Clause 78 of the Finance Bill, 2026 proposes targeted amendments to section 402 of the Income-tax Act, 2025, which contains definitions applicable to Chapter XIX-B (Tax Deduction at Source – TDS). The amendments address two long-standing interpretational issues:
- Identification of the “authorised person” responsible for TDS in remittances relating to foreign exchange assets; and
- Classification of supply of manpower for TDS purposes.
Both amendments are clarificatory in nature, intended to reduce litigation and ensure uniform application of TDS provisions.
1. Clarification of “Authorised Person” for Payments to Non-Residents
Existing Legal Position
Section 402(27) defines the expression “person responsible for paying” for TDS purposes.
- Clause (c) applies where payment is made to a non-resident Indian and such payment represents consideration for the transfer of a foreign exchange asset, which is not a short-term capital asset.
- In such cases, the authorised person responsible for remitting the sum or crediting it to the Non-Resident (External) Account (NRE) is treated as the person responsible for paying.
However, the Income-tax Act, 2025 did not define the term “authorised person”, giving rise to ambiguity.
Amendment Proposed by Clause 78
Clause 78 amends section 402(27)(c) to expressly provide that “the expression “authorised person” shall have the same meaning as assigned to it in section 2(c) of the Foreign Exchange Management Act, 1999 (FEMA)“.
Meaning and Implications
- Section 2(c) of FEMA defines an authorised person as a person authorised by the Reserve Bank of India to deal in foreign exchange or foreign securities (including authorised dealers, money changers, and offshore banking units).
- The amendment ensures statutory alignment between FEMA and income-tax law.
- It removes uncertainty regarding TDS responsibility in cross-border remittances involving banks and authorised dealers.
Practical impact: Banks and other FEMA-authorised intermediaries can clearly identify their TDS obligations, reducing compliance disputes.
2. Inclusion of Supply of Manpower within the Definition of “Work”
Background: Persistent TDS Classification Dispute
Under section 393(1) of the Income-tax Act, 2025:
- Table Sl. No. 6(i): TDS on payments to contractors for carrying out any work
- 1% where the payee is an Individual or HUF
- 2% in other cases
- Table Sl. No. 6(ii): TDS by Individuals/HUFs on payments for any work not covered elsewhere – 2%
- Table Sl. No. 6(iii): TDS on professional or technical services, attracting higher rates (generally 10%)
There has been consistent ambiguity on whether supply of manpower constitutes:
- “work” under contractor provisions, or
- “technical or professional services”.
This ambiguity has resulted in inconsistent TDS practices and frequent litigation.
Amendment Proposed
Clause 78 amends section 402(47) (definition of “work”) to expressly include “supply of manpower” within its scope.
Effect of the Amendment
By statutorily including supply of manpower within “work”:
- TDS shall apply under:
- section 393(1): Table Sl. No. 6(i), or
- section 393(1): Table Sl. No. 6(ii), as applicable.
- Such payments will not be treated as fees for professional or technical services under Table Sl. No. 6(iii).
Compliance Impact
| Aspect | Before Amendment | After Amendment |
| Classification of manpower supply | Ambiguous | Clearly “work” |
| Applicable TDS rate | Disputed | 1% / 2% |
| Risk of re-characterisation | High | Minimal |
| Litigation exposure | Significant | Substantially reduced |
Effective Date
- Effective from: 1 April 2026
- Applicable for: Tax Year 2026-27 and onwards
Conclusion
Clause 78 of the Finance Bill, 2026 provides much-needed statutory clarity in two sensitive areas of TDS compliance. By aligning the meaning of “authorised person” with FEMA and conclusively classifying supply of manpower as “work”, the amendment reduces interpretational disputes, enhances certainty, and supports ease of compliance for taxpayers and intermediaries alike.
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