Compliance Checklist for MSME Payments and Tax Audit Reporting under Section 43B(h) for AY 2025-26

Introduction

The Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006, and the Income Tax Act are key legislative tools that regulate and govern the recognition of MSMEs in India. With MSMEs being a backbone of the Indian economy, playing a vital role in both goods and services sectors, ensuring their financial health through timely payments and compliance with legal obligations is crucial.

Effective from Assessment Year (AY) 2025-26, Section 43B(h) of the Income Tax Act introduces provisions for payments made to Micro and Small Enterprises (MSEs). According to this provision, businesses are required to make payments within specified time limits—15 days for goods and services without a written agreement, and 45 days if a written agreement exists. Any failure to adhere to these timelines will result in the disallowance of expenses related to such payments, leading to potential tax repercussions.

This checklist provides businesses and auditors with a clear, step-by-step approach to ensure compliance with the regulations under Section 43B(h). It covers crucial aspects, such as MSME classification, timelines for payments, handling delayed payments, and tax audit disclosures. By adhering to the following guidelines, businesses can reduce risks, avoid penalties, and streamline their tax processes.

Checklist for Compliance with Section 43B(h) of the Income Tax Act (Effective AY 2025-26 and onwards)

1. Applicability of Section 43B(h)

Scenario: A company purchases raw materials from an MSME supplier on May 1, 2025, without a written agreement. Payment is due on May 21, 2025. To comply, the company must ensure the payment is made by May 16, 2025 (15 days from acceptance).

• Ensure compliance from AY 2025-26 onwards.

• Payments to Micro and Small Enterprises (MSEs) must be made within the prescribed time limits:

  • 15 days from acceptance for goods and services without a written agreement.

  • 45 days from acceptance if a written agreement specifies the credit period.

• Medium Enterprises are not covered under this provision.

• Example: If the company buys professional services from an MSME on April 1, 2025, the payment must be made by April 16, 2025 if no written agreement exists. Delaying this payment will lead to the disallowance of the related expense for tax purposes.

2. MSME Classification & Registration Verification

Scenario: A business uses the services of an MSME registered as a manufacturer. The supplier's Udyam Registration is cross-verified, and their GST registration is checked to confirm that they are indeed registered as a service provider or manufacturer.

• Ensure the supplier has a valid Udyam Registration Certificate.

• Verify the supplier’s GST registration to confirm whether they are a trader, manufacturer, or service provider.

• Traders registered under MSME are not covered—only payments for goods and professional services are subject to disallowance under Section 43B(h).

• Example: An MSME supplier providing manufacturing services must be verified for both Udyam and GST registrations. Payments for goods and professional services provided by such MSMEs will fall under the Section 43B(h) disallowance if not paid within the specified timelines.

• New MSME Classification Limits (effective from April 1, 2025):

  • Micro: Investment up to ₹2.5 Cr, Turnover up to ₹10 Cr.

  • Small: Investment up to ₹25 Cr, Turnover up to ₹100 Cr.

  • Medium: Investment up to ₹125 Cr, Turnover up to ₹500 Cr (Not applicable for 43B(h)).

3. Disallowance Considerations

Scenario 1: A business purchases goods from an MSME supplier, records the expense, but makes the payment 60 days later. In this case, the expense will be disallowed under Section 43B(h) despite the goods being in inventory.

• Confirm that the supplier is a registered Micro or Small Enterprise under Udyam.

• Identify payments that remain outstanding beyond the 15 or 45-day timelines.

• Ensure that the purchase amount has been debited to the Profit & Loss account in the same financial year.

• Example: If a purchase is made from an MSME on January 1, 2025, and payment is made on March 1, 2025, the expense will be disallowed for FY 2024-25 as the payment was made beyond the 15/45-day limit.

• Payments made after March 31, but within the MSME Act’s timelines, will not be disallowed for tax purposes.

4. Interest Implications Under MSMED Act

Scenario: A business fails to make timely payments to an MSME supplier, and the supplier charges interest at three times the RBI-notified rate. The business is liable for interest payment, which is not tax-deductible.

• Interest on delayed payments is calculated at three times the RBI-notified rate, compounded monthly.

• Even if the MSME supplier waives the interest, it is still legally owed.

• Example: If a business delays a payment, leading to ₹5,000 interest being charged by the MSME supplier, this interest amount is not deductible for tax purposes.

• Interest paid or payable under Section 16 of the MSMED Act is not deductible under the Income Tax Act.

5. Disclosure & Compliance Requirements

Scenario: An auditor identifies a payment that was due to an MSME on January 30, 2025, but was paid on February 15, 2025. The auditor must disclose the delayed payment in the tax audit report.

• Financial Statements (As per Section 22, MSMED Act):

  • Outstanding principal and interest amounts (separately).

  • Interest paid during the year on delayed payments.

  • Interest accrued but not yet paid.

  • Interest payable for future periods.

• Tax Audit Report (Form 3CD, Clause 22 & Clause 26):

  • Clause 22 mandates the disclosure of unpaid amounts to MSMEs beyond the prescribed time limits. If payments remain overdue beyond the prescribed timelines, they must be reported in the tax audit report.

  • Clause 26 includes a specific sub-clause for reporting disallowance under Section 43B(h) of the Income Tax Act.

  • Auditors must verify and reconcile MSME payments with financial statements, ensuring that payments to MSMEs which are delayed beyond the prescribed timelines are disclosed properly.

  • Example: If a payment is overdue, the auditor must disclose the amount in Clause 22 and report disallowed expenses in Clause 26.

6. Revised MSME Payment Reporting in Clause 22 of Form 3CD

The latest amendment to Clause 22 of Form 3CD mandates more detailed reporting for payments made to MSMEs under India’s MSME Development Act, 2006. Taxpayers must disclose the following key details for enhanced compliance and transparency:

• Total amount payable to MSMEs under Section 15 of the MSMED Act.

• Amount of interest that cannot be claimed as a deduction under Section 23 of the MSMED Act due to delayed payments.

• A clear distinction between:

  • Payments made within the prescribed period (15/45 days).

  • Payments delayed beyond the due date (overdue payments).

This updated reporting requirement aims to improve the accuracy of disclosures and provide clearer insights into the taxpayer’s compliance with MSME payment obligations.

7. Modifications in Clause 26—Deduction under Section 43B of Income-tax Act, 1961

Clause 26 of Form 3CD has been revised to enhance the clarity of reporting and differentiate between various categories of payments covered under Section 43B. The modification emphasizes specific reporting of amounts allowed as deductions only upon actual payment:

• Previously, this clause only required the disclosure of amounts allowable upon actual payment of statutory dues (e.g., taxes, duties).

• The amendment refines the language and includes specific references to payments under Section 43B(h) (related to MSME payments) and clarifies that payments to MSMEs which are delayed beyond the prescribed timelines will result in disallowance of expense.

This change ensures that auditors properly distinguish between eligible payments and those that are disallowed for tax purposes, improving the accuracy and transparency of financial statements.

