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Corporate and Individual Taxation

SECTION 194J of the Income Tax Act- TDS on Professional & other Service Fees

In this article, lets discuss what TDS on Professional services is, how much you have to pay, or if there is an exemption on it, and more...
Written by:
Prachi Darji
Published on
13-Sep-2019

The deduction of tax at source which is also known as TDS (Tax Deducted at source) has been quite helpful while collecting the taxes in the country. It is done by targeting the source of income. By this, it can be said that TDS is helpful for both the government and the person who is paying the tax.

The person who is making the payment is responsible for both for the deduction of the tax and also for depositing the same to the government. The tax is collected from the source where an individual’s income is generated. The introduction of Tax Deducted at Source(1) (TDS) has made the work of government and taxpayers very easy. It has made the system more smooth and easy to function.

When we talk about the government, TDS is helpful in controlling the evasion to a certain extent by applying liability on the business entities to deduct the tax with respect to certain expenses if the business entities cross the specified threshold or limit. It also maintains the inflow of tax which runs throughout the year. And when we talk about the taxpayers, it makes it very easy for the people who have been burden with filing their income tax return on time. It becomes easy because they get credit for the taxes that are deducted at the source.

One of the important and common types of payments that are done by the business entity is towards professional fees or fees for technical services. Some examples of professional fees are Fees paid to the doctor, engineer, lawyer, CA, CS, interior designer, advertiser, architecture, etc. And the technical services include the rendering of technical, managerial or consultancy services.

Types of Payments Covered

Following are the types of payment that are covered under this:

  1. Professional Fees

  2. Technical services fees

  3. The remuneration that is paid to the directors excluding the salary (for example fees paid to the director to attend the board meeting)

  4. Royalty

  5. Payments are done in the nature of non-compete fees or a fee is paid to not share any technical knowledge with someone (for example fees paid to restrict someone to carry on the business or profession for a certain specified period or within the specified geographical boundaries)

Some important points of Section 194J of the Income Tax Act are:

  1. Threshold Limit: If the payment is greater than Rs. 30,000 then tax has to be deducted during the year. However, no such limit is defined if the payment is made to the director. And also, the tax will always deduct no matter how small the amount is.

  2. Person liable to deduct the tax: Every person, who is doing the payment to pay the fees for professional or technical services, is liable to deduct the tax. But this is subjected to some exceptions and they are:

  • In case an individual or HUF is running the business where the turnover of the business does not exceed Rs 1 crore during the previous financial year.

  • In case an individual or HUF carrying on the profession where his or her turnover does not exceed Rs 50 lakh during the previous financial year.

In simple words, we can say that all the entities (other than the individuals or HUF who are not at all required to do the tax audit) need to deduct the tax.

3. Rate of Deduction of tax: Any payments which are covered under this section have to pay TDS at the rate of 10%. However, from 1st April 2017 onwards, the payments that are made to the call centre operators, the tax is deducted at a reduced rate of 2%. And in case, if any payee does not furnish his or her PAN then the deduction rate would be 20%.

4. Time of Deduction: The deduction of tax shall be done at the time of passing such entry in the accounts book or while making the actual payment, whichever is earlier.

Other relevant points regarding Section 194J of the Income Tax Act:

  • Where any sum referred to in Section 194J of Income Tax Act(2) is credited to an account named ‘suspense account’ or by any other name, then the person is liable to pay the sum as per the accounts book because such crediting is deemed to be the credit of such sum to the account of the payee. Therefore, the provisions of this section will be applied.

  • The person who is deducting the TDS under this section (194J of the Income Tax Act) issues a tax credit certificate which indicates that the amount is paid and the TDS is also deducted.

 

Consequences of non-deduction or late deduction

There are two-fold consequences for the non-deduction or late deduction of the tax:

  1. A part of the expenditure would be disallowed: The 30% expenditure will be disallowed in the year in which the expenditure was claimed (by seeing the profit and loss account). However, the disallowed 30% will be re-allowed if the TDS (Tax Deducted at source) is paid to the government in the same year.

  2. Levy of interest until the date of payment: In case of delay in making the payment of tax, then the person has to pay the interest along with TDS (Tax Deducted at Source) to the government. By the following manner, the rate of interest is determined:

  • When no deduction of tax is done: The interest shall be payable at 1% per month from the date on which the tax was required to be deducted to the date of making the actual deduction.

  • When the tax is deducted but not paid: If the tax is deducted but it is not paid to the government then interest shall be payable at 1.5% per month from the date on which the tax was deducted to the date of making the payment to the government.

 

External Links:

1. Tax Deducted at Source - A sitemap of the Tax Deducted at Source.

2. Section 194J of Income Tax Act - A detailed view of Section 194J of Income Tax Act.