TDS on Professional/Technical Services Section 194J

Introduction: Tax Deducted at Source (TDS) is a system implemented by the Indian Income Tax Department to collect tax at the source of incom...

Introduction:

Tax Deducted at Source (TDS) is a system implemented by the Indian Income Tax Department to collect tax at the source of income. The aim of TDS is to ensure a regular inflow of funds to the government, avoid tax evasion, and reduce the burden of tax collection. TDS is deducted by the payer of the income and deposited with the government on behalf of the payee. The amount of TDS is then credited to the payee's income tax account.

Section 194J:

Section 194J is a provision under the Indian Income Tax Act that pertains to TDS on fees for professional or technical services. As per this section, any person who pays any sum to a resident for professional or technical services is required to deduct TDS at the rate of 10%.

Professional services include legal, medical, engineering, architectural, accountancy, technical consultancy, or any other profession which requires specialized knowledge or skill. Technical services, on the other hand, include services that involve the application of technical knowledge or experience such as designing, developing, maintaining, or operating computer software or hardware.

It is important to note that TDS under Section 194J is only applicable if the sum paid for professional or technical services exceeds Rs. 30,000 in a financial year. The TDS deducted is to be deposited with the government within the specified time limit, failing which the payer may be liable to pay interest and penalty.

Conclusion:

TDS under Section 194J is an important provision under the Indian Income Tax Act that helps the government in collecting tax revenue. It applies to payments made for professional or technical services and is meant to ensure that tax is deducted at the source. As a result, it helps in preventing tax evasion and reduces the burden of tax collection. It is important for businesses and individuals to understand the provisions of TDS under Section 194J to ensure compliance with the law and avoid any penalties.

II. Instances when no tax shall be deducted/Thershold Limit

Section 194J of the Income Tax Act mandates the deduction of Tax Deducted at Source (TDS) on certain types of payments such as professional fees, technical fees, royalty, non-compete fee, etc. However, there are some instances where no tax shall be deducted under Section 194J.

The first instance is when the amount paid towards professional fees, technical fees, royalty, or non-compete fee during the financial year does not exceed Rs. 30,000. This threshold limit of Rs. 30,000 is applicable to each payment separately and not to the total payment made during the financial year.

The second instance when no tax shall be deducted under Section 194J is when the payment is made for the personal service of an individual or Hindu Undivided Family (HUF). This exemption applies only to payments made to individuals or HUFs and not to payments made to any other entity such as a company, partnership firm, or LLP.

The third instance is when the payee has obtained a certificate from the Assessing Officer for non-deduction or lower deduction of tax. The certificate is issued by the Assessing Officer upon application by the payee, and after due verification of the payee's tax liability. If the certificate is obtained, the payer is not required to deduct tax at the source or can deduct tax at a lower rate, as specified in the certificate.

In conclusion, the instances when no tax shall be deducted under Section 194J provide relief to small payees and personal service providers. The certificate for non-deduction or lower deduction of tax is especially helpful for payees who have a lower tax liability. It is important to comply with the provisions of TDS to avoid any penalties or interest charges.

III. Rate of TDS

The rate of TDS (Tax Deducted at Source) for payments made under Section 194J of the Income Tax Act, 1961 is either 2% or 10% depending on the type of fee paid. For fees paid to professionals, technical service providers, or royalty, the TDS rate is 10%. For fees paid for the use of copyright, patent, design, or trademark, the TDS rate is 2%.

However, if the payee is engaged only in the business of operation of call center, then the TDS rate is 2% for all types of fees. It's important to note that a higher rate of TDS will be applicable if the payee does not furnish their PAN (Permanent Account Number). The higher rate will be the rate prescribed under the relevant provisions of the Act or 20%, whichever is higher.

It's essential for the deductor to determine the correct TDS rate applicable and deduct tax at the time of payment to avoid any penalty or interest. The TDS deducted should be deposited with the government within the specified due dates, failing which, the deductor will be liable to pay interest and penalty on the late payment.

IV. Payment of tax to the credit of the Government:

Once the TDS has been deducted, the tax so deducted must be deposited to the credit of the Government of India within the prescribed time limit. The time limit for payment of tax deducted at source is as follows:

• For tax deducted during the month of March: 30th April of the same year
• For tax deducted during any other month: Within 7 days from the end of the month in which the tax was deducted.

If the tax is not deposited within the prescribed time limit, the deductor may have to pay interest and penalties as per the provisions of the Income Tax Act.

V. Issuance of TDS certificate:

Once the tax has been deducted and deposited to the credit of the Government, the deductor is required to issue a TDS certificate to the payee. The TDS certificate serves as proof that tax has been deducted at the source and deposited to the credit of the Government.

The procedure for issuing a TDS certificate is as follows:

The TDS certificate must be issued in Form 16A or any other format prescribed by the Income Tax Department.