8. Key Differences Between MSMED Act & Section 43B(h)

Criteria	MSMED Act	Section 43B(h) (Income Tax Act)
Applicability	Micro & Small Enterprises	Micro & Small Enterprises
Due Date for Payment	15/45 days	15/45 days
Interest on Delay	3X RBI Bank Rate (compounded monthly)	No interest provision under IT Act
Disallowance	Not applicable	Deduction disallowed for delayed payment
Interest Deductibility	Not deductible (Sec 23, MSMED Act)	Not deductible
Coverage	Goods & Services	Goods & Professional Services

9. Practical Steps for Businesses

Scenario: A company implements an automated system to alert finance teams about payment due dates to ensure compliance with MSME payment timelines.

• Verify MSME status before recording purchases and availing professional services.

• Ensure timely payments (within 15/45 days) to avoid disallowance of expenses.

• Maintain records of outstanding MSME dues for financial reporting and tax audits.

• Recognize and disclose interest on delayed payments as per the MSMED Act.

• Implement automated payment tracking systems to avoid unintentional disallowance.

• Example: Set up automated reminders in the accounting system to ensure payments are made within the required timeframe, thus avoiding disallowance due to delays.

10. Summary & Final Takeaways

Scenario: A business must ensure that payments to MSMEs are always made within the prescribed timelines to avoid penalties and tax consequences.

• Section 43B(h) applies from AY 2025-26 onwards, impacting expense deductions for delayed payments.

• Payments to Micro & Small Enterprises must be made within 15/45 days to avoid disallowance.

• Traders registered as MSMEs are excluded—only payments to service providers and manufacturers are covered.

• Professional service payments to MSMEs must comply with 15/45-day payment timelines.

• Interest on late payments under the MSMED Act must be recognized and disclosed, but it is not tax-deductible.

• Form 3CD reporting and financial statement disclosures must be made to avoid penalties.

• Proactive payment management and MSME verification are crucial to ensure tax compliance and prevent financial impact.

 

Guide to TDS & TCS Rates Effective from April 1, 2025

The concept of TDS ensures tax collection at the very source of income. A deductor making specified payments to a deductee must deduct tax and deposit it with the government. The deductee can claim credit for TDS based on Form 26AS or the TDS certificate.

TDS Rates for FY 2025-26

Section	Particulars	Threshold (₹)	TDS Rate (%)
192	Salary Income	As per slab	Slab rates (Old/New Regime)
192A	EPF – Premature withdrawal	50,000	10% (30% if no PAN)
193	Interest on Securities	10,000	10%
193	Interest on Debentures	5,000	10%
194	Dividend	10,000	10%
194A	Interest from banks/post office	50,000 (100,000 for seniors)	10%
194A	Interest from others	10,000	10%
194B	Winnings from Lottery/Games	10,000 (Single transaction)	30%
194BB	Winnings from Horse Races	10,000 (Single transaction)	30%
194C	Contractor Payments	30,000 (Single)/100,000 (Aggregate)	1% (Ind./HUF), 2% (Others)
194D	Insurance Commission	20,000	5% (Ind.), 10% (Companies)
194DA	Life Insurance Proceeds	100,000	5%
194E	Payments to Non-resident Sportspersons	NA	20%
194EE	NSS Withdrawal	2,500	10%
194G	Lottery Commission	20,000	5%
194H	Commission/Brokerage	20,000	5%
194I	Rent (Land/Building/Furniture)	600,000	10%
194I	Rent (Plant & Machinery)	600,000	2%
194IB	Rental Payments by Individuals (Non-Tax Audit)	50,000 per month	5%
194IA	Property Sale (except Agriculture Land)	5,000,000	1%
194IC	Joint Development Agreement Payments	NA	10%
194J	Professional/Technical Fees	50,000	2% (Technical), 10% (Others)
194LA	Compensation for Immovable Property Acquisition	500,000	10%
194LB	Interest on Infrastructure Bonds to NRIs	NA	5%
194LD	Interest on Bonds/Govt. Securities	NA	5%
194N	Cash Withdrawal > ₹1 Crore	10,000,000	2%
194Q	Purchase of Goods	5,000,000	0.1%
194T	Remuneration, Interest, Commission to Partners	20,000	10%
206AB	TDS for Non-filers of ITR	NA	5% or Twice the rate in force
194P	TDS for Senior Citizens (75+ with No ITR)	NA	Slab rates

Tax Collected at Source (TCS) Rates

Certain transactions require sellers to collect tax at source while receiving payments.

TCS Rates for FY 2025-26

Section	Goods/Services Liable for TCS	Threshold (₹)	TCS Rate (%)
206C(1)	Alcoholic Liquor for Human Consumption	NA	1%
206C(1)	Timber (Forest Lease)	NA	2.5%
206C(1)	Timber (Other Sources)	NA	2.5%
206C(1)	Other Forest Produce (excluding Timber/Tendu)	NA	2.5%
206C(1)	Scrap	NA	1%
206C(1)	Tendu Leaves	NA	5%
206C(1)	Minerals (Coal/Lignite/Iron Ore)	NA	1%
206C(1C)	Parking Lot, Toll Plaza, Mining & Quarrying	NA	2%
206C(1F)	Sale of Motor Vehicles (>₹10 lakh)	1,000,000	1%
206C(1G)	Overseas Tour Packages	1,000,000	5% (10% if no PAN)
206C(1G)	Education Loan Remittance (LRS)	700,000	Nil
206C(1H)	Sale of Goods	5,000,000	0.1%

Key Compliance Considerations:

1. Higher TDS/TCS Rates for Non-filers: Non-compliant taxpayers face a higher TDS rate of 5% or twice the standard rate.

2. Senior Citizens (75+): Section 194P allows automatic TDS deduction, exempting them from ITR filing.

3. Lottery & Winnings: Flat 30% TDS applies on winnings from lotteries, games, and horse races.

4. Rental Payments: Individuals (non-tax audit cases) must deduct 5% TDS if monthly rent exceeds ₹50,000.

5. TCS on Overseas Tour Packages: Sellers must collect 5% TCS on tour packages above ₹10 lakh, increasing to 10% if PAN/Aadhaar is not provided.

Adhering to the revised TDS and TCS rates is crucial for tax compliance and avoiding penalties.

Guide on Partner’s Contribution in an LLP: Legal, Statutory, and Taxation

A Limited Liability Partnership (LLP) combines the flexibility of a partnership with the advantages of limited liability. The partnership agreement in an LLP governs the contributions made by each partner, and it is crucial to ensure that all legal, statutory, and tax obligations are met.

This article explores the different types of contributions in an LLP, the compliance requirements, and the tax implications, with practical examples to ensure clarity.

Legal Framework Governing Partner’s Contribution in an LLP

Forms of Contribution under the LLP Act, 2008

The LLP Act, 2008 outlines the various forms in which a partner may contribute to the LLP. These include:

• Monetary Contributions: Cash, bank deposits, or promissory notes.

• Tangible Assets: Real estate, machinery, or any other physical property.

• Intangible Assets: Intellectual property, goodwill, patents, trademarks, etc.

• Service Agreements: Contributions may also include agreements to contribute services.

