Terms: The lack of explicit definitions in the Bill may create interpretative ambiguity, especially if the definitions in the 1961 Act are amended or repealed. Judicial guidance or clarificatory circulars may be required to resolve disputes.
• Aggregation and Threshold Calculation: The provision requires aggregation of payments for threshold determination, but does not clarify whether this is on a contract-wise or payee-wise basis. The prevailing practice is payee-wise aggregation, but explicit clarification would aid compliance.
• Nature of Payment: The inclusion of both "work" and "professional services" ensures wide coverage, but may also lead to interpretative disputes where the distinction is blurred (e.g., technical consultancy vs. contract work).
• No Deduction at Source Table: As per Sl. No. 8(b) and Sl. No. 9, payments exclusively for personal purposes by individuals/HUFs are exempt from TDS, providing relief for non-commercial transactions and aligning with the legislative intent of targeting only large, non-personal payments.

Practical Implications

• For Individuals and HUFs: The provision brings high-value, non-business payments by individuals/HUFs within the TDS net, requiring them to monitor payments, deduct tax, deposit it with the government, and comply with reporting requirements. While the high threshold of Rs. 50 lakh limits the scope to significant transactions (such as construction contracts, large professional fees, property renovations, etc.), it does impose compliance on non-business taxpayers who may not be familiar with TDS processes.
• For Recipients (Contractors, Professionals, Agents): The provision ensures greater reporting and traceability of high-value income, reducing the scope for tax evasion. However, it may also lead to cash flow issues if TDS is not appropriately credited, and require recipients to reconcile TDS credits in their tax returns.
• For Tax Authorities: The provision enhances the ability to track high-value transactions and widen the tax base, but also necessitates clear administrative guidance to address ambiguities and ensure smooth compliance by non-business payers.
• Compliance Requirements: While procedural relaxations (such as exemption from TAN in Section 194M) reduce compliance burden, the need to monitor cumulative payments, deduct and deposit TDS, and issue TDS certificates remains a challenge for individuals/HUFs not accustomed to tax withholding obligations.

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

1. Text of Section 194M

Section 194M, inserted by the Finance (No. 2) Act, 2019 (effective from 1 September 2019), provides as follows:

• Any individual or HUF (other than those required to deduct tax under 194C, 194H, or 194J) responsible for paying any sum to a resident for carrying out any work (including supply of labour), commission (not being insurance commission), brokerage, or fees for professional services, shall deduct TDS at 2% (w.e.f. 1 October 2024; earlier 5%) if the aggregate payments exceed Rs. 50,00,000 in a financial year.
• No requirement to obtain TAN (Section 203A not applicable).
• Definitions of "contract", "commission or brokerage", "professional services", and "work" are as per corresponding explanations in Sections 194C, 194H, and 194J.

2. Key Similarities

• Coverage: Both provisions apply to individuals/HUFs not otherwise liable to deduct TDS under the main business/professional TDS sections, and cover payments for contract work, professional services, and commission/brokerage.
• Threshold: Both have a threshold of Rs. 50 lakh per financial year, ensuring only high-value payments are covered.
• Rate: Both prescribe a TDS rate of 2% (Section 194M was amended from 5% to 2% effective 1 October 2024).
• Timing: Both require deduction at the time of credit or payment, whichever is earlier.
• Definitions: Both rely on definitions from the main TDS sections for key terms, ensuring consistency and clarity.
• Aggregation: Both require aggregation of payments to each payee for threshold determination.
• Exemption for Personal Purposes: Both exempt payments made exclusively for personal purposes by individuals/HUFs from TDS, aligning with the policy of targeting only non-personal, high-value transactions.

3. Key Differences and Evolution

• Structural Integration: Clause 393(1)[Table: S.No. 6(ii)] is part of a comprehensive, tabular TDS regime in the 2025 Bill, integrating various TDS provisions into a single framework, whereas Section 194M is a standalone section in the 1961 Act.
• Reference to Other Provisions: The new provision cross-references other serial numbers in the Table (e.g., excluding those liable under 6(i), 6(iii), 1(ii)), while Section 194M refers to 194C, 194H, and 194J. The underlying intent is similar, but the drafting is adapted to the new structure.
• Definitions: Section 194M explicitly adopts definitions from other sections, while the Bill relies on cross-references and may require reading definitions from elsewhere in the Bill or subordinate legislation.
• Procedural Relaxations: Section 194M explicitly exempts payers from obtaining a TAN, easing compliance. The Bill's provision does not specify this, leaving the matter to rules or administrative instructions. If the exemption continues, it would be a significant relief for non-business payers.
• Wording and Clarity: The Bill's provision is more concise and tabular, which aids in quick reference but may create interpretative challenges for complex cases. Section 194M's narrative format is more detailed.
• Potential for Expansion: The Bill's tabular structure allows for easier modification, addition, or rationalization of TDS categories in the future, potentially increasing flexibility for policymakers.

4. Policy and Compliance Considerations

• Compliance Burden: Both provisions impose new compliance requirements on individuals/HUFs making high-value payments, but the high threshold ensures that only significant transactions are covered. The exemption from TAN and simplified procedures u/s 194M should ideally be retained in the new regime to avoid discouraging compliance.
• Revenue Impact: The provision is aimed at plugging revenue leakages from high-value, non-business transactions, and is likely to yield significant tax collections from sectors such as construction, consultancy, and agency services.
• Risk of Litigation: Ambiguities in definitions, aggregation, and classification of payments may lead to disputes, particularly where the line between personal and non-personal payments is blurred, or where the payer's status changes during the year.
• Administrative Guidance: Clear rules, FAQs, and circulars will be essential to ensure smooth transition and compliance, especially for non-business taxpayers unfamiliar with TDS processes.

Comparative Table

Conclusion

Clause 393(1)[Table: S.No. 6(ii)] of the Income Tax Bill, 2025 represents a continuation and rationalization of the policy embodied in Section 194M of the Income-tax Act, 1961, targeting high-value payments by individuals and HUFs for contract work, professional services, and commissions/brokerages. The provision is carefully crafted to avoid overlap with the main TDS sections, applies a high threshold to minimize compliance burden, and adopts a flat 2% rate for simplicity. Its integration into a comprehensive, tabular TDS framework enhances clarity and flexibility, but also necessitates careful administrative guidance to address potential ambiguities and ensure smooth compliance. The comparative analysis reveals substantial continuity between the two regimes, with refinements in drafting and structure reflecting broader reforms in the TDS framework. Going forward, clarity on procedural requirements (such as TAN exemption), aggregation methodology, and definitions will be critical to achieving the policy objectives of widening the tax base and promoting compliance, while minimizing undue burden on non-business taxpayers.

Full Text:

Clause 393 Tax to be deducted at source.