Tax Deduction at Source (TDS) aids tax collection by targeting income sources and eases taxpayers' load during income tax return filing, allowing them to claim credit for source-deducted taxes.
Professional and technical service fees, such as those paid to lawyers, engineers, accountants, and others, are common payments for businesses. These payments to residents fall under section 194J.
Payment Types
This section covers:
These are services provided by professionals such as doctors, lawyers, engineers, accountants, advertisers, interior decorators, and technical consultants. Certain professions are also notified by the CBDT Board under Section 44AA.
The CBDT has notified professions like film artists, company secretaries, and authorised representatives under Section 44AA.
Additionally, the CBDT has notified sports-related professions, including athletes, commentators, event managers, anchors, umpires, referees, physiotherapists, coaches, trainers, team doctors, and sports columnists under Section 194J.
Technical services, as per tax law, include managerial, technical, and consultancy services, excluding payments considered as salary.
The Supreme Court rules that only services provided by humans qualify as technical services, not those provided by machines or robots.
Royalty is a payment for:
Non-Compete Fees are payments made for an agreement preventing the sharing of business rights or information that could be used elsewhere.
Tax Deduction Threshold
Persons Liable for Tax Deduction
Everyone who pays for professional or technical services must deduct tax at source. However, there are exceptions:
In simpler terms, all entities, except individuals/HUF not required to perform a tax audit in the previous year, should deduct tax while making payments for professional or technical services.
Tax Deduction Under Section 194J
Payment Type |
Tax Deduction Rate |
Technical service fees |
2% |
Call centre operator payments |
2% |
Cinematographic film royalty |
2% |
Other payments (e.g. Professional Services) |
10% |
No PAN provided by Payee |
20% |
When to Deduct Tax Under Section 194J
Taxes are deducted when-
whichever happens first.
TDS on Professional and Technical Services Examples
Example 1: Mr. Jay paid Mr. Veer for professional services in F.Y. 2021-22. A payment of Rs 55,000 was made in April and Rs 22,000 in December. The TDS liability for these payments will vary based on the following scenarios:
Scenario 1 Analysis: Mr. Jay is not liable for Tax Audit u/s 44AB, so there is no requirement to deduct tax when paying Mr. Veer.
Scenario 2 Analysis: Mr. Jay used the service for personal reasons, so there's no need to deduct TDS for these payments.
Scenario 3 Analysis: If Mr. Jay is subject to a tax audit and used the service for business, then a 10% TDS must be deducted from the Rs. 55,000 payment. This is because the transaction exceeds the threshold limit of Rs. 30,000. Also, TDS should be deducted from the second payment of Rs. 22,000 as it exceeds the annual threshold limit.
Example 2: A Badminton Club pays Mr Pravin, an Indian resident, Rs 10 lakh per annum as a coach. Does the club need to deduct TDS from this payment?
Coaching services are professional services under section 194J. As the remuneration exceeds Rs 30,000 per annum, the Badminton Club must deduct TDS under section 194J from the payment to Mr Pravin.
Consequences of TDS Non-deduction or Late Deduction
Failure to deduct tax or late deduction results in two main consequences:
TDS Deposit Deadline
|
Non-Government Deductors |
Government Office Deductors |
Payment before 1st March |
7th day of following month |
7th day of following month |
Payment in March |
April 30th |
Tax payment date is the date of professional or technical fee payment to the payee, but the related challan is deposited by the 7th day of April |