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TDS on Commission and Brokerage

Section 194H of the Income Tax Act deals with TDS and its scope in terms of commission and brokerage. The purpose of the present article is to explain the provisions of Section 194H.

What are Commission and Brokerage?

Commission or brokerage involves any payment, received or receivable, directly or indirectly, or by a person acting on behalf of another person. TDS in relation to commission or brokerage includes the following:

• Services rendered, provided it isn’t professional services.
• Services rendered in the course of buying and selling of goods.
• Transactions relating to any asset, valuable article or thing, other than securities.

Taxpayers should note that the concept of presumptive taxation is not applicable to income from commission.

Liability to Deduct Tax

Income tax is supposed to be deducted by any person, other than an individual or a Hindu Undivided Family, who is responsible for paying the resident, any income by way of commission or brokerage. This provision is exclusive of Insurance commission which is separately dealt with. Individuals and Hindu Undivided family, who are covered in Section 44AB (Section 44AB deals with tax audit) are also entitled to perform tax deductions.

Timing of Deduction

Deduction will be implemented at the time of credit of the taxable income to the account of the payee or to any other account, whether it is referred to as suspense account or by any other name, or at the time of payment of such income in cash, or by the issue of a cheque or draft or by any other mode, whichever is earlier among these.

Rate of TDS

The rate of TDS, applicable until the end of the financial year 2017-18, will be 5%. Surcharge, education cess, or SHEC shall not be added to the above rates. Hence, tax deduction at source will be executed at the basic rate. If the deductee fails to quote PAN, the rate of TDS will be 20%.

When is TDS under this Section inapplicable?

TDS is not applicable in the following scenarios:

• Where the amount or its aggregate does not exceed 15,000 rupees in a particular financial year.
• Where a person makes an application to an officer under Section 197 requesting deduction of tax at NIL, or at a lower rate.

Deduction of Tax at NIL or at a lower Rate

As already discussed, the deductee can make an application under Section 197 seeking deduction of tax at NIL or at a lower rate. The approval of the Assessing Authority is subject to certain conditions, predominantly that of furnishing of PAN.

Time-Limit

Tax deducted during the months of April-February must be deposited on or before the 7th of next month, while tax deducted during the month of March must be deposited on or before the 30th of April.

Issue of TDS Certificate and Time-Limit

All deductors must ensure proper and timely issue of certificates. The certificate must be issued within the following dates:

Non-Government Deductor

• The deadline for issuing certificates for the months of April-June would be the 30th of July.
• The deadline for issuing certificates for the months of July-September would be the 30th of October.
• The deadline for issuing certificates for the months of October-December would be the 30th of January.
• The deadline for issuing certificates for the months of January-March would be the 30th of May.

Government Deductor

• The deadline for issuing certificates for the months of April-June would be the 15th Of August.
• The deadline for issuing certificates for the months of July-September would be the 15th of November.
• The deadline for issuing certificates for the months of October-December would be the 15th of February.
• The deadline for issuing certificates for the months of January-March would be the 30th of May.

Service Tax Component

TDS would not be performed on the additional service tax component of the bill, but only on the actual bill payable.

Discounts and Applicability of TDS

Tax deduction at source under Section 194H is not inclusive of discounts on stamp papers, incentives offered to distributors and so on.

Principal-Agent Relationship

Principal and agent relationship is fundamental in determining TDS under Section 194H. TDS is not applicable in a case where sales were performed directly without the involvement of an agent.

TDS where Commission/Brokerage is Retained

Deduction of tax is also applicable in a situation where commission or brokerage is retained by the consignee/agent and not remitted to the principal, as the retention of the said personnel amounts to constructive payment of the same to him by the consignee or principal. In such a case, the deduction of tax at source is required to be made from the amount of commission. Therefore, the consignor/principal must deposit the tax-deductible on the amount of commission income to the credit of Central Government within the prescribed time.

Turnover Commission payable by RBI to Agency Banks

The work of receipt of tax payments and the issue of refunds are performed by an agency bank, which is authorized to perform the various functions of the Government. In turn, the Central Government, through the RBI, makes a payment to these agency banks. This kind of payment is known as a “Turnover commission”, which would not incur a deduction of tax at source.

More TDS Exemptions

The following payments will be devoid of TDS, given a scenario where these payments have been made by a person to a bank listed in the second schedule of Reserve Bank of India Act, 1934, except a foreign bank:

• Bank guarantee commission.
• Cash management service charges.
• Depository charges on maintenance of DEMAT accounts.
• Commodity warehousing service charges.
• Underwriting service charges.
• Clearing charges, including interchange fee or the likes of it, which is charged at the time of settlement.
• Clearing activities under the Payments and Settlements Act, 2007.
• Credit card or debit card commission for transactions between the merchant establishment and acquirer bank.