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Section 194J of the Income Tax Act, 1961 deals with TDS rules concerning the payments made towards fees for various professional or technical services. The tax must be deducted at the applicable rate by the payer who avails the consultancy services rendered by a professional. This TDS on professional fees must be deducted before the payment for any professional or technical service is completed. For example, if an individual entity avails an architect’s professional services, then it will have to deduct TDS under Section 194J before paying the applicable fees to the architect. This article attempts to accentuate the provisions of TDS which are applicable to services obtained from professionals.
Section 194J entails the deduction of tax in respect of below-mentioned payments made to a resident:
Payment of a fee, royalty, etc. made to a non-resident does not attract ‘TDS on professional fees’ under Section 194J. Payments to non-resident persons are governed by Section 195.
Every payer other than an individual or HUF, who is responsible for making payments of fees, royalty, etc. as covered under Section 194J to a resident, needs to deduct TDS. However, an individual or HUF is also brought under the TDS ambit if such individual or HUF was liable to get a tax audit done under Section 44AB in the previous FY. Tax audit clause is attracted if gross sales/turnover of a business exceeds Rs. 1 crore or gross receipts of a profession exceeds Rs. 50 lakhs during the previous FY.
Pursuant to Section 194J, tax is to be deducted at the time of payment or credit to the account of the payee whichever is earlier.
Some cases where there is no requirement to deduct TDS under Section 194J include the following:
From the payments covered under Section 194J, the payer is required to deduct TDS @ 10%. This 10% is replaced by 2% if the payee is solely engaged in operating a call centre business. Moreover, if the payee fails to furnish his PAN details, then TDS on professional fees shall be deducted at a higher rate of 20%.
The payer is accountable to deposit TDS on professional fees under Section 194J to the credit of the Central Government, as shown below:
TDS during April to February
On or before 7th of succeeding month
TDS during March
On or before 30th April
The payer issues Form 16A certificate to the deductee as a proof of TDS to allow the deductee to claim its credit at the filing his ITR. Form 16A is furnished within 15 days of filing TDS quarterly returns. The due dates of issuance of TDS certificate are:
Due date of filing of TDS return
Due date for issuing TDS Certificate
April to June
July to September
October to December
January to March
The person liable to deduct TDS is charged with interest if he fails to deduct TDS or fails to deposit tax (after deduction) to the credit of the Government. Interest is levied @ 1% for delay in deduction and @ 1.5% for delay in payment after the deduction of TDS.
Another consequence of non-deduction or late deduction of TDS is that 30% of the expenditure pertaining to the services received will be disallowed in the books of the payer. This disallowance will be applicable for the financial year in which the transaction was carried out. Therefore, full tax benefits of expenses can be claimed by the assessee only when TDS is properly deposited to the Government.
One of the most important payments often made by business entities is towards professional fees or fees for technical services paid to a lawyer, engineer, architect, consultant, etc. The payer is required to deduct TDS on professional fees @10% on such payments and give the balance amount to the payee. Moreover, by placing the liability to deduct tax on the shoulders of business entities, such TDS provisions allow the Government to control tax evasion in respect of certain expenses.
Also, Read: Section 145 of the Income Tax Act,1961
A CA together with MBA (Fin) and M Com, she relishes taking interest in insightful writing in the domain of taxation and finance. She has gained experience as a full-time author and has also served an accounting role in industry.
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