TDS on 194J for technical services reduced to 2% from 1st April 2020

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 of 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.

Extract from FINANCE BILL Memorandum, 2020

Section 194J of the Act provides that any person, not being an individual or a HUF, who is responsible for paying to a resident any sum by way of fees for professional services, or fees for technical services, or any remuneration or fees or commission by whatever name called (other than those on which tax is deductible under section 192 of the Act, to a director), or royalty or any sum referred to in clause (va) of section 28, shall, at the time of payment or credit of such sum to the account of the payee, deduct an amount equal to ten per cent as income-tax.

Section 194C of the Act provides that any person responsible for paying any sum to a resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract shall at the time of payment or credit of such sum deduct an amount equal to one per cent in case payment is made to an individual or a HUF and two per cent in other cases.

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.

Extract of Relevant Amendment Proposed by Finance Bill, 2020

79. In section 194J of the Income-tax Act, in sub-section (1)

(a) in the long line, for the words “ten per cent. of such sum”, the words and brackets “two per cent. of such sum in case of fees for technical services (not being a professional service) and ten per cent. of such sum in other cases,” shall be substituted; 35

(b) in the second proviso, for the words, brackets, letters and figures “the monetary limits specified under clause (a) or clause (b) of section 44AB”, the words “one crore rupees in case of business or fifty lakh rupees in case of profession” shall be substituted.

This amendment will take effect from 1st April, 2020.