TDS under section 194J on Professional and technical service fees: The Tax Deducted at Source (TDS) program, specifically focusing on revenue sources, has proven to be instrumental in the nation’s tax collection efforts. By lessening the tax payment burden for taxpayers, especially concerning professional and technical service fees, TDS allows individuals and entities to claim credit for taxes withheld at the source when filing income tax returns.
Paying for professional fees or technical service fees is one of the most significant and frequent types of payments that a corporate entity makes. Fees paid to lawyers, doctors, engineers, architects, chartered accountants, interior decorators, advertisers, etc. are some examples of professional fees. The provision of managerial, technical, or consulting services would be considered technical services. Section 194J covers certain payments paid to residents.
TDS on Payment
Section 194J primarily applies to two types of services: professional services and technical services.
- Professional Services: These include services provided by individuals or firms with expertise in fields like medicine, law, architecture, accounting, interior design, and various advisory services. So, if you hire a lawyer or a doctor, the payments you make to them may come under this section.
- Technical Services: This category encompasses services related to technology, management, or consultancy. It covers expertise in areas like engineering, software development, and management consulting. If you pay for technical know-how or consulting, Section 194J might apply.
Read more: Summary of Section 194M- TDS on payment to resident contractors and professionals
Meaning of different terms
Professional services
It refers to the services provided by someone who works in the medical, architecture, civil, medical, or engineering fields. Accountancy, interior design, advertisement, professional consulting, and any other occupation recognized by the Board under Section 44AA are examples of other facilities.
Film writers, company clerks, and authorized delegates are among the other resources approved under Section 44AA.
It also includes athletes, program organizers, reporters, anchors, umpires and judges, coaches and assistants, physiotherapists, staff doctors, and sports columnists.
Technical Services
According to income tax regulations, “fees for technical services” refers to management, technical, and consulting services; however, it does not include sums of money that the beneficiary of such income views as compensation.
- Providing services involving technical expertise or technological expertise is one way to define technical services.
- The operation and management of the client’s business can be characterized as the scope of managerial services.
- Consultancy services can be defined as advisory services in which clients receive the necessary guidance and assistance for their business.
In accordance with the ruling of the Supreme Court, human services would be considered technical services. It wouldn’t have any services rendered by robots or machines.
Read more: TDS Rate Chart for FY 2023-24 – AY 2024-25 – Income Tax
Royalty
Royalty means the payment made for:
- Transfer of rights or usage of an invention, model, design, trademark, patent, etc.
- Use of patents, inventions, designs, etc.
- Provide any information related to using an invention, patent, formula, etc.
- Transfer of rights related to scientific findings, literary work, films or videotapes for radio broadcasting but does not include consideration for the sale, exhibition, or distribution of cinematographic films.
- Providing any information related to technical, industrial, commercial or scientific knowledge, experience or skill
What is Limit of the threshold for tax deduction under section 194J:
Not all payments made for professional or technical services are subject to TDS. Section 194J kicks in when the payment exceeds Rs 30,000 in a financial year. It’s important to note that this limit applies to each payment independently, not the total annual sum. This means that if you make several payments to a professional or consultant throughout the year, each exceeding Rs 30,000, you must deduct TDS for each of them.
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TDS on Payment of remuneration to the company’s director
The company’s director provide managerial services. Hence, any sum payable or paid to the director as sitting fees, remuneration or any other sum (other than in the nature of salary) will attract the provisions of section 194J. Managerial services are technical in nature, hence 2% TDS should be deducted for payment of fees for technical services. There is no such limit for payments (commission, fees or remuneration) made to a director by the company. The tax will have to be deducted no matter how small the amount.
Who Must Deduct TDS?
Every person making a payment in the nature of fees for professional or technical services is liable to deduct tax at source. However, below persons are not liable to deduct TDS on such payments:
- In case of an individual or HUF carrying on business: Where turnover does not exceed Rs 1 crore during the previous financial year..
- In case of an individual or HUF carrying on profession: Where turnover does not exceed Rs 50 lakh during the previous financial year.
To put it simply, all entities (other than individuals/HUF who are not required to do tax audit in the preceding year) need to deduct tax (TDS) while paying fees for professional or technical services.
Consequences of Non-deduction or Late Deduction
Disallowance of Expenditure
- When measuring benefit or expense in the year in which the cost is claimed, 30% of the expenditure would be disallowed.
- In the year in which TDS is withheld and billed to the income tax authority, the disallowed spending will be recovered.
Read Also: Save Tax : Why do you need to submit investment proofs in last quarter of FY?
Interest on Deduction Failure
- Failure to Deduct TDS: 1% per month/part of a month from the day such tax was supposed to be deducted before the date of actual deduction.
- Failure to Pay or Deposit TDS– The taxpayer refused to pay or deposit the withheld TDS to the income tax department after it was deducted. From the day on which the tax was withheld before the date of payment to the state, the interest rate will be 1.5% a month/part of the month.
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