Example:

• Partner A contributes Rs. 10 lakh in cash.

• Partner B contributes office space valued at Rs. 20 lakh.

• Partner C contributes technical services worth Rs. 15 lakh (valued by an expert).

Valuation of Non-Monetary Contributions

For non-monetary contributions, such as property or services, it is mandatory that these be valued by a Chartered Accountant or an approved valuer.

Example:

• Partner D contributes a trademark valued at Rs. 5 lakh.

• A registered valuer will assess its fair market value, and this value will be recorded in the LLP’s accounts.

Obligation to Contribute

Partners must honor their contribution obligations as stated in the LLP Agreement. If a partner fails to contribute as agreed, it may lead to operational disruption or disputes.

Example:

• Partner E has agreed to contribute Rs. 20 lakh within 6 months of incorporation but delays payment. To avoid issues, the LLP Agreement should specify a clear timeline for contributions.

Statutory Compliance for LLP Contributions

LLP Agreement Filing

The LLP Agreement must be filed with the Registrar of Companies (ROC) within 30 days of incorporation. Ensure that the LLP Agreement clearly states the partner contributions (monetary and non-monetary), profit-sharing ratios, and timelines for contributions.

Annual Filings

• Form 11 (Annual Return) must be filed by May 31st every year. This form includes details of the partners, their contributions, and profit-sharing ratios.

• Form 8 (Statement of Account & Solvency) is to be filed by October 30th every year.

Accounting and Disclosure Requirements

Contributions, both monetary and non-monetary, must be disclosed in the LLP’s financial statements. Non-cash contributions must be valued by an authorized valuer and recorded accurately.

Audit Requirements

If the LLP’s turnover exceeds Rs. 40 lakh or if contributions exceed Rs. 25 lakh, a statutory audit is mandatory.

Taxation of Partner's Contribution in an LLP

Taxation of Capital Contributions

• Monetary Contributions: The capital contribution made by a partner (cash or assets) is not taxable when made.

• Non-Monetary Contributions: Capital gains tax may be applicable on assets like property or goodwill when they are contributed. The capital gains will depend on the difference between the market value and acquisition cost.

Example:

• Partner F contributes a commercial property bought for Rs. 5 lakh, but the current market value is Rs. 15 lakh.

• The capital gains tax will apply on the difference of Rs. 10 lakh (market value – acquisition cost).

Tax Treatment of LLP Income

• LLP Income Tax: LLPs are taxed at 30% on their total income (plus surcharge and cess, if applicable).

• Partners' Remuneration: The LLP can deduct the remuneration paid to partners under Section 40(b) of the Income Tax Act. The amount should not exceed the prescribed limits.

• Interest on Capital: LLPs can deduct interest on capital contributions up to 12% per annum under Section 40(b). Any excess is treated as taxable income in the hands of the partner.

Example:

• Partner G receives Rs. 6 lakh as remuneration and Rs. 2.5 lakh as interest on capital.

• The LLP can deduct the remuneration (subject to limits) and interest on capital up to Rs. 2.5 lakh. Excess amounts will be taxed as income for the partner.

Taxation on Profit Withdrawals

• Profit Distribution: Profits distributed to partners are not taxable in the hands of the LLP, as they are only taxed when withdrawn by the partner.

• Partner's Share of Profits: The share of profits is not taxed in the LLP but may be taxed as per the partner’s income bracket if they are withdrawing amounts regularly.

Example:

• Partner H withdraws Rs. 3 lakh from the LLP’s profits.

• This withdrawal is not taxed in the LLP but will be subject to tax in Partner H’s hands, depending on their income tax bracket.

Tax Planning Tips for LLP Partners

• Optimize Remuneration and Interest on Capital: Ensure that the remuneration and interest on capital do not exceed the limits under Section 40(b) to maximize deductions.

• Utilize Capital Gains Exemptions: If contributing property, explore exemptions under Sections 54 and 54F of the Income Tax Act to reduce tax liabilities.

• Expense Management: Properly track and manage business expenses to claim eligible deductions and reduce taxable income.

• Consider Structuring as a Holding Entity: For NRIs, structuring the LLP as a holding entity could allow better management of profits and tax optimization, particularly with respect to Double Taxation Avoidance Agreements (DTAA).

• Timely Withdrawals: Ensure that profit withdrawals are made strategically to optimize tax obligations, especially for NRIs who might also be subject to taxes in their home country.

Special Considerations for NRIs in LLPs

Foreign Direct Investment (FDI) in LLPs

NRIs can invest in LLPs through 100% Foreign Direct Investment (FDI), provided the LLP operates in a sector where FDI is allowed and the LLP adheres to FEMA regulations.

Repatriation of Funds

NRIs can repatriate their share of profits without restrictions, but the process must comply with FEMA and RBI guidelines. The capital contributions and profit distributions must be reported to the RBI.

Tax Residency Certificate (TRC)

NRIs should obtain a Tax Residency Certificate (TRC) from the country of their residence to avail benefits under the Double Taxation Avoidance Agreement (DTAA). This helps avoid double taxation of the income in both countries.

Conclusion

Understanding partner contributions in an LLP is critical for maintaining legal compliance and optimizing tax efficiency. By ensuring proper documentation of contributions, filing statutory returns on time, adhering to accounting norms, and keeping track of taxation requirements, LLPs can avoid penalties and defaults. NRIs should pay special attention to FDI regulations and FEMA guidelines when investing in LLPs, ensuring smooth operations and repatriation of profits.

The Central Board of Direct Taxes (CBDT) Notifies Waiver of Interest on Late Payments of TDS/TCS Due to Technical Glitches

The Central Board of Direct Taxes (CBDT) has issued a notification regarding the waiver of interest on the late payment of tax deducted at source (TDS) or tax collected at source (TCS) due to technical glitches. This waiver has been granted under the authority of section 119 of the Income-tax Act, 1961.

Legal Provisions for Interest Levy

Section 201(1A) of the Income-tax Act provides for the levy of interest on failure to deduct or remit TDS to the credit of the Central Government by the deductor. Similarly, section 206C(7) of the Act prescribes interest for failure to collect or remit TCS to the credit of the Central Government by the collector.

Background and Justification

The CBDT has received representations from taxpayers regarding difficulties encountered while making payments of TDS and TCS as per sections 200 and 206C of the Act. Due to technical issues, despite taxpayers initiating payments and their accounts being debited on or before the due date, the actual credit to the Central Government occurred after the deadline. Consequently, taxpayers received notices for the levy of interest under section 201(1A)(ii) or section 206C(7) of the Act.

Directive for Waiver

Exercising its powers under section 119 of the Act, the CBDT has directed that:

• The Chief Commissioner of Income-tax (CCIT) or Director General of Income-tax (DGIT), or in their absence, the Principal Chief Commissioner of Income-tax (PrCCIT), may reduce or waive interest charged under section 201(1A)(ii) or section 206C(7) in cases where:

  • The taxpayer/deductor/collector initiated the payment and the amount was debited from their bank account on or before the due date.

  • The delay in crediting the tax to the Central Government was due to technical issues beyond the taxpayer's control.

