Understanding TDS for Professional and Technical Services (Section 194J)
Understanding TDS for Professional and Technical Services (Section 194J)
Section 194J of the Income Tax Act, 1961 deals with Tax Deducted at Source (TDS) for professional or technical fees paid to residents. This article explains the key points of Section 194J, including recent amendments and who is liable to deduct TDS.
Recent Amendments (effective April 1, 2020)
· TDS Rates:
o Specialized (non-skilled) services: 2%
o All other covered services (including technical services): 10%
· Applicability Threshold:
Businesses and professions that made over Rs 1 crore or Rs 50 lakh in the previous year must deduct TDS.
Who Must Deduct TDS (the Deductor)
Anyone (except individuals/Hindu Undivided Families) making the following payments to a resident (except employees or Hindu Undivided Families) is liable to deduct TDS under Section 194J:
· Fees for professional or technical services
· Director remuneration (excluding exempt payments under Section 192 or royalties)
· Non-compete fees
TDS Rates
· Royalties for films: 10%
· Technical services (excluding film royalties): 2% (effective April 1, 2020)
· Call center operations: 2% (effective June 1, 2017)
· No PAN provided: 20%
· Professional services: 10%
When to Deduct TDS
TDS applies to payments exceeding Rs 30,000 in a financial year for the following:
· Professional services fees
· Technical services fees
· Non-compete fees
· Royalties
What are Professional Services?
Professional services cover different areas such as medicine, engineering, architecture, law, accounting, and interior design. Professional services include medicine, engineering, architecture, law, accounting, and interior design.
The Income Tax Act includes services from film writers, company secretaries, and authorized representatives. Athletes, referees, sports journalists, and physiotherapists are also considered to provide professional services.
What are Technical Services?
Technical services refer to consulting, technological, or managerial services provided by an individual. Manual labor involved in assembly, mining, and manufacturing doesn't qualify as technical services.
What are Non-Compete Fees?
Non-compete fees are payments to prevent someone from using patents, licenses, trademarks, or know-how for business purposes for TDS.
What are Royalties?
Royalties are payments for:
· Transfer of ownership rights for patents, inventions, designs, or trademarks
· Use of patents, inventions, designs, etc.
· Sharing knowledge about inventions, copyrights, or similar rights
· Use of equipment for agricultural, research, or commercial purposes
· Transferring rights to published works, documentaries, or videotapes for broadcasting
Specific Cases where TDS Applies
Based on departmental circulars and case law, TDS may also apply to:
· Medical services provided by hospitals
· Professional fees paid to film artists by publicity companies
· Payments to management consulting or HR firms
· Registrar fees paid by companies for data exchange
Consequences of Non-Compliance
If you don't deduct TDS, you may not be able to claim up to 30% of the expense for tax purposes..
· Interest: Penalties are levied for non-deduction or late deposit of TDS:
o Non-deduction: 1% per month from the due date till deduction.
o Late deposit: 1.5% per month from the deduction date till deposit.
Understanding Section 194J is crucial for businesses and professionals dealing with payments for specified services. Get advice from a tax advisor for help with complicated taxes.