Introduction
A person paying commission (other than insurance commission) or brokerage shall deduct tax therefrom at the rate of 5%. The tax shall be deducted if the sum paid or payable exceeds Rs. 15,000.
1. About
1.1. Deductor
Any person, other than an individual or HUF, shall be required to deduct tax under this provision. However, an individual or HUF shall also be liable to deduct tax under this provision if his turnover or gross receipts, during the financial year immediately preceding the financial year in which commission or brokerage is paid or credited, exceeds Rs. 1 crore in case of business and Rs. 50 lakhs in case of a profession.
An individual or HUF, not liable for deduction of tax under this provision, shall deduct tax in accordance with provisions of Section 194M.
1.1-1. Meaning of Commission or brokerage
'Commission' or 'Brokerage' includes any payment received, directly or indirectly, by a person acting on behalf of another person, for services rendered (not being professional services) or for any services in the course of buying or selling of goods or for any transaction relating to any asset, valuable article or thing but not being securities.
For example, if a person pays commission to his agent for buying and selling goods on his behalf, then tax shall be deducted under section 194H. However, if he pays commission to a share broker for buying and selling shares then no tax shall be deducted under this provision.
In the case of an agency contract, tax deduction shall be required under this provision even if the agent receives the payment indirectly from the third party (for say, a customer). Further, TDS liability cannot be avoided by the principal even if he does not have control over the payments indirectly received by the agent from the customers.
Example, an airline company enters into a contract with its agents wherein they are allowed to sell tickets to the customer at a price higher than the price fixed by the airline and retain the excess amount. In this case, the excess amount received by agents would be treated as commission, and accordingly, the airline company shall be required to deduct tax therefrom.
1.2. Deductee
Tax is required to be deducted under this provision only if the commission or brokerage is payable to a person who is resident in India. The tax shall be deducted under Section 195 if sum is payable to a non-resident.
1.3. Threshold limit
Tax shall be deducted if amount of commission and brokerage paid or payable during the financial year exceeds Rs. 15,000.
1.4. Rate of TDS
Tax shall be deducted at the flat rate of 5%. The rate shall not be further increased by Surcharge and Health & Education Cess.
If the deductee does not furnish his PAN to the deductor, the tax shall be deducted at the rate prescribed under Section 206AA.
If such deductee has not furnished the return of income for a specified period, the tax shall be deducted at the rate prescribed underSection 206AB.
Where both the provision of Section 206AA and Section 206AB are applicable, that is, the deductee has neither furnished his PAN to the deductor nor has he furnished his return of income for the specified periods, the tax shall be deducted at the rates provided in section 206AA or section 206AB, whichever is higher.
1.5. Time of Deduction
The tax is deducted at the time of payment or at the time of credit of commission or brokerage, whichever is earlier. The tax shall be deducted even if sum is credited to the 'Suspense Account'.
1.6. Exemption from TDS
1.6-1. From Commission payable by BSNL or MTNL
No tax is required to be deducted from commission or brokerage payable by Bharat Sanchar Nigam Limited (BSNL) or Mahanagar Telephone Nigam Limited (MTNL) to their public call office franchisees.
1.6-2. From discount given to Stamp Vendor
The stamp vendors purchase stamp papers at denominated price less discount on principal to principal basis and there is no contract of agency at any point of time between the parties.
As licensed stamp vendors take delivery of stamp papers on payment of full price less discount and they sell such stamp papers to retail customers, neither of the two activities (buying from the government and selling to the customers) can be termed as service in the course of buying or selling of goods. Therefore, the discount given to the licensed stamp vendors does not fall within the expression 'commission' or 'brokerage'.
1.6-3. From Turnover Commission paid to Banks
The Board has clarified that tax would not be required to be deducted by RBI on the amount of turnover commission paid or credited by it to the bank for their services to collect the tax and to issue the tax refunds.
1.6-4. Fees retained by advertising companies from media companies for canvassing/booking advertisements
The CBDT has clarified that no TDS is attracted on payments made by television channel/newspaper companies to the advertising agency for booking or procuring of or canvassing of advertisements.
