Section 194J

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Introduction

Section 194J of the Income Tax Act, 1961 mandates the deduction of Tax Deducted at Source (TDS) on payments made for professional or technical services. This provision applies to individuals, Hindu Undivided Families (HUFs), or companies paying for specific services, including professional and technical assistance, royalties, and non-compete fees. Here’s a detailed overview of Section 194J, covering its applicability, updated TDS rates, eligible payment types, and other critical information.

Applicability of Section 194J of the Income Tax Act

As per Section 194J, individuals, HUFs, and companies must deduct TDS on specific payments exceeding ₹30,000 in a fiscal year. This requirement applies if:

The individual’s gross income exceeds ₹1 crore (for businesses) or ₹50 lakh (for professions).
Payments include fees for professional or technical services, royalties, and non-compete fees.
The payee provides technical, managerial, or consultancy services.

Exemptions: Payments to employees under employment contracts, and transactions with HUFs, are not subject to Section 194J deductions.

You may also want to know Section 80E

Types of Payments under Section 194J

Professional Fees: Payments for services from professionals like doctors, architects, interior designers, accountants, and engineers.
Technical Services: Payments for technical, consultancy, or managerial services.
Director Fees: Remuneration paid to corporate directors.
Royalty: Payments made for intellectual property use, including patents, copyrights, and trademarks.
Non-Compete Fees: Fees paid to prevent an individual or entity from entering into competitive business agreements.

Amendments to Section 194J TDS Rates (Effective April 1, 2020)

Following recent amendments, TDS rates under Section 194J differ based on the nature of services rendered:

Technical Services: 2%
Call Centers: 2%
Professional Services, Royalty, Director Fees: 10%
If PAN is not provided: 20%

These changes are designed to reduce compliance costs and streamline the TDS framework across various professional services.

Who is Required to Deduct TDS?

The following entities are required to deduct TDS on applicable payments:

Business Entities: Any business with annual revenue exceeding ₹1 crore.
Professionals: Those earning over ₹50 lakh annually.
Corporations and Non-Individual Entities: For royalty payments, director fees, and professional services.

TDS is deducted at the time of payment or credit, whichever is earlier.

You may also want to know Section 194A

Specific Payment Cases Covered under Section 194J

Professional Services: Includes services from qualified professionals in medicine, engineering, architecture, legal fields, and other recognized professions.
Technical Services: Includes consultancy, managerial, and technical services offered to businesses and companies.
Royalty Payments: Applicable for using copyrights, patents, trademarks, and other intellectual properties.
Non-Compete Fees: For fees paid to prevent competition, covering intellectual property agreements and market exclusivity.

Consequences of Non-Deduction or Late Deduction of TDS

Failure to deduct or deposit TDS on time can lead to penalties and interest charges:

Disallowance of Expense: 30% of the expenditure may be disallowed when computing taxable income.

Interest Charges:

For non-deduction of TDS: 1% per month from the due date to the actual deduction date.
For late payment after deduction: 1.5% per month from the deduction date until payment.

How to File TDS under Section 194J

Taxpayers must file TDS using Form 26Q. They are required to submit the deducted amount to the Income Tax Department by the 7th day of the following month. The TDS return should include details such as the deductee’s PAN, the amount paid, and the nature of the payment.

Documents Required for Compliance with Section 194J

To ensure accurate deductions and avoid penalties, entities must retain:

Invoices or Payment Receipts: Proof of payments made for professional and technical services.
TDS Certificates (Form 16A): Issued to deductees as proof of TDS deduction.
PAN and GST Details of Deductees: For accurate filing and to avoid higher TDS rates.

Example: Calculation of TDS under Section 194J

If a company pays ₹50,000 to a consultant for professional services, they must deduct TDS at 10% (₹5,000). For payments related to technical services, the TDS rate would be 2%.

Benefits of Section 194J Compliance

Proper compliance with Section 194J enables taxpayers to claim eligible expenses, reduces the risk of penalties, and promotes transparency. Moreover, maintaining a compliant TDS history improves the taxpayer’s reputation with financial institutions, potentially aiding in future funding requirements.

Conclusion

Section 194J serves a vital role in ensuring transparency in professional and technical service transactions. It establishes clear requirements for deducting TDS on specific payments and helps streamline revenue tracking for tax purposes. Entities can achieve compliance by understanding the applicable rates, timely filing, and maintaining proper documentation. By adhering to Section 194J, taxpayers can effectively avoid penalties and contribute to a compliant tax ecosystem.