Refund Eligibility

Even if the interest under section 201(1A)(ii) or section 206C(7) has already been paid, the taxpayer may apply for a waiver, and if granted, a refund of the paid interest may be processed.

Timeframe for Waiver Applications

The Board has clarified that no waiver application shall be entertained beyond one year from the end of the financial year for which the interest was charged under section 201(1A)(ii) or section 206C(7) of the Act.

Official Notification

Notification Details

• Circular No.: 05/2025

• Date: 28/03/2025

• Issued By: Central Board of Direct Taxes (CBDT)

• Subject: Waiver of Interest on Late Payments of TDS/TCS Due to Technical Glitches

This notification aims to provide relief to taxpayers facing undue interest levies due to delays caused by unavoidable technical issues. Taxpayers are encouraged to apply for the waiver within the prescribed timeframe to avail of the benefits

Guide to Section 17(2) Proviso (ii)(b): Certification of Hospitals for Tax-Exempt Medical Benefits

Introduction

Section 17(2) of the Income Tax Act provides tax exemptions for medical facilities provided by employers to employees. Under Proviso (ii)(b) of this section, hospitals can obtain certification from the Chief Commissioner of Income Tax (CCIT) to qualify as an approved medical facility. Once certified, medical treatment provided by such hospitals to employees is considered a tax-exempt perquisite, benefiting both the employer and the employees.

This guidance note provides a comprehensive overview of the benefits, eligibility, application procedure, compliance requirements, and conditions for obtaining certification under Section 17(2) Proviso (ii)(b).

Benefits of Certification under Section 17(2) Proviso (ii)(b):

For Employees:

• Tax-Free Medical Treatment – Employees receiving treatment at certified hospitals enjoy complete tax exemption on medical reimbursements from their employer.

• Access to Quality Healthcare – Certification ensures that hospitals maintain infrastructure and hygiene standards, leading to better healthcare services.

For Employers:

• Seamless Reimbursement Process – Certified hospitals allow employers to reimburse medical expenses without additional tax liability.

• Employee Welfare & Retention – Providing tax-free medical benefits improves employee satisfaction and retention.

For Hospitals:

• Increased Patient Footfall – Employers prefer sending employees to certified hospitals, leading to an increase in patients and revenue.

• Enhanced Credibility & Recognition – Certification by the Income Tax Department enhances the hospital’s reputation and credibility.

• Compliance with Standards – Hospitals adhering to required norms improve healthcare quality and operational efficiency.

Procedure for Obtaining Certification under Section 17(2) Proviso (ii)(b):

Eligibility Check

• The hospital must comply with Rule 3(1) of the Income Tax Rules regarding infrastructure, medical equipment, and staffing.

• It should be a registered medical institution with the relevant local authority.

Submission of Application

• The hospital must submit an application to the Chief Commissioner of Income Tax (CCIT) in the prescribed format.

• The application must include documentary evidence of compliance with required conditions.

Document Submission

The following documents must be submitted:

• Hospital Registration Certificate from local health authorities.

• Proof of Infrastructure Compliance – Building compliance certificates, hygiene certifications, and operational approvals.

• List of Medical Equipment & Staff – A complete list of medical instruments, ICU facilities, and details of qualified medical staff.

• Treatment Facilities for Specified Diseases – Documents proving that the hospital provides treatment for diseases listed in Rule 3(2).

Inspection & Verification

• The Chief Commissioner of Income Tax (CCIT) may conduct a site inspection to verify compliance with the required norms.

• Any deficiencies noted during the inspection must be rectified before approval.

Issuance of Certification

• Upon successful verification, the CCIT grants certification, allowing the hospital to provide tax-exempt medical treatment under Section 17(2), Proviso (ii)(b).

Conditions for Certification under Section 17(2) Proviso (ii)(b):

As per Rule 3(1) of the Income Tax Rules, the following conditions must be met by the hospital:

Infrastructure & Hygiene Requirements:

• Building Compliance – The hospital building must comply with applicable municipal regulations.

• Hygiene & Ventilation – Rooms must be well-lit, ventilated, and maintained with high hygiene standards.

• Minimum Bed Requirement – The hospital must have at least ten iron spring beds.

• Operation Theatre – A fully equipped operation theatre with at least 180 square feet of floor space and a separate sterilization room.

• Labour Room – If providing maternity services, a labour room of at least 180 square feet is mandatory.

• Infectious Patient Isolation – Proper arrangements for isolating patients with infectious diseases.

• Safe Drinking Water & Storage Facilities – Availability of potable water and separate storage for medicines and food.

Medical Equipment & Facilities:

• Essential Equipment:

  • Sterilization Units – High-pressure sterilizer and instrument sterilizer.

  • Oxygen Cylinders & Attachments – Adequate oxygen supply for emergency use.

  • Surgical Instruments & Pathological Laboratory – Fully equipped laboratory for diagnostic tests.

  • Electrocardiogram (ECG) Machine – Essential for heart disease monitoring.

  • Backup Power Supply – Stand-by generator for uninterrupted medical services.

Staffing & Doctor Availability:

• Doctor Availability:

  • At least one qualified doctor must be available 24/7 for every 20 beds.

  • If ICU facilities are provided, at least two dedicated ICU doctors must be available round-the-clock.

• Nursing Staff Ratio:

  • At least one nurse per 5 beds, available 24/7.

  • ICU must have one nurse per ICU bed, with a minimum of four nurses per four ICU beds.

• Patient Health Records:

  • Detailed health records for each patient, including name, address, diagnosis, and treatment details.

Specified Diseases Covered for Tax-Exempt Medical Benefits:

Hospitals seeking certification must provide treatment for the specified diseases listed in Rule 3(2), including:

• Cancer

• Tuberculosis (TB)

• Acquired Immunodeficiency Syndrome (AIDS)

• Major Organ & System Diseases Requiring Surgery:

  • Heart, blood, bone marrow, respiratory system, nervous system, urinary system, liver, gall bladder, endocrine glands, etc.

• Skeletal & Fracture Treatments:

  • Bone fractures and dislocations requiring orthopedic intervention.

• Gynecological & Obstetric Ailments:

  • Cesarean sections, laparoscopic interventions, and related treatments.

• Severe & Prolonged Medical Treatments:

  • Conditions requiring hospitalization for three continuous days.

  • Mental disorders, drug addiction treatments, severe allergic reactions, etc.

Hospitals must maintain proper documentation of treatment history to ensure compliance with tax exemption rules.

Conclusion

Obtaining certification under Section 17(2) Proviso (ii)(b) is a strategic step for hospitals, offering tax advantages and enhancing their credibility. Hospitals must diligently meet all infrastructure, staffing, and operational standards to qualify. Adhering to stringent compliance norms, maintaining accurate patient records, and ensuring regular audits will facilitate approval and continued certification. By fulfilling these obligations, hospitals can effectively leverage tax benefits while providing high-quality healthcare services to employees

MSME-1 Compliance: A Definitive Guide for Businesses

 The Ministry of Corporate Affairs (MCA), through Notification No. S.O. 1376(E) dated 25th March 2025, has made it mandatory for companies procuring goods or services from Micro and Small Enterprises (MSEs) to submit a half-yearly return in Form MSME-1 if payments exceed 45 days from the date of acceptance or deemed acceptance.

