AKSHAY KSHIRSAGAR
Section 194J – TDS on Professional or Technical services
By CA Priyanka Jain on 12th January 2023
Amendments in TDS Section 194J
Some changes to Section 194J of the TDS law as part of the Finance Bill 2020.
These changes will go into effect on April 1, 2020. Now, let’s look at the changes to the Finance Bill 2020.
Under Section 194J, TDS will be deducted at a rate of 2% if the fees are for technical services and not professional services. In all other cases, the rate can just go up to 10% of the amount.
A individual or HUF needs to deduct TDS if their business or profession’s total sales, gross receipts, or turnover that exceeds 1 crore rupees in the case of their business, or 50 lacs in the case of their profession.
Section 194J – Fees for professional or technical services
Meaning Professional Fees and Sec 194J
Meaning of Professional Service Fee In accordance with the Income Tax Act’s definition, a service needs to have the following characteristics in order to be categorized as “Professional Services”:
Service meets the following criteria:
1. It is offered by a person;
2. It is performed in the course of a profession; and
3. It falls under one of the professions listed in the definition or another profession that has been notified under Section 44AA.
According to Section 2(31) of the Income Tax Act, a “person” is any of the following:
(i) An individual;
(ii) a Hindu undivided family;
(iii) a company;
(iv) a firm;
(v) an association of persons or a body of persons, whether incorporated or not;
(vi) a local authority; and
(vii) every artificial juridical person that does not fall under any of the aforementioned subclasses.
Therefore, a person can either be an individual, HUF, firm, or any other artificial person, according to the definition provided
Professional Services as under Section 194J include
Medical
Legal
Engineering
Architectural profession
Accountancy
Technical consultancy, or
Interior decoration
Professional services notified in section 44AA include
Film artist
Authorized representative
Company Secretary
Professional Services related to sports activities
Anchors
Commentators
Event Managers
Physiotherapists
Referees and Umpires
Sports Persons
Types of payments covered
The type of payments to residents covered under this section are as follows:
1. Professional fees
2. Fees for technical services
3. Remuneration paid to directors excluding salary (For e.g., sitting fees to attend board meetings)
4. Royalty
Professional Services
It relates to the work done by a person who works in the fields of architecture, law, medicine, or engineering. Accounting, interior design, advertising, technical consulting, and any other profession recognised by the under Section 44AA
Filmmakers, corporate secretaries, and authorised representatives are additional services that are recognised under Section 44AA.
It also includes athletes, event coordinators, commentators, news anchors, umpires and referees, coaches and trainers, physiotherapists, medical experts, and sports commentators.
Technical services
According to income tax rules, “fees for technical services” refers to managerial, technical, and consulting services but excludes payments that the recipient of such income deems to be salary.
Technical services are those that include the use of technical expertise or technological expertise.
Running and managing the client’s business falls within the definition of managerial services.
Consultancy services can be considered advisory services where clients receive essential counsel and consultation for their businesses.
Royalty
For the purposes of this section, royalty refers to payment for the transfer of rights to an invention, secret formula, model, design, trademark, or patent.
Using an invention, model, or patent, for example.
Sharing any information pertaining to the utilisation of an invention, patent, formula, or similar device.
The use of, or the right to use, the equipment for industrial, scientific, or commercial reasons.
Transfer of rights to literary works, scientific discoveries, films or videotapes for radio broadcasting, with no regard for sale, exhibition, or distribution.
Non-applicability of TDS under section 194J
An individual or a Hindu undivided family do not require to deduct taxes at source. However, an individual or HUF requires to deduct tax from fees for professionals or fees for technical services if their total sales, gross receipts, or turnover from their business or profession in the prior fiscal year exceeded “1 crore in the case of business” or “50 lacs in the case of the profession.”
Threshold limit for deducting
Fees for professional services | 30000 |
Fees for technical services | 30000 |
Royalty | 30000 |
Non-compete fees | 30000 |
Remuneration/ commission/fees payable to a director of a company | No such limit |
Tax deductibility threshold If the amount exceeds 30,000 during the year, you need to deduct TDS for the same. This 30,000 is the maximum limit that applies to each item or payment separately. TDS is also levied on commission, compensation, or fees paid to a company’s directors under this clause. The 30,000 restriction does not apply in certain circumstances.
Non-applicability of TDS under section 194J
An individual or a Hindu undivided family do not require to deduct taxes at source. However, an individual or HUF requires to deduct tax from fees for professionals or fees for technical services if their total sales, gross receipts, or turnover from their business or profession in the prior fiscal year exceeded “1 crore in the case of business” or “50 lacs in the case of the profession.”
What is the time limit to deposit TDS u/s 194J ?
Particular | Time limit to deposit TDS |
If the amount is paid or credited in the month of March | On or before 30th April |
If the amount is paid or credited in the month other than March | Within 7 days from the end of the month is which deduction is made |
Individuals required to deduct taxes
Every individual who receives a fee for professional or technical services requires to deduct tax at the point of sale. However, the following individuals do not require to withhold TDS on such payments:
1. In the event of a sole proprietorship or a HUF, when turnover does not exceed Rs 1 crore in the previous fiscal year.
2. In the case of an individual or HUF carrying on a profession, where the previous fiscal year’s turnover did not exceed Rs 50 lakh.
Simply put, all entities (other than individuals/HUF who has no obligation to conduct a tax audit the previous year) must deduct tax (TDS) when paying fees for professional or technical services.
Individuals required to deduct taxes
Section 194J of the Income Tax Act of 1961 lists various penalties in the event that an individual or organization receiving services forgets to deduct TDS while making payments or delays TDS payments to the government. Some of the punishments impose are as follows:
Less Tax Benefit in lieu of Spending: If an individual or company fails to deduct TDS, Their expenditure for services can be disallowed for the applicable financial year in which the transaction is. In practice, the full tax benefits of a tax assessee’s expenses are available only after deduction and prompt payment of TDS to the government.
In the event of a delay, the Assessee must pay a simple penalty on the due as follows:
If tax is not deducted, interest at 1% per month or part of a month is payable from the date TDS was to be deducted to the date of actual deduction.
Tax Deducted but Not Deposited to the Government: Interest at 1.5% per month or part of a month is payable from the date tax was deducted until the date payment to the government is made.
What is Section 194J of the Income Tax Act, 1961
Section 194J of the Income Tax Act, 1961 states the provisions for deducting tax at source during payment of fees for professional services or technical services or royalties.
What do you mean by non-compete fees for the purpose of deducting tax under section 194J?
Non-compete fees is any sum received, in cash or kind, under an agreement for
Not carrying out any business or profession
Not sharing any intellectual property rights (trademark, patent etc) which are likely to assist in the manufacture or processing of goods or provision of services.
Is section 194J applicable to a non-resident?
No, TDS under section 194J is not applicable to a non-resident.
However, when someone transfer money to a non-resident, deduct tax under section 195 read with section 115A of the Income Tax Act, 1961
What is the maximum amount up to which tax need not be deducted under this section?
Maximum amount not chargeable to tax is upto Rs.30,000
I.e., no need to deduct tax if the aggregate amount paid or credited during the financial year by the aforesaid person to the payee does not exceed Rs. 30,000.