Section 194J: TDS on professional fees or technical services

Budget 2020 reduced the rate for tax deducted at source (TDS) in case of fees for technical services under Section 194J of the Income Tax Act 1961 to two percent from the existing 10 percent from April 1, 2020. The TDS rate for the payment other professional services except that for technical services remains same at 10%. This change in TDS rate will come in effect from 1st April, 2020.

The Section 194J of the I-T Act deals with TDS on payments for services such as — fees for professional services and technical services, royalty and non-compete fee as referred under Section 28 (VA) of I-T Act. So far these services were charged with a TDS at 10 percent to a resident over Rs 30,000 during a financial year. However from April 1, 2020 TDS in case of fees for technical services under Section 194J of the Income Tax Act 1961 shall deduct at two percent.

It is noticed that there are large number of litigations on the issue of short deduction of tax treating assessee in default where the assessee deducts tax under section 194C, while the tax officers claim that tax should have been deducted under section 194J of the Act

Therefore to reduce litigation, it is proposed to reduce rate for TDS in section 194J in case of fees for technical services (other than professional services) to two per cent from existing ten per cent. The TDS rate in other cases under section 194J would remain same at ten per cent. The following are some additional details about Section 194J of the IT Act, 1961.

What is Threshold limit for deducting TDS under section 194J:

TDS has to be deducted in case the payment made is greater than Rs. 30,000 during the year. The minimum TDS exemption limit specified under Section 194J as of AY 2019-20 is Rs. 30,000 per annum for all individuals and entities. However, there is no such limit for payments made to a director. The tax will have to be deducted no matter how small the amount.

Who is liable to deduct TDS under section 194J:

Every person, who is making a payment in the nature of fees for professional or technical services is liable to deduct tds u/s 194J provided the threshold limit of Rs. 30,000 per annum is met

However there are following exceptions:

1. Individuals and HUF’s shall not deduct TDS when such services are availed only for personal purposes.
2. In case of an individual or HUF carrying on business: Where his turnover does not exceed Rs. 1 crore during the previous financial year / Rs. 5 crore from F.Y 2020-21 onwards.
3. In case of an individual or HUF carrying on profession: Where his turnover does not exceed Rs. 50 lakh during the previous financial year.

In simple terms, all entities (other than individuals/HUF who are not required to do tax audit in the preceding year) need to deduct TDS.

What is Rate of TDS under section 194J

All payment covered under this section 194J shall be subject to TDS as follows:

• Flat rate of 10% on the transaction amount if PAN (Permanent Account Number) is provided by the professional services provider (payee).
• W.e.f April 1, 2020 Flat rate of 2% on the transaction amount if PAN (Permanent Account Number) is provided by the technical services provider (payee).
• W.e.f. April 01, 2017 the tax on payments made to operators of call centres shall be deducted at a reduced rate of 2%.
• Flat rate of 20% on the transaction amount if PAN (Permanent Account Number) is not provided by the payee

Time of deduction of TDS under section 194J

TDS under section 194J  should be deducted at the time of passing such entry in the accounts or making the actual payment of the expense, whichever earlier.

Consequences of non-deduction or late deduction under section 194J

Income Tax Act, 1961 mentions various penalties in case an individual or entity availing services forgets to deduct TDS while making the payment or delays the TDS payments to the government. Not deducting the TDS or late deduction of TDS shall attract following penalties:

1. Disallowance of a part of the expenditure: 30% of the expenditure shall be disallowed in the year in which the expenditure is claimed (taken to the profit and loss account).  However, the 30% disallowed expenditure shall be re-allowed in the year in which the TDS is paid to the government.

2. Levy of interest until date of payment: In case there is a delay in the payment of tax to government, interest has to be paid along with the TDS to the Government in the following manner:

• Where TDS not deducted: Interest shall be payable at 1% per month/part of month from the date on which such tax was required to be deducted up to the date of actual deduction.
• Where TDS has been deducted but not paid to the government: Interest shall be payable at 1.5% per month/part of month from the date on which such tax was deducted up to the date of payment to the government.

Time Limits for TDS Payment under Section 194J to government

After deduction of TDS u/s 194J, the deductor is required to deposit the amount deducted with the government. The following are details of the TDS payment time limits as described by Section 194J: