TDS on Professional and Technical Services
Tax Deducted at Source (TDS) is a critical component of India’s tax system, designed to deduct tax before payment to the supplier of the services. Among the various sections governing TDS, TDS on Professional and Technical Services-Section 194J defines the rules, conditions and rates for deducting TDS while making payment of such services. In this article we will deep in dive to understand various rates, terms associated to Section 194J like Professionals, Technical Services and will also figure out the applicability of Section 194J under various scenarios.
What is Section 194J
According to Section 194J, of Income Tax Act, 1961, any person (other than individual or Hindu Undivided Family) while making payment to a resident for professional or technical services is required to deduct an amount at the rate of 10% or 2% respectively of the amount paid or credited to the recipient.
However, individuals or a Hindu Undivided Family whose total sales or turnover from the business or profession exceed the threshold limits specified under section 44AB during the immediately preceding financial year in which fees for professional services or technical services are credited or paid shall be liable to deduct income-tax under this section.
Applicability of Section 194J
Section 194J applies to any person (except individuals and Hindu Undivided Families not covered under tax audit (section 44AB)) responsible for paying to a resident any sum by way of:
Fees for professional services
Fees for technical services
Royalty
Non-compete fees
Fees/ Remuneration paid to directors (not being salary)
These payments are subject to TDS, provided they exceed a specified threshold limit during the financial year.
Meaning of Key Terms under Section 194J
Professional Services
Professional services under Section 194J include services rendered by professionals such as legal experts, doctors, engineers, architects, interior decorators, accountants, consultants, and technical consultants. The scope also extends to artists, writers, and other professionals providing similar services.
Technical Services
Technical services refer to services involving specialized knowledge in technology, such as software development, technical consulting, engineering services, and other similar activities. The definition is broad, covering all services that require technical expertise.
Royalty
Royalty payments covered under Section 194J include payments for the transfer of intellectual property rights, patents, trademarks, copyrights, and similar assets.
Director’s Fees/ Remuneration
Any payment made to a company’s director, which is not part of their salary, is covered under Section 194J and is subject to TDS. The payments made to the director as Salary are covered under Section 192B.
Threshold Limit for TDS Deduction
TDS under Section 194J is applicable only if the total amount paid or credited or likely to be paid or credited exceeds ₹30,000 in a financial year. This threshold limit applies individually to each of the specified services.
For example, if a company pays ₹28,000 for professional services and ₹28,000 for technical services, then in this case no TDS is required to be deducted under Section 194J, as each payment is below the ₹30,000 threshold.
Time of Deduction
TDS under Section 194J must be deducted at the earlier of the following two events:
- At the time of credit of such sum to the account of the payee.
- At the time of payment in cash, cheque, or any other mode.
If the payment is made in advance or as an installment, TDS must be deducted on the date of payment.
Payment and Reporting of TDS Deducted
The deductor is responsible for:
Depositing the TDS:
The deducted amount must be deposited with the government by the 7th of the following month. For March, the due date is April 30 of the subsequent financial year.
Filing TDS Returns:
TDS deducted under Section 194J must be reported in the quarterly TDS return (Form 26Q). Failure to do so can result in penalties and interest.
Consequences of Non-Compliance
In case of failure to deduct or deposit TDS as required under Section 194J can lead to:
Disallowance of expenses:
Under Section 40(a)(ia), the expense on which TDS was not deducted or deposited will not be allowed as a deduction while computing income under the head “Profits and gains of business or profession” which will result in higher book profits.
Interest and Penalties:
The deductor will be liable to pay interest for late deduction or non-deduction and may face penalties for non-compliance.
Exemptions and Lower Deduction
In certain cases, the payee can apply for a certificate under Section 197 for a lower or nil TDS deduction. This can be applicable if the payee’s estimated total income justifies such a lower rate. The payee needs to furnish this lower or NIL TDS Deduction certificate to the deductor in order to convey such rate of deduction applicable.
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