If you are a business owner or a professional who makes payments to other professionals or technical experts for their services, you need to be aware of Section 194J of the Income Tax Act, 1961. This section deals with the deduction of tax at source (TDS) from such payments made to a resident.
By the end of this post, you will have a clear understanding of Section 194J and its implications for your business. You will also learn some tips and best practices to avoid any errors or penalties related to this section.
What are the types of Payments Covered under Section 194J?
Section 194J applies to any person (other than an individual or a Hindu Undivided Family) who is responsible for paying any of the following fees to a resident:
- Fees for professional services
- Fees for technical services
- Non-compete fees or any other sum referred to in section 28(VA)
These payments are covered under Section 194J irrespective of whether they are made in cash, cheque, draft, or any other mode.
What are the Meanings of Various Terms Used in Section 194J?
Let us understand the meanings of some of the key terms used in Section 194J:
- Professional services: These are the services rendered by a person in the course of carrying on a legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, or any other profession notified by the board.
The list of notified professions includes:
|Authorized representative, Film artist, Company Secretary, Information technology, Sports person, Sports association, Event manager, Fashion designer, Broadcaster, News agency, Musician Singer, Lyricist, Story writer, Cameraman, Director, Editor, Art director, Dance director, Actor, Anchor, Dress designer
- Technical services: These are the services of a managerial, technical, or consultancy nature, including the provision of services by technical or professional experts.
Some examples of technical services are:
|Software development, Web designing, Graphic designing, Digital marketing, SEO, Content writing, Data analysis, Research and development, Quality control, Testing, Certification, Audit, Consultancy, Advisory, Training
Royalty: This is the consideration paid for the transfer of any right, property, or information, including:
- The transfer of all or any rights in respect of any patent, invention, model, design, secret formula, process, trademark, or similar property.
- The imparting of any information concerning the working of, or the use of, any patent, invention, model, design, secret formula, process, trademark, or similar property.
- The use of any patent, invention, model, design, secret formula, process, trademark, or similar property.
- Sharing information related to technical, industrial, commercial, or scientific knowledge, expertise, or skills.
- The use or right to use any industrial, commercial, or scientific equipment.
- The conveyance of rights for copyright, literary, artistic, or scientific works, such as films, tapes, or video cassettes, for television or radio broadcasting use. Excluding compensation for the sale, distribution, or exhibition of cinematographic films.
- The rendering of any services in connection with the above activities.
Non-compete fees: These are the fees paid for not carrying out any activity about any business or profession. For example, if a company pays another company or a person to refrain from competing with it in the same market or industry, such payment is considered a non-compete fee.
What are the Rates and Thresholds for Deducting TDS under Section 194J?
The rates and thresholds for deducting TDS under Section 194J are as follows:
- For fees for professional services, technical services, royalty, and non-compete fees, the rate of TDS is 10%.
- For fees for technical services in the nature of royalty, the rate of TDS is 2%.
- The threshold for deducting TDS under Section 194J is Rs. 30,000 per financial year for each type of payment. This means that if the total amount of payment made to a resident for any type of payment covered under Section 194J exceeds Rs. 30,000 in a financial year, TDS has to be deducted.
- The rate of TDS is subject to surcharge and cess, as applicable, depending on the status and income of the deductee (the person receiving the payment).
- The rate of TDS is also subject to the provisions of the Double Taxation Avoidance Agreement (DTAA), if any, between India and the country of residence of the deductee.
When and How to Deduct TDS under Section 194J:
- Deduction Timing: TDS under Section 194J must be deducted when the fees are credited to the deductee's account or paid, whichever occurs first.
- Deposit Timeline: The deductor must deposit TDS by the 7th of the next month (from April to February) or by the 30th of April (for March).
- TDS Return Filing: File the TDS return in Form 26Q every quarter, due on July 31st, October 31st, January 31st, and May 31st for respective quarters.
- TDS Certificate Issuance: Issue the TDS certificate in Form 16A quarterly by August 15th, November 15th, February 15th, and June 15th for respective quarters.
- TDS Rates: Deduct TDS at specified rates unless the deductee provides a certificate for a lower rate under Section 197.
How to Apply for a Lower Rate of TDS under Section 194J?
The deductee can apply for a lower rate of TDS under Section 197 if he/she satisfies the following conditions:
- The deductee has filed the income tax return for the previous year.
- The deductee has paid the tax due on the income declared in the return.
- The deductee estimates that the tax liability for the current year will be lower than the TDS amount.
The deductee has to make an application in Form 13 to the Assessing Officer (AO), along with the following documents:
- A copy of the PAN card.
- A copy of the income tax return for the previous year.
- A copy of the computation of income and tax liability for the current year.
- A copy of the TDS certificates received for the current year.
- A copy of the invoices or agreements for the payments covered under Section 194J.
- Any other relevant documents or information.
The person in charge (AO) will review your request and papers. If everything seems genuine, they might give you a certificate for a lower TDS rate under Section 197. This certificate will mention the new rate, the TDS amount, the deductor's details, and how long it's valid.
You need to give this certificate to the deductor. They will then deduct TDS at the specified rate in the certificate, not the usual rate.
What are the Consequences of Non-compliance with Section 194J?
If the deductor fails to deduct or deposit TDS under Section 194J, he/she will face the following consequences:
- Interest: If the deductor doesn't deduct or deposit TDS on time, they will be charged interest. This includes 1% per month (or part of a month) for the delay in deduction and 1.5% per month (or part of a month) for the delay in deposit.
- Penalty: The deductor may face penalties under Section 271C and Section 271CA, equal to the TDS amount not deducted or deposited, respectively.
- Prosecution: There's a possibility of prosecution under Section 276B or Section 276BB, with potential imprisonment ranging from 3 months to 7 years, along with a fine.
In case of failure to file the TDS return or issue the TDS certificate:
- Late filing fee: A late filing fee of Rs. 200 per day will be imposed for delayed TDS return filing, capped at the total TDS amount.
- Penalty: The deductor could face a penalty of Rs. 10,000 to Rs. 1,00,000 under Section 271H for not filing the TDS return or issuing the TDS certificate.
- Prosecution: Prosecution under Section 276CC is possible for failing to file the TDS return, carrying a prison term of 3 months to 7 years, depending on the TDS amount.
Tips and Best Practices to Comply with Section 194J
Follow these tips to comply with Section 194J and avoid mistakes or penalties:
- Check the PAN and residential status of the person you're deducting TDS from before making payments.
- Deduct TDS at the right rate and threshold based on the type and amount of payment, and consider any provisions in the DTAA.
- Submit TDS to the government on time, using the correct challan and details.
- File the TDS return by the deadline, using the right form and details.
- Provide the TDS certificate on time, using the appropriate form and details.
- If eligible, request a lower TDS rate and give the certificate to the deductor.
- When filing your income tax return, claim credit for the TDS deducted and deposited.
- Keep accurate records and documents related to payments and TDS.
- Promptly correct any errors or defaults in the TDS statement or certificate.