This directive aims to enforce financial discipline, enhance liquidity for MSEs, and strengthen the overall business ecosystem by addressing delayed payments.

Applicability: Who Must File Form MSME-1?

• All companies purchasing from MSEs (excluding medium enterprises) must comply.

• Filing is compulsory if payment delays exceed 45 days from the date of acceptance or deemed acceptance.

• Ensuring accurate payment tracking is crucial to avoid non-compliance penalties.

Essential Information Required for MSME-1 Filing

• Supplier Name & PAN (Mandatory for all MSEs reported)

• Number of transactions with each MSE supplier

• Mode of payment (Through TReDS or Other mode)

• Amount Paid & Outstanding Details:

  • Paid within 45 days

  • Paid after 45 days

  • Outstanding for 45 days or less

  • Outstanding for more than 45 days

• Reason for delayed payments (if applicable)

Mandatory Filing Deadlines

Due Date	Period Covered
30th April	October - March
31st October	April - September

Late filing or non-compliance may attract penalties, making it critical for businesses to file on time.

Business Implications of MSME-1 Compliance

• Regulatory Penalties: Failure to comply may result in financial and legal consequences.

• Stronger Supplier Relationships: Timely payments enhance trust and long-term business partnerships.

• Enhanced Financial Planning: Structured payment tracking fosters better cash flow management.

• Operational Adjustments: Companies must set up robust monitoring systems for MSE payments.

Step-by-Step Compliance Plan

To avoid last-minute delays, companies should complete the following steps before the due date:

MSME-1 Compliance Checklist

✔ Identify all transactions with MSE suppliers
✔ Verify payments exceeding 45 days from acceptance date
✔ Gather Supplier Details (Name & PAN)
✔ Categorize payments as per MCA reporting guidelines
✔ Record payment delays and reasons (if applicable)
✔ Complete the attached MSME Excel Sheet with accurate data
✔ Submit the Excel Sheet by 15th April for timely filing
✔ Review all details for accuracy to prevent errors

Companies must proactively manage their obligations, ensuring compliance with MCA regulations to mitigate risks and uphold responsible corporate governance.

TDS Late Filing Fee Under Section 234E - Compliance, Challenges & Reliefs

With increasing compliance scrutiny and automated processing of TDS returns, deductors are frequently receiving demand notices under Section 234E for late filing fees. Many taxpayers are unaware that late fees cannot be waived and that demands are being raised for older periods. With the approaching deadline of 31.03.2025, it is crucial to address any pending TDS compliance issues to avoid financial penalties. This article aims to clarify when the late fee is valid, when it is not applicable, and how to ensure compliance to avoid unnecessary financial burden.

Applicability of Late Filing Fee under Section 234E

Section 234E of the Income Tax Act, 1961, mandates a late filing fee for the delayed submission of TDS/TCS returns. If a deductor fails to submit the TDS/TCS statement within the prescribed due date, they are liable to pay a fine of ₹200 per day until the failure continues, subject to the total TDS amount deducted.

Key Aspects of Late Filing Fee (Post 1st June 2015)

1. Legal Validity – The late filing fee under Section 234E has been explicitly made applicable with the insertion of Section 200A(1)(c) and (d) by the Finance Act, 2015, with effect from 1st June 2015. Prior to this, there was no provision for automatic levy of fees under intimation under Section 200A.

2. Auto-Adjustment in TDS Intimations – Post 1st June 2015, the late fee is automatically adjusted while processing TDS statements under Section 200A, and the deductor is mandatorily required to pay it.

3. Upper Limit on Late Fee – The total fee cannot exceed the total tax deducted/collected for the respective quarter.

4. Non-Waivable Nature – Unlike penalties, the late fee under Section 234E is mandatory and non-waivable, meaning that no appeal or discretion is available to reduce or remove this charge.

5. Applicability on Older Defaults – Late filing fees for TDS statements filed before 1st June 2015 but processed after this date should not be charged, as per multiple judicial pronouncements.

Relevant Provisions Before and After Finance Act 2015

Section 200A Prior to 1st June 2015 (Before Amendment):

Prior to 1st June 2015, Section 200A allowed for processing of TDS returns, but did not provide for levying a fee under Section 234E. It allowed only for the computation of arithmetical errors, incorrect claims, and interest payable on TDS defaults. There was no legal basis for imposing a late filing fee under Section 234E before this amendment.

Additionally, it was provided that no intimation under this sub-section shall be sent after the expiry of one year from the end of the financial year in which the statement is filed. Furthermore, an incorrect claim apparent from any information in the statement was defined as:

• An entry that is inconsistent with another entry in the same or another statement.

• A deduction rate that is not in accordance with the provisions of the Act.

Section 200A After 1st June 2015 (Post Amendment):

The Finance Act, 2015, amended Section 200A to include sub-clause (c) and (d), thereby permitting the computation and levy of fee under Section 234E while processing TDS statements. This means that from 1st June 2015 onwards, the late filing fee became enforceable through automated demand intimations.

The amendment also clarified that the intimation of any demand under this section must be sent within one year from the end of the financial year in which the statement is filed.

Judicial Precedents Supporting Non-Imposition of Fee for Periods Before 1st June 2015

Several court rulings have held that demands under Section 234E cannot be enforced for returns filed before 1st June 2015, even if processed afterward. Some key cases include:

• Rajesh Kourani v. UOI (Gujarat HC) – Held that prior to 1st June 2015, there was no mechanism to levy a fee under Section 234E, making such charges invalid for earlier periods.

• Fatheraj Singhvi v. UOI (Karnataka HC) – Upheld that 234E is not applicable for TDS statements filed before 1st June 2015, even if processed later.

Compliance and Payment Mechanism

1. Checking Defaults – Deductors should review TRACES portal for any pending 234E late fee demands and clear dues before 31.03.2025 to avoid further complications.

2. Payment Process – The fee must be paid using challan ITNS 281 under Fee under Section 234E.

3. Avoiding Future Late Fees – Ensure timely TDS filings as per due dates:

   • Q1 (April-June) – 31st July

   • Q2 (July-September) – 31st October

   • Q3 (October-December) – 31st January

   • Q4 (January-March) – 31st May

Conclusion

The late filing fee under Section 234E is strictly applicable post 1st June 2015, and courts have ruled against retrospective imposition. With automated compliance checks and the deadline of 31.03.2025, it is crucial for deductors to ensure timely TDS return filing and clear any outstanding late fees to avoid unnecessary penalties and additional financial burden.

MCA Mandates Half-Yearly Returns for Delayed MSE Payments – Compliance Alert

The Ministry of Micro, Small and Medium Enterprises, through Notification No. S.O. 1376(E), dated 25th March 2025, has mandated all companies procuring goods or services from Micro and Small Enterprises (MSEs) to submit a half-yearly return to the Ministry of Corporate Affairs (MCA) if payments exceed 45 days from the date of acceptance or deemed acceptance. This directive, issued under F. No. 16/8/2018/E-P&G/Policy, is signed by Dr. Rajneesh, Additional Secretary and Development Commissioner.

