The deduction of tax at source or TDS has been beneficial in collecting taxes in the country by targeting the source of income itself. It also eases the taxpayer’s tax burden when it is time to file their income tax returns. That is because they get credit for the taxes deducted at the source.
One of the most important and common types of payments that a business entity makes is towards professional fees or fees for technical services. Some illustrative examples of professional fees are fees paid to a lawyer, doctor, engineer, architect, chartered accountant, interior decorators, advertisers, etc. Technical services would include the rendering of managerial, technical or consultancy services. Such payments made to residents are covered under section 194J.
Types of Payments Covered
The type of payments to residents covered under this section are as follows:
Professional fees
Fees for technical services
Remuneration paid to directors excluding salary (E.g., sitting fees to attend board meetings)
Royalty
Payments like non-compete fees (i.e., fees paid to not carry on any business or profession for a specified time and within certain geographical boundaries) or fees paid to not share any technical knowledge or know-how.
Threshold Limit for Deducting Tax
The tax has to be deducted in case the payment is greater than Rs. 30,000 during the year. However, there is no such limit for payments made to a director, and the tax will have to be deducted no matter how small the amount.
Persons Liable to Deduct Tax
Every person who is making payments like fees for professional or technical services is liable to deduct tax at source with the following exceptions:
In the case of an individual or HUF carrying on a business, his turnover does not exceed Rs. 1 crore during the previous financial year.
In the case of an individual or HUF carrying on the profession, his turnover does not exceed Rs. 50 lakh during the previous financial year.
To put it simply, all entities (other than individuals/HUF who are not required to do tax audits in the preceding year) need to deduct tax.
TDS Rate under section 194J
Any payment covered under this section shall be subject to TDS at the rate of 10%.
From April 1st 2020, the payment of fees for technical service shall be subject to TDS at the rate of 2%.
With effect from 01.04.2017, the tax on payments made to operators of call centres shall be deducted at a reduced rate of 2%.
If the payee does not furnish his PAN, then the deduction rate would be 20%.
Time of Deduction under section 194J
The tax should be deducted at the time of-
whichever earlier.
For Example:- Mr. Jay has availed professional service from Mr. Veer in F.Y. 2021-22. The first payment in April was Rs. 55000 and the second payment in December month was Rs. 22000. Let us check the TDS liability for both the payments
For the F.Y. 2021-22 in three scenarios:
Mr. Jay is not liable for audit u/s 44AB.
Mr. Jay is liable for audit u/s 44AB, and he provided has taken service for personal purposes.
Tax audit u/s 44AB is applicable to Mr. Jay in F.Y. 2021-22, and he has taken professional service for business purposes.
Case 1
Since Mr. Jay is not liable for Tax Audit u/s 44AB he is not liable to deduct tax while making payment to Mr. Veer.
Case 2
Though Mr. Jay has taken professional service that was for personal purpose. Hence, no TDS is required to be deducted while making payments for such services.
Case 3
If Tax Audit is applicable to Mr. Jay and he avails the professional services for business purposes, TDS @10% must be deducted at Rs. 55,000 while making payment or credit in the accounts, whichever is earlier. . This is because the transaction has exceeded the threshold limit of Rs. 30,000.
Similarly, since the transaction amount has exceeded the threshold limit in the financial year, TDS should be deducted for all the payments made to Mr. Veer. Hence, tax shall be deducted at source on second payment of Rs. 22,000 also.
Consequences of Late Deduction and Non-Deduction
Not deducting the tax or late deduction of the tax has a two-fold consequence:
Time Limit for Tax Payment
| Non- Government Deductor | Government Deductor |
Payment made before March 1st | 7th day from the end of the month | 7th day from the end of the month |
Payment made in the month of March | April 30th | Tax payment is made on the date of charge to the payee, but the corresponding challan is deposited by the 7th day from the end of the month. |
For more information on this, visit TAXAJ
Posted by Aashima
Team TaxaJ
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