Introduction:

The implementation of Tax Deducted at Source (TDS) has significantly facilitated tax collection in the country by directly targeting the income sources. TDS not only lightens the taxpayer’s burden during the filing of income tax returns but also allows them to claim credit for the deducted taxes.

Among the various types of payments made by businesses, professional fees or fees for technical services stand out as crucial and frequent transactions. Professional fees encompass payments to lawyers, doctors, engineers, architects, chartered accountants, interior decorators, advertisers, and more. Meanwhile, technical services include managerial, technical, or consultancy services. Such payments to residents fall under the purview of section 194J.

Section 194J :

Section 194J of the Income Tax Act, 1961 delineates regulations concerning Tax Deducted at Source (TDS) on payments for diverse professional and technical services. Integral to the advance tax deduction framework, TDS under Section 194J is withheld at the applicable rate before finalizing payments for such services. Here are further insights into Section 194J .

Purpose of Section 194J:

• TDS has significantly streamlined tax collection processes. Within businesses, a substantial portion of fees typically goes toward professional or technical services, with payments directed to residents falling under the purview of Section 194J of the Income Tax Act.
•  As a business owner you are required to pay wages for various technical and professional services. Administrative expenses include salaries paid to doctors, lawyers, maintenance workers, architects and similar workers, while technical expenses include fees paid to consultants or engineers.

Payments covered:

• Below are the various types of payments to residents falling under Section 194J of the IT Act:
• Professional activities typically include services provided by individuals in the medical, legal, construction, and engineering fields.
• The category also extends to services provided by sportspersons, commentators, event managers, umpires, team physicians, referees, and others.Also covered are services rendered by film artists, secretaries, or authorized representatives.
• Royalty under this section encompasses considerations for: The transfer of rights for a design, trademark, invention, or formula. 
• The transfer of rights related to films, videotapes, literary works, scientific findings. 
• The use of a patent, model, or invention, and more.
• Technical services encompass managerial, consultancy, or other technical services, excluding mining, construction, or assembly activities.
• Payments related to non-compete fees are also within the scope of Section 194J of the Income Tax Act. A non-compete fee constitutes an amount disbursed to another individual or entity pursuant to an agreement, thereby restraining them from engaging in similar trade or professional activities.
• Fees disbursed by advertising agencies to film stars.
• Medical services rendered by hospitals.

Threshold limit  for Section 194J Deduction:

• If the amount paid for professional and technical work exceeds Rs 30,000 in a financial year, the tax should be deducted.
• Please note that the maximum limit of Rs 30,000 applies independently to each item or payment.
• However, there is no limit on the amount of company payments (commissions, fees, or remuneration) that the company makes to a director. Taxes must be deducted, regardless of the amount due.

Who is Required to Deduct TDS under 194j:

• Every person or entity liable to pay labor and technical expenses is liable to deduct TDS under Section 194J, if the annual payment exceeds the upper limit of Rs 30,000.
• Individuals and HUFs are not required to deduct TDS when such services are exclusively utilized for personal purposes.
• Individuals and HUFs engaged in business, with gross income not exceeding Rs. 50 lakh in the previous year, TDS is not liable to be deducted under Section 194J.
• “Individuals and HUFs engaged in business, with turnover or gross receipts not exceeding Rs. 1 crore in the preceding year, are not required to deduct TDS under section 194J.

Rate of TDS :

• All payments classified as services under section 194J are subject to the following tax treatment:
• For operators of call centers, the TDS rate is lower at 2% of the transaction value.
• “If the professional/technical service provider (payer) provides his PAN (Permanent Account Number), a flat rate of 10% of the transaction amount will be levied.
• “A flat rate of 20% is applied to the transaction amount if the payee does not provide their PAN (Permanent Account Number).

Time Limits:

• Once TDS is deducted under section 194J, the deductor has to remit the deduction to the government. The time limit for payment of TDS is mentioned in Section 194J as follows:
• “If the payment after deduction of TDS is paid in March of the financial year, the payment of tax under Section 194J must be completed by April 30 of the same calendar year.
• “If the payment after TDS deduction is made before the 1st of March in the applicable financial year, then the TDS must be deposited with the government by the 7th day of the subsequent month. For example, if TDS is deducted on the 1st of December 2018, the TDS amount needs to be deposited with the government on or before the 7th of January 2019.

Consequences of  Late Deduction:

• Not deducting the tax or deducting it late has dual consequences:
• In case of delay in payment of taxes, interest along with TDS will have to be paid to the government. The rate of interest has been fixed as follows.
• In cases where no tax deduction has been made, interest shall be payable at a rate of 1% per month or part thereof, from the date on which the tax was required to be deducted up to the date of actual deduction.
• In cases where tax has been deducted but not paid to the government, interest shall be payable at a rate of 1.5% per month or part thereof, from the date on which the tax was deducted up to the date of payment to the government.
• 30% of expenses will not be allowed in the year of claim (recorded in profit and loss account). However, 30% of the disallowed amount will be further disallowed in the year of payment of TDS to the government.

Final Word:

When engaging services for your business, ensure TDS deduction. Failure to deduct TDS promptly may result in penalties. Refer to the aforementioned sections for clarity on Section 194J.