To address the persistent issue of delayed payments, the directive enforces financial discipline, improves liquidity for MSEs, and strengthens the overall business ecosystem. All companies dealing with MSEs must track their payment cycles and comply with the reporting requirements to avoid regulatory scrutiny.

Compliance Requirements:

• Applicability: Covers all companies procuring goods or services from MSEs (excludes medium enterprises).

• Filing Trigger: If payments exceed 45 days from the date of acceptance or deemed acceptance.

• Details to Report:

  • Outstanding payment amounts due to MSEs.

  • Reasons for payment delays.

• Filing Frequency: Biannual submission to the MCA.

Business Implications:

• Regulatory Scrutiny: Non-compliance may lead to penalties and legal consequences.

• Operational Adjustments: Companies must implement strong monitoring systems to track MSE payments.

• Financial Planning: Timely payments will help businesses maintain better relationships with suppliers and ensure smoother cash flow.

Companies should proactively manage their obligations, ensuring compliance with the MCA directive to mitigate risks and foster responsible corporate governance.

Analysis of TDS on Rent and House Rent Allowance (HRA) under the Income-tax Act, 1961

Recent Notices by the Income Tax Department

The Income Tax Department has recently intensified its scrutiny of deductions and exemptions claimed by taxpayers, particularly focusing on donations under Section 80G and House Rent Allowance (HRA) exemptions under Section 10(13A).

On Sunday, several taxpayers received official communications via SMS and email, highlighting concerns over non-deduction of Tax Deducted at Source (TDS) on rental payments. These alerts are linked to the provisions of Section 194-IB of the Income-tax Act, 1961 ('Act'), which mandates TDS deduction on rental payments that exceed a specified threshold. The tax department has urged taxpayers to verify the legitimacy of their HRA claims and rectify any discrepancies.

Understanding Section 194-IB of the Act

Applicability of Section 194-IB

Under Section 194-IB, individuals and Hindu Undivided Families (HUFs) who are not required to get their accounts audited under Section 44AB must deduct TDS when:

• The monthly rent paid to a resident landlord exceeds Rs. 50,000.

• TDS must be deducted at the rate of 2% (previously 5%, reduced w.e.f. October 1, 2024).

• The tax must be deducted once in a financial year, either in March or in the last month of tenancy if the rental arrangement is terminated earlier.

This means that tenants who paid rent exceeding Rs. 50,000 per month without deducting TDS are now being flagged by the tax department for non-compliance.

Repercussions of Non-Deduction of TDS on Rent

Failing to deduct and deposit TDS on rent as required by Section 194-IB may result in serious consequences:

• Liability to deduct and pay the tax retroactively if not deducted earlier.

• Interest on non-deduction of tax at 1% per month under Section 201(1A).

• Deemed assessee-in-default under Section 201(1).

• Penalty equivalent to the amount of tax not deducted, as per Section 271C.

• Prosecution risk under Section 276B, leading to imprisonment ranging from 3 months to 7 years.

• Disallowance of 30% of rent payments as an expense under Section 40(a)(ia) if claimed as a business deduction.

These stringent provisions highlight the importance of complying with TDS obligations on rental payments.

Relief Provisions Under Section 201(1) of the Act

Taxpayers can seek relief from penalties under the proviso to Section 201(1) if:

• The landlord has filed an income tax return under Section 139.

• The landlord has included the rental income in their return and paid applicable taxes.

• The tenant obtains Form 26A, a Chartered Accountant’s certificate, confirming that the above conditions are met.

By submitting Form 26A electronically, taxpayers can avoid being deemed an assessee-in-default and escape penalties, except for interest on non-deduction.

The CBDT Notification No. 11/2016 dated December 2, 2016, outlines the detailed procedure for furnishing and verifying Form 26A to rectify non-deduction defaults.Computation Illustration

Partial-Year Tenancy (2-3 Months Before Year-End)

Ms. T, a self-employed individual, rented an apartment from January to March 2024 at Rs. 80,000 per month. The total rent paid was Rs. 2,40,000, exceeding the Rs. 50,000 per month threshold but falling below the annual threshold.

Applicability of TDS:

• Since the tenancy ended before October 2024, the applicable rate was 5%.

• TDS on Rs. 2,40,000 at 5% = Rs. 12,000.

• Interest if unpaid until July 2024: Rs. 12,000 × 1% × 5 months = Rs. 600.

For partial-year tenancies, tenants must deduct and deposit TDS in the last month of the tenancy to avoid interest and penalties.

Where Landlord Has Not Paid Tax

If the landlord has not reported the rental income in their tax return, or if Form 26A is not obtainable, the taxpayer has two options:

• Deduct and deposit TDS retroactively, along with applicable interest and penalties.

• Forego the HRA exemption and pay tax on the differential taxable salary, updating their tax return accordingly.

Taxpayers who failed to deduct TDS on rent payments should act promptly to correct non-compliance before penalties and prosecution become applicable.

Steps to Ensure Compliance:

• Verify if rent paid exceeds Rs. 50,000 per month.

• Deduct TDS at 2% (or 5% for tenancies ending before October 2024).

• File Form 26A if the landlord has already paid tax.

• Ensure accurate reporting in tax returns to avoid penalties.

By proactively addressing these obligations, taxpayers can avoid scrutiny, penalties, and potential legal action, ensuring smooth compliance with TDS provisions on rental payments.

GST Compliance Roadmap & Key Updates for Businesses – March 2025

As the financial year 2024-25 comes to a close, it is imperative for businesses and taxpayers to stay updated with the latest GST-related advisories, compliance requirements, and parliamentary discussions. This professional note provides a comprehensive summary of the key updates, case studies, and actionable steps for March 2025.

GSTN Advisories for March 2025

1. Biometric Authentication for Directors

Background: The GST Network (GSTN) has introduced an enhancement allowing directors to opt for biometric authentication at any GST Suvidha Kendra (GSK) in their home state. Previously, biometric authentication was restricted to designated GSKs in the taxpayer’s jurisdiction.

Key Features:

• Available for Public Limited, Private Limited, Unlimited, and Foreign Companies.

• Currently enabled in 33 states/UTs; to be extended soon to Uttar Pradesh, Assam, and Sikkim.

• Not mandatory—directors may still visit the designated jurisdictional GSK if preferred.

Case Study: A private limited company based in Maharashtra faced delays due to long queues at its jurisdictional GSK. With this new option, the director was able to complete biometric authentication in a GSK near his residence, reducing processing time by two weeks.

2. Issues in Filing Applications under Waiver Scheme (SPL 01/SPL 02)

GSTN has addressed multiple grievances regarding difficulties in filing waiver applications. Key issues include:

• Order details not appearing in SPL-02.

• Payment details not auto-populating.

• Challenges in linking voluntary payments (DRC-03) with demand orders (DRC-03A).

