Know When Business and Profession required to deduct TDS even if tax audit is not applicable
Tax deduction at source is a means of collecting tax on income, dividends or asset sales, by requiring the payer to deduct tax due before paying the balance to the payee. In India, under the Indian Income Tax Act of 1961, income tax must be deducted at source as per the provisions of the Income Tax Act, 1961. In this article we will discuss about business and profession, also who is required to deduct TDS.
What is Business?
Business is an economic activity concerned with the production or purchase and sale of merchandise and rendering of services with the purpose of earning profit. As per section 2(13) of the Income tax act, 1961 Business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.
What is Profession?
Profession is a form of economic activities, wherein special skills, knowledge and expertise is required to be applied by the person, in his occupation. So, profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill. As per section 2(36) of the Income tax act, 1961 Profession includes vocation. As per section 44AA profession includes the following:
- Film Artist
- Technical Consultancy
- Interior Decorator
- Company Secretary
What is Tax audit?
Tax audit is the official examination or audit of the tax department to the tax return that declares by taxpayers as required by law. Section 44AB of the Income-tax Act, 1961 contains the provisions for the tax audit of an entity. Under section 44AB, every person who is engaged in business or profession is required to conduct tax audit and gets his books of accounts audited by a practicing Chartered Accountant if during the previous the turnover or gross receipts of the assessee is more than Rs. 1 crore in case of business or Rs. 50 Lakhs in case of profession.
In case the person is covered under presumptive taxation scheme of Income tax act than the assessee is required to conduct tax audit if the income from business is less than 8% of the total turnover in case of business assessee or less than 50% of the total receipts in case of person carrying professions.
The Finance Act 2020, has made amendment under section 44AD and increased the turnover limit to Rs. 5 crore. In order to qualify for the limit the assesee is required to fulfill 2 conditions as follows:
a. total cash receipts during the previous year is less than 5% of the total receipts, and;
b. total cash payment during the previous year is less than 5% of the total payments.
Who is required to deduct TDS?
Any person making specified payments mentioned under the Income Tax Act are required to deduct TDS at the time of making such specified payment. But no TDS has to deducted if the person making the payment is an individual or HUF whose books are not required to be audited as per section 44AB.
As per the amendment made by the Finance act 2020, every person is required to deduct TDS if during the previous year the turnover or gross receipts is more than Rs. 1 crore in case of assessee caring business or Rs. 50 Lakhs in case of assessee caring profession.
This is applicable from FY 2020-21 and AY 2021-22
Understanding with example:
Mr. X is caring business of cement manufacturing during the financial year 2020-21 he made payment of Rs. 50,000 to a contractor. Let us decide whether Mr. X is required to deduct TDS if turnover of Mr. X during year is Rs. 1.2 crore and filing income tax return on presumptive basis without Tax Audit
As per section 194C Any person responsible for paying any sum to a resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract, he is liable to deduct TDS.
As the turnover of business is crossing 1 Cr, Mr X is liable to deduct TDS even if he is not auditing books of Accounts under section 44AB
Where payment made to contractor is more than Rs. 30,000 than assessee is compulsorily required to deduct TDS.
In the given case the turnover of Mr. X is more than Rs. 1 crore and the payment has crossed the threshold limit of Rs. 30000, hence he shall be liable to deduct TDS from the payment made to contractor.