Section – 194T

The Hon’ble Finance Minister has introduced a new tax deduction requirement (TDS) for firms, including LLPs, effective from Assessment Year 2025- 26 (FY 2024-25) as per new budget Proposals.

Key points:

TDS Rate: 10% on the total payments made to partners, including salary, remuneration, bonus, commission, or interest.

Timing: Deduction is required at the time of crediting the amount (including in the capital account maintained by the firm in the books of accounts) or actual payment, whichever is earlier.

Threshold: No deduction if the total payments do not exceed in aggregate ₹20,000 in the financial

Exclusion: Share of profit is not subject to this deduction.

Rationale behind the new section:

The Government’s rationale for introducing the new section is predominantly to address the current legislative gap regarding tax deductions on specific payments. By incorporating this section, it is proposed that these payments be subjected to TDS regulations. However, the underlying objective appears to be the establishment of a more orderly and timely system for maintaining and finalizing accounts, thereby mitigating the last-minute rush associated with income tax return submissions.

Potential challenges arising from this section:

1. Aggregate Deduction:

• The provisions of the new sections will be effective from AY 2025-26 (FY 2024-25), but the bill is pending in the Rajya Sabha as of now. Once approved by the Rajya Sabha and Hon’ble President, it will apply to FY 2024-25.
• Currently, tax deductions are pending, and after the Finance Act, 2024 is implemented, an aggregate deduction of 10% on the payments made over approximately 5 months to partners will apply which significantly increasing their financial burden.

2. Additional Compliance by the Firm

The Firm must file the ITR-5 form, disclosing payments to partners (such as remuneration, interest, bonus, commissions, and profit shares) along with their PANs. With the new section, the firm will also need to compute and file TDS returns under the same Act. This results in additional compliance for the firm and repetitive information collection for the department.

3. The partnership firm may be subject to penal action under the provisions of the Act.

• Currently, the due date for filing the TDS return for the quarter ending 31st March 2025 is 31st May 2025, with the TDS deduction deadline set for 30th April 2025. Failure to file the TDS return or to deduct and remit TDS on time results in penalties, late fees, and interest on the TDS amount.
• Additionally, the deadline for filing the Income Tax return is 31st July for non-audit firms and 31st October for audit firms, following the end of the relevant financial year.

With the introduction of this new section, firms whose remuneration is linked to profits and who finalize their accounts at the time of filing the ITR or just before will likely miss the TDS deduction and filing deadlines. Consequently, they will be deemed as defaulters, incurring late fees and interest on TDS payments, which could amount to approximately 4 months for non-audit firms and 7 months for audit firms. This imposes an additional financial burden on the firm, despite their best efforts to comply.

(Therefore, the Legislature’s indirect intent to regularize and finalize the books of accounts within a specific timeframe is underscored by this provision.)

Controversies:

From the above analysis, it can be said that the Government has made TDS mandatory on salary, remuneration, bonus, commission, or interest. However, withdrawal by the partner is excluded and the firm can pay the partner by way of monthly/quarterly withdrawal as suitable and delay the TDS implication until the remuneration will not be finalized based on the profit situation of the firm.

However, this will create the practical dilemma that the withdrawal made by the partner during the year on periodic basis would cover under the remuneration clause or not and tax would be deductible on that withdrawal part or not as many times withdrawal made by the partner will adjust against the remuneration and if this situation arise then on what amount the TDS should be deducted and when, is the moot question as of now. However, one should have to draft the remuneration clause wisely in the partnership deed to get benefited.

Conclusion:

Therefore, the section introduced by the Government demands more amendments to make it more efficient and effective and the Government will have to relook into it before making it mandatory