Clarification on Deadlines:

• Waiver applications can be filed until June 30, 2025 (not March 31, 2025).

• However, the tax payment deadline under the waiver scheme is March 31, 2025.

• If issues persist, taxpayers should use Form DRC-03 under the ‘Others’ category and later submit Form DRC-03A.

Example: A taxpayer in Gujarat attempted to file SPL-02 but faced auto-population issues. By manually checking the Electronic Liability Ledger, he identified the correct payment details and successfully filed his waiver application.

GST Action Plan for March 2025

Taxpayers must complete the following tasks before the financial year ends:

Action Item	Deadline
Opt for Composition Scheme (CMP-02)	March 31, 2025
File LUT for export/zero-rated supplies	March 31, 2025
File GSTR-9C (if pending)	March 31, 2025
Avail GST Amnesty Scheme (SPL-01/SPL-02)	March 31, 2025
Opt for QRMP scheme	March 31, 2025
Apply for GST refunds (April 2023 onwards)	March 31, 2025
Reconcile ITC claims (GSTR-2A vs. GSTR-3B)	March 31, 2025
Obtain ISD registration (mandatory from April 1, 2025)	March 31, 2025
Close existing invoice series and start a new one	March 31, 2025

Conclusion: March is a critical month for GST compliance. Taxpayers should proactively address their compliance requirements to avoid penalties, ensure smooth transitions into the next financial year, and take advantage of relief measures such as the waiver scheme. Staying updated with GSTN advisories and parliamentary developments will help businesses navigate tax complexities efficiently.

For more details, visit the GST portal or consult a tax expert to ensure timely compliance.

Parliamentary Updates on GST: Updates include GST evasion data, GST on insurance services, and forward charge mechanism for GTAs, along with annual RODTEP return filing deadlines.

Intangible Assets- Compliance Strategies & Case Studies

Introduction

Intangible assets play a crucial role in financial reporting, offering insights into a company’s intellectual and creative wealth. However, their correct recognition, measurement, and disclosure present challenges. The Financial Reporting Review Board (FRRB) of ICAI has observed various discrepancies in financial statements concerning compliance with Indian Accounting Standards (Ind AS), particularly Ind AS 38 on intangible assets.

Leading corporations like Infosys and TCS have successfully leveraged intangible assets such as proprietary software and patents to enhance their market value. In contrast, companies that fail to provide adequate disclosures often face regulatory scrutiny and investor skepticism. Improper reporting of intangible assets can lead to financial misstatements, negatively impacting stock valuations and stakeholder confidence.

This article presents key observations by the FRRB and provides guidance on ensuring compliance, supported by real-world examples and a case study.

Observations on Intangible Assets

Inadequate Disclosure of Goodwill

Observation

Many financial statements reflect substantial goodwill but fail to disclose its origin. Internally generated goodwill should not be recognized as an asset under Ind AS 38. If goodwill is acquired through a business combination, relevant disclosures under Ind AS 103 are mandatory but often missing.

Relevant Provisions

• Ind AS 38 - Intangible Assets: "Internally generated goodwill shall not be recognised as an asset."

• Ind AS 103 - Business Combinations: Mandates detailed disclosure of goodwill reconciliation for material business combinations.

Implication & Guidance

Companies must clearly disclose the source of goodwill and comply with impairment testing requirements under Ind AS 36. Failure to do so may result in non-compliance penalties and financial misstatements. If goodwill arises from a business combination, detailed disclosures as per Ind AS 103 should be incorporated.

Example: TCS Limited’s consolidated financial statements for FY 2023-24 correctly disclosed goodwill acquired under business combinations, ensuring transparency.

Misclassification of Research and Development (R&D) Expenditure

Observation

Some financial statements classify R&D expenses as either revenue or capital expenditure without distinguishing between research and development phases. Ind AS 38 requires research costs to be expensed immediately, while development costs may only be capitalized if specific conditions are met.

Relevant Provisions

• Ind AS 38 - Intangible Assets: "No intangible asset arising from research shall be recognised. Expenditure on research shall be recognised as an expense when incurred."

• Ind AS 38 - Intangible Assets: Lists conditions under which development costs can be capitalized.

Implication & Guidance

Companies should correctly classify R&D expenses—research costs must be expensed, and development costs should only be capitalized if all Ind AS 38 conditions are met. Misclassification can lead to misrepresentation of financial performance and asset values. Clear R&D accounting policies should be disclosed in annual reports.

Example: A pharmaceutical company developing a new drug can only capitalize development expenses if clinical trial success is probable and the drug has regulatory approval pathways.

Non-Disclosure of Intangible Assets Reconciliation

Observation

A company reported a significant increase in ‘Intangible Assets Under Development’ but did not disclose a reconciliation of carrying amounts at the beginning and end of the period, as required under Ind AS 38.

Relevant Provisions

• Ind AS 38 - Intangible Assets: Requires disclosure of reconciliation showing additions, disposals, revaluations, and impairment losses.

Implication & Guidance

Companies must ensure proper reconciliation of intangible assets in financial statements. Clearly distinguishing between internally generated and acquired assets enhances investor understanding and compliance with regulatory requirements.

Example: Infosys Limited’s standalone financial statements for FY 2023-24 correctly provided a reconciliation of intangible assets.

Omission of Amortization Method and Useful Life

Observation

A company recognized software as an intangible asset but did not disclose the amortization method and useful life, violating Ind AS 38 requirements.

Relevant Provisions

• Ind AS 38 - Intangible Assets: Requires disclosure of amortization methods and useful life for each class of intangible assets.

Implication & Guidance

To ensure compliance, companies must disclose the amortization method and useful life of intangible assets. These disclosures are crucial for assessing asset valuation and future financial performance.

Example: Infosys Limited’s FY 2023-24 financial statements correctly disclosed the amortization method and useful life for acquired software.

Lack of Clarity on Internally Generated vs. Acquired Intangible Assets

Observation

Some companies recognize intangible assets like software, memberships of corporate networks, customer contracts, and brand trademarks but do not specify whether they were internally generated or acquired.

Relevant Provisions

• Ind AS 38 - Intangible Assets: Requires entities to distinguish between internally generated and acquired intangible assets.

Implication & Guidance

Companies must explicitly state whether their intangible assets are internally generated or acquired. This disclosure ensures compliance with Ind AS 38 and provides investors with clarity on asset valuation and financial decision-making.

Best Practices for Compliance

1. Ensure Comprehensive Disclosures: Companies should provide complete and clear disclosures of intangible assets, including goodwill, amortization methods, and R&D expenses.

2. Maintain Proper Classification: Clearly differentiate between research and development expenses, internally generated and acquired assets, and various intangible asset classes.

3. Conduct Regular Impairment Testing: Periodically assess the recoverable value of goodwill and other intangible assets to prevent overstatement.

4. Implement Strong Internal Controls: Establish governance frameworks to ensure compliance with Ind AS 38 and other applicable standards.

5. Provide Reconciliation of Intangible Assets: Include a reconciliation statement in financial reports to enhance transparency and compliance.

Case Study: Leveraging Intangible Assets for Business Growth

Company: XYZ Tech Solutions Pvt. Ltd.

