Section 194J of Income Tax Act - TDS on Professional or Technical Fees

Businesses frequently make payments for professional or technical services. These can include fees for professional or technical services from lawyers, doctors, engineers, architects, chartered accountants, interior decorators, and advertisers. Technical services encompass managerial, technical, and consultancy services. Payments for these services to residents are subject to TDS on professional or technical services under Section 194J of the Income Tax Act.

Section 194J of the Income Tax Act of 1961 governs Tax Deducted at Source (TDS) on payments for professional and technical services. It requires anyone making such payments to a resident, except individuals and Hindu Undivided Families (HUFs), to deduct TDS at a rate of either 10% or 2%, depending on the specific service and payment amount.

Individuals and Hindu Undivided Families (HUFs) required to undergo a tax audit under Section 44AB of the Income Tax Act (due to a business turnover exceeding Rs. 1 crore or professional income exceeding Rs. 50 lakhs) must also deduct TDS on professional or technical services payments under Section 194J of Income Tax Act.

Types of Payments on where TDS on professional or technical services payments shall be deducted under Section 194J of Income Tax Act-

• Professional fees
• Fee for technical services
• Remuneration to directors
• Royalty payments
• Non-compete fees related payments

The Central Board of Direct Taxes (CBDT) has issued clarifications regarding the applicability of Section 194J, including these special considerations:

• Routine Maintenance Contracts: Payments under routine maintenance contracts, even if they include spare parts, are generally subject to TDS under Section 194C. However, if the contract includes technical services, Section 194J applies instead.
• Recruitment Agencies: Payments to recruitment agencies (e.g., Monster India, Naukri.com) are subject to TDS under Section 194J.
• TDS on GST Amount: TDS under Section 194J is calculated on the payment amount excluding GST, provided the GST is itemized separately on the invoice.
• Media Houses: Commissions paid by media houses (e.g., TimesNow) to advertising agencies (e.g., FoxyMoron) are subject to TDS under Section 194J.

Threshold for deducting TDS on professional or technical services payments shall be deducted under Section 194J of Income Tax Act-

The threshold for deducting TDS on professional or technical services payments shall be deducted under Section 194J is ₹30,000 per payment. This means TDS is only required if a single payment for professional or technical services exceeds ₹30,000. Even if total payments to the same professional or service provider in a financial year exceed ₹30,000, TDS is not required on individual payments below that threshold. For example, separate payments of ₹25,000 and ₹35,000 to the same lawyer would only require TDS deduction on the ₹35,000 payment.

Rate of TDS on on Professional or Technical Fees under Section 194J of the Income Tax Act-

• Technical Service Fees: 2% & Rs. 30,000
• Call Center Operator Payments: 2% & Rs. 30,000
• Film Royalty: 2% & Rs. 30,000
• Other Royalty: 10% & Rs. 30,000
• Professional Services: 10% & Rs. 30,000
• PAN not Provided: 20% & Rs. 30,000
• Director Remuneration: 10% & Nil

Time Limit to Deposit TDS on professional or technical services payments under Section 194J of the Income Tax Act-

The time limit for depositing TDS on professional or technical services payments under Section 194J of Income Tax Act generally falls on the 7th day of the month subsequent to the month when the TDS was deducted. This means, TDS deducted under section 194J in June should be deposited by July 7th. However, an exception is made for TDS deducted in March, which should be deposited by April 30th.

Penalty for non-compliance Section 194J OF Income Tax Act-

Failure to deduct or remit Tax Deducted at Source (TDS) under Section 194J for professional and technical services can lead to serious repercussions:

Disallowance of Expenditure:

• Non-resident payments: Payments to non-residents without TDS deduction or timely remittance may be disallowed as expenses under Section 40(a)(ia), though this disallowance can be reversed upon subsequent deduction and remittance.
• Resident payments: A 30% disallowance under Section 40(a)(ia) may apply to payments to residents without proper TDS deduction and remittance.

Interest:

• Non/Late Deduction: Interest at 1% per month (or part thereof) is levied on the TDS amount from the due date to the actual deduction date.
• Late Payment: Interest at 1.5% per month (or part thereof) is charged on the TDS amount from the deduction date to the payment date if the deducted TDS is not deposited with the government on time.

Penalties:

• Non/Late Deduction: A penalty equal to the TDS amount can be imposed under Section 271C.
• Non-Payment of Demand: Failure to pay a tax demand can result in further penalties under Section 221, the amount depending on the delay but capped at the tax demand itself.
• Prosecution: In cases of non-remittance of TDS under section 194J, prosecution may be initiated, carrying a potential prison sentence of three months to seven years.