TDS on Commission and Brokerage: Complete Guide to Section 194H
Commission and brokerage payments are widely prevalent across various sectors of business. Payments made to agents, intermediaries, brokers, distributors, and representatives often form a significant part of operational expenses. Since commission income is typically earned through facilitation of transactions rather than direct employment, the Income-tax Act provides a separate mechanism for deduction of tax at source on such payments.
TDS on commission and brokerage is governed by Section 194H of the Income-tax Act, 1961. This provision ensures that income earned by agents and intermediaries is properly reported and subjected to tax at the time of payment itself.
Legislative Intent Behind Section 194H
The primary purpose of Section 194H is to capture tax on income earned through agency relationships. Commission income is often paid periodically or adjusted against accounts, and without a TDS mechanism, such income could remain underreported. By placing the obligation on the payer to deduct tax at source, the law ensures timely tax collection and improved compliance.
Meaning of Commission and Brokerage
For the purpose of Section 194H, commission or brokerage refers to any payment received or receivable, directly or indirectly, by a person acting on behalf of another person. Such payment is typically made for services rendered in the course of buying or selling goods, securing business, or facilitating transactions between parties.
Commission income usually arises from an agent–principal relationship, where the agent acts on behalf of the principal and earns a consideration for such services. The terminology used in agreements—such as incentive, margin, service charge, or brokerage—is not decisive. What matters is the substance of the transaction and the existence of an agency arrangement.
Who is Required to Deduct TDS
Any person responsible for paying commission or brokerage to a resident is required to deduct TDS under Section 194H. This obligation applies to companies, partnership firms, LLPs, trusts, cooperative societies, and individuals or HUFs who are liable to tax audit under the Income-tax Act.
Individuals and HUFs not subject to audit are generally not required to deduct TDS under this section.
Rate of TDS and Threshold Limit
TDS under Section 194H is deducted at a rate of 5%. However, tax is required to be deducted only when the total commission or brokerage paid or credited to a payee exceeds ₹15,000 in a financial year.
Once this threshold is crossed, TDS becomes applicable on the entire amount paid or credited during the year, and not merely on the excess over ₹15,000.
Timing of Deduction
TDS under Section 194H is required to be deducted at the time of credit of the commission amount to the account of the payee or at the time of actual payment, whichever is earlier. This includes situations where commission is credited to a suspense account or adjusted through journal entries.
Failure to deduct tax at the time of such accounting entries is a common compliance lapse and may result in interest liability.
Distinction Between Commission and Trade Discount
One of the most frequent areas of dispute under Section 194H is the distinction between commission and trade discount. A trade discount is generally allowed upfront and reduces the sale price, whereas commission is a payment made for services rendered as an agent.
If the relationship between parties is on a principal-to-principal basis and the discount is built into the pricing structure, it may not qualify as commission. However, if the intermediary acts on behalf of the principal and earns a consideration for facilitating sales, Section 194H may apply.
Importance of PAN and Accurate Reporting
Permanent Account Number (PAN) of the commission recipient must be obtained and correctly reported. PAN-based reporting ensures that TDS credit is properly reflected in the deductee’s tax records. Non-availability of PAN may result in deduction of tax at a higher rate and complications in reconciliation.
Practical Illustration
Assume a company pays sales commission of ₹75,000 during a financial year to an agent for procuring business. Since the aggregate payment exceeds the threshold limit, TDS at the rate of 5% is required to be deducted. Accordingly, ₹3,750 is deducted as TDS, and the balance amount is paid to the agent. The deducted tax is deposited with the Government and reflected in the agent’s tax records.
Common Compliance Issues Under Section 194H
In practice, disputes often arise due to incorrect classification of payments, especially where incentives or margins are involved. Other common issues include ignoring the annual threshold limit, non-deduction of tax on year-end provisions, and delay in depositing deducted tax.
Such non-compliance may lead to interest liability, late filing fees, and notices from the Income Tax Department.
Post-Deduction Compliance Requirements
After deducting TDS under Section 194H, the deductor must deposit the tax within prescribed timelines, file quarterly TDS returns, and issue the applicable TDS certificate to the commission recipient. These steps are essential to ensure that the deductee can claim credit of the tax deducted while filing the income-tax return.
Conclusion
Section 194H is a critical provision governing taxation of commission and brokerage income. Given the frequent use of agents and intermediaries in business transactions, careful evaluation of the nature of payments and relationships is essential. Proper compliance with TDS provisions not only avoids penalties but also ensures smooth tax administration for both payers and recipients.
