Section 194T: Challenges in TDS on Partner Payments
The introduction of Section 194T, effective from April 1, 2025, mandates a 20% tax deduction at source (TDS) on salary, interest, bonus, or commission exceeding ₹20,000 annually, payable to a partner in a partnership firm. While intended to streamline taxation, the provision poses practical challenges. Firstly, throughout the financial year, partners may draw or contribute varying amounts to the firm. Where the firm credits salary or interest only at year’s end, TDS applied on interim withdrawals could run out of sync with the final credited income, causing mismatches. Where the firm does not credit any salary or interest in a year due to losses or low profitability, the TDS deductions during the year would give rise to tax paid without there being any corresponding income, complicating compliance with Form 26AS reporting and TDS certificate issuance.
The “credit or payment, whichever is earlier” provision mandates TDS on all partner withdrawals made in the year on account of salary or interest. The consequence of this provision is a rather heavy-handed process, requiring continuous vigilance and adjustments by firms. It has been further criticized for causing compliance obstacles, not to mention withholding funds from partners that may otherwise be utilized fruitfully. The MOF and the CBDT indicated that it intend to further simplify tax procedures and may even reduce the 71 extant provisions contained in the TDS. Advocates for its repeal assert that Section 194T should be repealed before being implemented and that this would avoid resulting administrative inefficiencies as well as an undue burden on taxpayers, making the entire tax process much more fluid. Now, the Income Tax Department is proud of awarding speedy refunds and the CBDT is even more proud in announcing that over Rupees Two Lakh Crores have been refunded. But this is something to lament because so much money has been collected from where it is not due. In refunding such a huge amount the sources of the department are wasted and the assessee’s money is withheld for non-productive purposes, which could have been avoided if tax is not deducted where it is not actually due.
This new section 194 specifies that 20% tax is to be deducted at source from 01.04.2025 if the same exceeds Rs. 20,000/- in a year from the interest, salary, bonus commission, etc., payable to the partner of a Partnership Firm at the time of credit or payment whichever is earlier. The following are the practical problems in implementing this new TDS provision: 1. Total amount outstanding to the credit of a partner in the Firm’s Books of Account is Rs. 10,00,000/-. He has been drawing money throughout the year and whenever there is a shortage in the firm’s hand he brings in money. At the end of the year if the credit balance is more than Rs. 10,00,000/-, then he has brought in fresh capital and hence no TDS is required. The interest and salary are credited at the end of the year. In my opinion, it is sufficient to deduct TDS at the end of the year since there are no drawings toward salary/interest during the year. But if ultimately the credit balance at the yearend is below Rs. 10,00,000/- (before the credit of salary/interest), Tax should have been deducted during withdrawals because such drawings may be termed a drawing towards salary/interest. But it is a cumbersome affair. The Partnership firm may not know whether they are going to give salary/interest till the year-end.
The section says credit or payment whichever is earlier and every payment to the partner may be subject to TDS even though the salary and interest are credited at the year’s end because drawings made during the year will be treated as payments towards salary/interest. There will be TDS at the year-end if salary/interest has not been credited because of the paucity of profits or due to losses. There shall not be any income in the form of salary or interest if 10% was deducted and paid during the year from the drawings. Then how to issue TDS certificate and how can it be reported in Form No. 26AS, where there will be TDS and NIL Income?