The TDS certificate must be issued within a specified time limit, which is as follows:

• For tax deducted during the quarter ending 30th June: 15th August of the same year
• For tax deducted during the quarter ending 30th September: 15th November of the same year
• For tax deducted during the quarter ending 31st December: 15th February of the following year
• For tax deducted during the quarter ending 31st March: 15th June of the following year

The TDS certificate must contain the details of the deductor and the payee, the amount of tax deducted, the date of payment, and other relevant details.

The certificate should be downloaded from the official website of TDS Centralized Processing Cell (CPC), http://contents.tdscpc.gov.in.

The TDS certificate must be signed and verified by the deductor. If the deductor is a company, the TDS certificate must be signed by an authorized person.

The TDS certificate must be issued in duplicate, with one copy given to the payee and the other copy retained by the deductor for his records.

Issuing a TDS certificate is mandatory, and failure to do so may result in penalties and legal consequences for the deductor.

VI Consequences of not deducting TDS

If a person responsible for deducting TDS under Section 194J fails to do so or deducts an amount less than the prescribed rate, they may be penalized. The penalty is equal to the amount of TDS that should have been deducted but was not. Additionally, interest at the rate of 1% per month or part of a month is also charged on the amount of TDS not deducted or deducted at a lower rate.

Thus, it is important for the person making payment of interest to ensure that TDS is deducted as per the provisions of Section 194J to avoid any penalties or interest charges.

In addition to these compliance requirements, it is important for the payer to maintain proper records of TDS deducted and deposited. These records must be kept for at least seven years from the end of the financial year in which the TDS was deducted. Failure to maintain these records may result in penalties and legal consequences.

Understanding the Importance of Timely Deduction and Payment of TDS

Tax Deducted at Source (TDS) is a way of collecting tax at the source of income. It is applicable to various types of income such as salaries, interest, commission, rent, etc. TDS is a significant source of revenue for the government, and it helps in preventing tax evasion. However, the importance of TDS does not end with its deduction, and timely payment of TDS is equally crucial.

Delay in Payment of TDS

As per section 201 of the Income Tax Act, 1961, if any person who is liable to deduct tax at source does not deduct tax at source, or after deducting fails to pay the whole or any part of the tax to the credit of the government, then such person shall be liable to pay simple interest at the following rates:

Interest shall be levied @ 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted.

Interest shall be levied @ 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid to the credit of the government.

In other words, interest will be levied @ 1% for delay in deduction and @ 1.5% for delay in payment after deduction.

Default in Any Prescribed Procedure

The deductor will be liable to fee/penalty/prosecution in respect of the following defaults:

• Default in obtaining Tax Deduction Account Number (TAN)
• Default in deduction of tax
• Default in payment of tax to the credit of the government
• Default in furnishing the TDS return
• Default in furnishing the TDS certificate to the payee

Disallowance of expenses while computing business income due to non-deduction of tax at source under section 194J:

As per section 40(a)(ia), any sum payable to a resident, which is subject to deduction of tax at source, would attract 30% disallowance while computing income chargeable to tax under the head "Profits and gains of business or profession" if tax is deductible at source but is not deducted, or if tax is deducted during the year and not paid on or before the due date of filing of the income tax return specified under section 139(1).

However, any payment disallowed by this provision shall be allowed as a deduction in the computing of income of the year in which such tax has been paid to the government.

If the recipient has furnished their income tax return, taking into account the income in their return, paid the tax due on the income, and the payer obtains a certificate from a Chartered Accountant in Form No. 26A and electronically furnishes it to the Income-tax Department, no disallowance shall be made even if the tax has not been deducted at source from any sum paid to a payee.

In conclusion, it is important for deductors to comply with the provisions of TDS and issue TDS certificates on time. Any delay in deduction or payment of TDS may attract interest, and failure to comply with the prescribed procedures may result in penalties or prosecution. Additionally, non-deduction of TDS may lead to disallowance of expenses while computing business income, which may have a significant impact on a taxpayer's bottom line.

VII Conclusion

 In conclusion, it is essential for businesses and professionals to comply with the TDS provisions under 

Section 194J of the Income Tax Act. This section governs the tax deduction at source for fees for professional or technical services.

The key points to remember are that any person or entity making a payment to a resident for professional or technical services should deduct TDS at the rate of 10% on the payment amount if it exceeds INR 30,000 in a financial year. If the payment is made to a non-resident, the TDS rate is usually higher at 20%.

Non-compliance with the TDS provisions can lead to penalties and interest, and it can also damage the reputation of the business or profession. It is crucial to maintain proper documentation and timely payment of TDS to avoid any legal implications.

Moreover, compliance with TDS provisions not only ensures the smooth functioning of the business or profession but also contributes to the overall growth and development of the economy. It ensures that the government has sufficient funds to carry out developmental activities, and it also promotes transparency in financial transactions.

In summary, compliance with TDS provisions under Section 194J is an essential aspect of doing business or providing professional services. It not only ensures adherence to the law but also contributes to the growth of the economy. Therefore, it is crucial for businesses and professionals to understand and comply with the TDS provisions to avoid any legal consequences and contribute to the overall development of the country.