A Guide for Businesses and Professionals

Section 194J of the Income Tax Act is a key provision that requires businesses to deduct Tax Deducted at Source (TDS) on payments made for professional or technical services. Whether you’re paying for consultancy, legal advice, or technical expertise, it’s important to understand this section to stay compliant with tax rules. This provision covers payments for professional services, technical services, royalties, and even director’s fees.

In this article, we’ll break down the essentials of Section 194J, including the TDS rates, the thresholds, and the types of services it covers. Let’s dive in!

What is Section 194J of the Income Tax Act?

Section 194J mandates the deduction of TDS when payments are made for professional or technical services. For anyone other than individuals or Hindu Undivided Families (HUFs), TDS must be deducted at rates of 10% or 2%, depending on the nature of the payment and its amount. If the recipient doesn’t provide their Permanent Account Number (PAN), the TDS rate goes up to 20%.

The section applies to anyone making payments for professional or technical services, including royalties and fees paid to directors (excluding salaries).

Payments Covered Under Section 194J

Here are the main types of payments covered under Section 194J:

• Professional Service Fees: Payments for expert services in fields like law, medicine, consultancy, and engineering.
• Technical Service Fees: Payments for services related to technology, such as software development or technical consultancy.
• Director Fees: Fees paid to directors of a company (excluding salary, such as sitting fees for attending meetings).
• Royalty: Payments made for the use or transfer of intellectual property like patents, trademarks, or designs.
• Non-Compete Fees: Payments made to someone for agreeing not to compete or engage in similar business activities for a specified time or within a specified geographical area.

What Are Professional and Technical Services?

Professional services are typically those provided by qualified experts in their field. Examples include:

• Medical services
• Legal services
• Accountancy and consultancy services
• Advertising, engineering, and architectural services
• Notified professions like sports coaches, umpires, and commentators

On the other hand, technical services refer to services involving technical expertise, such as:

• Technical consultancy
• Managerial services
• Certain types of training or advice

However, construction, mining, and assembly services are not considered technical services under this section.

TDS Rates Under Section 194J

Here’s a quick overview of the TDS rates based on the type of payment:

• Technical Services: 2% (Threshold limit: Rs. 30,000)
• Royalty (for sale/distribution of films): 2% (Threshold limit: Rs. 30,000)
• Other Royalty: 10% (Threshold limit: Rs. 30,000)
• Professional Services: 10% (Threshold limit: Rs. 30,000)
• Payments to Directors: 10% (No threshold limit)
• Payments to individuals/HUF (without PAN): 20% (Threshold limit: Rs. 30,000)

Threshold Limit for TDS Deduction

If the payment for professional or technical services exceeds Rs. 30,000 in a given year, TDS must be deducted. For instance, if you paid Rs. 20,000 for technical services and Rs. 25,000 for royalties, you wouldn’t need to deduct TDS because neither amount exceeds the Rs. 30,000 thresholds. However, any payments made to directors will always require TDS deduction, regardless of the amount.

When Should TDS Be Deducted?

TDS should be deducted at the time the payment is made or when the amount is credited to the payee’s account, whichever comes first.

Here are the deadlines for depositing TDS:

• Before March 1: Deposit by the 7th of the following month.
• In March: Deposit by April 30 for non-government deductors , or within the same month for government dedicators .

Penalties for Non-Deduction or Late Deduction of TDS

Not deducting TDS or delaying the deposit can lead to serious consequences:

• Disallowance of Expenditure: The payments won’t be allowed as deductions in the tax return.
• Interest: Interest is charged at 1% per month if TDS is not deducted on time, and 1.5% if the TDS is not paid to the government.
• Penalties: A penalty of up to the amount of TDS due can be imposed, along with further penalties for non-payment of the tax.
• Prosecution: Failing to deduct or pay TDS may result in imprisonment for a minimum of three months and up to seven years.

Exceptions to TDS Under Section 194J

Section 194J doesn’t apply in the following cases:

• Payments made for personal use (e.g., a personal lawyer or doctor).
• Payments to non-resident contractors or subcontractors.
• Payments that do not exceed Rs. 30,000 in total during the year.
• Royalties or non-compete fees paid by individuals or HUFs (unless they are subject to a tax audit).

Special Considerations

Some specific situations involve special provisions under Section 194J:

• Regular maintenance agreements involving the supply of parts will typically fall under Section 194C, but if the agreement involves technical services, then Section 194J applies.
• Payments made to employment agencies (like Naukri or Monster India) are also subject to TDS under Section 194J.
• If GST is separately mentioned in the bill, TDS is calculated on the amount before GST.

Conclusion

Section 194J plays a vital role in ensuring tax compliance when making payments for professional or technical services. By understanding the provisions, businesses can avoid penalties and ensure transparent financial practices. Staying updated on the changes in the tax landscape and consulting with experts will help in maintaining a smooth, tax-compliant environment.