Scenario: XYZ Tech Solutions developed a proprietary AI-based software and acquired premium memberships in corporate networks, significantly increasing its valuation. Initially, it expensed all software development costs and membership fees. However, after meeting Ind AS 38 recognition criteria, it capitalized later-stage development costs and classified network memberships as intangible assets.

Challenges Faced:

• Unclear differentiation between research and development expenses.

• Inadequate disclosure of goodwill from acquired startups.

• Lack of an amortization policy for software and memberships.

Corrective Actions Taken:

1. Implemented a structured R&D expense classification system.

2. Disclosed goodwill reconciliation and its impact on valuation.

3. Clearly defined the software’s useful life, membership amortization period, and disclosure policies in financial statements.

The company’s revised disclosures improved investor confidence, facilitated better financial planning, and ensured regulatory compliance. Proper disclosure and classification of intangible assets enhance investor confidence and regulatory compliance. Adhering to Ind AS 38 helps prevent financial misstatements and legal repercussions. Strong governance and internal controls are essential for maintaining compliance with financial reporting standards. By proactively addressing these challenges, organizations can mitigate risks, ensure reliable financial statements, and strengthen their market credibility.

Comprehensive Analysis of Section 194T: TDS on Payments to Partners (Effective from April 1, 2025)

Introduction Section 194T of the Income Tax Act, effective from April 1, 2025, introduces a 10% Tax Deducted at Source (TDS) on payments exceeding Rs. 20,000 annually made by partnership firms or Limited Liability Partnerships (LLPs) to their partners. These payments include salary, remuneration, commission, bonus, or interest. The TDS obligation arises at the time of crediting such amounts to the partner’s account (including the capital account) or making the payment, whichever is earlier. This section has various complexities, which are explored below, along with potential solutions.

Key Complexities and Case Studies

1. Applicability of Section 194T

• TDS is applicable for the financial year 2025-26 onwards.

• Any payment related to previous financial years but made on or after April 1, 2025, is not subject to TDS under this section.

• The deduction applies when the payment exceeds Rs. 20,000 in a financial year.

Case Study 1: A firm credits Rs. 25,000 as remuneration to a partner’s capital account in April 2025, relating to FY 2024-25.

• Since the amount pertains to the previous financial year, no TDS is applicable under Section 194T.

Case Study 2: A firm pays Rs. 30,000 as interest on a partner’s capital in May 2025, related to FY 2025-26.

• Since the amount relates to FY 2025-26, TDS at 10% is applicable under Section 194T.

2. Interpretation of Salary, Remuneration, Commission, Bonus, and Interest

• The term "salary" is not defined in the Income Tax Act for partners.

• As per Explanation 2 to Section 15, payments made to partners are not considered salary for tax purposes.

• The phrase "in the nature of" broadens the scope of applicability.

Case Study 3: A firm provides perquisites to partners instead of direct remuneration.

• Whether perquisites are covered under Section 194T or under Section 194R is ambiguous.

• Since Section 194T covers remuneration in the broader sense, TDS may still be required.

3. Disallowance of Expenses and TDS on Gross Amount

• Section 40(b) prescribes limits for claiming interest and remuneration as expenses.

• The absence of a similar proviso in Section 194T raises a question: should TDS be deducted on the gross amount or only up to the allowable limit?

Case Study 4: A firm pays Rs. 5,00,000 as remuneration to a partner, but only Rs. 3,00,000 is allowable under Section 40(b).

• If TDS is deducted on the full Rs. 5,00,000, the partner may face a mismatch between Form 26AS and taxable income.

• A possible solution is to request clarification from CBDT to align Section 194T with Section 40(b).

4. Issues with Partner Withdrawals

• Partners often withdraw funds throughout the year, which are later adjusted as remuneration.

• It is unclear whether TDS should be deducted at the time of withdrawal or only at year-end upon finalization.

Solution:

• Firms should define a clear policy for withdrawals and remuneration payments.

• If the amount is treated as remuneration in books, TDS should be deducted at the time of credit.

5. Non-Resident Partners and DTAA Considerations

• Section 194T does not distinguish between resident and non-resident partners.

• Section 195 requires TDS on payments to non-residents.

Case Study 5: A firm pays Rs. 50,000 as remuneration to a non-resident partner.

• Should TDS be deducted under Section 194T or Section 195?

• Since Section 195 is more specific, TDS should be deducted under Section 195 at applicable DTAA rates.

6. Interest on Partner’s Loan vs. Capital Account

• Section 194A exempts TDS on interest paid to partners.

• Section 194T mandates TDS on "interest" paid to partners.

Case Study 6: A firm pays Rs. 40,000 as interest on a partner’s loan and Rs. 25,000 as interest on capital.

• Interest on a loan is exempt under Section 194A(3)(iv).

• Interest on capital requires TDS under Section 194T.

7. Cash Basis Accounting for Firms like CA and Doctors in Practice

• Professionals like Chartered Accountants and doctors often follow the cash basis of accounting.

• TDS under Section 194T applies at the time of credit or payment, whichever is earlier.

• If a firm credits remuneration but does not make actual payments, TDS will still be required.

Solution:

• Professional firms should evaluate their cash flow to ensure they can meet TDS obligations even if payments are not immediately made.

8. Compliance and Mismatch in Form 26AS

• Firms deduct TDS on gross amounts, while partners claim deductions under Section 40(b), creating reconciliation issues.

• Automated notices from tax authorities due to mismatched Form 26AS.

Solution:

• CBDT should issue clarifications or FAQs on proper reporting.

• Firms should educate partners on proper income reporting.

Checklist for Compliance with Section 194T

Before 31.03.2025

✅ Review partnership agreements and finalize any pending payments to partners before 31.03.2025 to avoid TDS applicability. ✅ Assess the total remuneration, commission, and interest to be paid in FY 2025-26 and structure payments accordingly. ✅ Set up TDS compliance mechanisms, including ERP/accounting system updates for automatic deduction of TDS under Section 194T. ✅ Educate partners about the new TDS implications and the need for proper Form 26AS reconciliation. ✅ Clarify any ambiguity regarding withdrawal policies and remuneration structures in financial statements.

After 01.04.2025

✅ Deduct TDS at 10% when crediting or paying remuneration, commission, bonus, or interest to partners exceeding Rs. 20,000 annually. ✅ Ensure correct classification of payments and reconcile with Form 26AS to prevent mismatch issues. ✅ File TDS returns accurately and within prescribed deadlines to avoid penalties. ✅ Monitor any clarifications or amendments issued by the CBDT regarding Section 194T. ✅ Conduct periodic internal reviews to ensure compliance and minimize potential disputes.

Conclusion

Section 194T introduces multiple complexities, including:

• Ambiguities in definitions (salary vs. remuneration).

• Conflict with Section 40(b) limits.

• Issues in treating non-resident partners.

• Distinguishing between interest on loans vs. capital.

• Compliance burdens and potential tax notices.

By proactively addressing these challenges, firms and partners can ensure smooth implementation and compliance with Section 194T