1.6-5. From sum payable to Govt.
By virtue of Section 196, no tax shall be deducted under this provision from any sum payable to the Govt., RBI, Mutual Fund or any Corporation established under the Act which is exempt from tax.
1.6-6. From sum payable to specified IFSC units
The Central Government has specified that no tax is required to be deducted from the following specified payments to an IFSC unit:
IFSC Unit (payee) as a | Nature of payment |
Banking Unit[8] | Referral fees, Brokerage, and Commission on factoring and forfaiting services |
Finance Company[9] | Commission on factoring and forfaiting services |
Finance Unit[10] | Commission on factoring and forfaiting services |
Registered Distributor[11] | Distribution fee and Commission fee |
Custodian[12] | Commission fee |
International Trade Finance Service or "ITFS"[13] | Commission income |
FinTech Entity[14] | Commission income |
However, to avail of this exemption, the following conditions must be fulfilled:
(a) The IFSC unit receiving the income (payee) is required to furnish a statement-cum-declaration in Form No. 1 to the payer, giving details of previous years relevant to the 10 consecutive assessment years for which the payee opts for claiming deduction under Section 80LA(1A) and (2). The Form shall be furnished for each previous year relevant to such 10 consecutive assessment years and duly verified by the authorized person responsible for signing the return of income; and
(b) The payer shall not deduct tax on payment made or credited to the payee after the date of receipt of the copy of statement-cum-declaration in Form No. 1 and furnish the particulars of all the payments made to the payee on which tax has not been deducted in the TDS statement.
The above relaxation shall be available to the 'payee' only during the said previous years relevant to the 10 consecutive assessment years as declared by the 'payee' in Form No. 1 for which deduction under section 80LA is being opted. The 'payer' shall be liable to deduct tax on payments for any other year.
2. Compliance
2.1. Certificate for lower or nil deduction
Where estimated tax liability of an assessee justifies nil or lower deduction of tax, he can apply to the assessing officer for issue of lower deduction certificate under Section 197. However, assessee shall have no option to file a declaration to the deductor for nil deduction of tax under Section 197A.
2.2. Deposit of TDS
Tax deducted at source is required to be deposited to the credit of Central Government through Challan ITNS 281 within 7 days from the end of the month in which tax was deducted. However, the tax deducted during the month of March shall be deposited by 30th April of the next financial year. If deductor is a government office and tax is required to be deposited without submitting an Income-tax Challan, the Govt. Dept. shall deposit the tax on the same day on which tax has been deducted.
2.3. Filing of TDS Statement
The person responsible for deduction of tax at source is required to file statement of tax deducted at source in Form 26Q on quarterly basis.
2.4. TDS Certificate
The deductor shall issue a TDS certificate to the assessee in Form No. 16A within 15 days from due date of furnishing of TDS Statement. This certificate shall be generated and downloaded from the Dept. website.
3. Consequences of default
3.1. Failure to deduct or deposit tax
If any person, who is responsible for deduction of tax at source, fails to deduct or after deduction fails to deposit the same to the credit of Central Government, he shall be deemed to be an assessee-in-default. In such case, he shall be liable for payment of interest under Section 201.
3.2. Penalty and Prosecution
Any person who is deemed as an assessee-is-default shall be liable for payment of penalty under Section 271C which shall not exceed the amount he failed to deduct. Further, he shall be liable for prosecution under Section 276B.
3.3. Failure to furnish TDS statement
Any person who is responsible for deduction of tax at source is required to furnish a statement of tax deducted at source on a quarterly basis, failing which he shall be liable for payment of fee under Section 234E at the rate of Rs. 200 per day during which such default continues. However, such fee shall not exceed the amount of TDS. Further, he shall also be liable for payment of penalty under Section 271H and Section 272A.
3.4. Failure to issue TDS certificate
If any person, who is responsible for issue of TDS certificate, fails to issue such certificate, he shall be liable for payment of penalty under Section 272A.
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