TDS On Professional And Technical Services

Section 194J of the Income Tax Act of 1961 addresses the deduction of tax at source for fees for professional or technical services. When making the following payments to a resident in a fiscal year (more than Rs.30,000), an individual must deduct TDS at the rate of 10%. It applies to TDS on any sum paid in the form of – 

  1. a) fees for professional services
  2. b) Technical service fees
  3. b) Directors’ remuneration, fees, or commissions (excluding salary)
  4. d) Royalty
  5. e) Non-compete clause

Threshold Limit

Except for payments to directors, the threshold limit for each of the foregoing payments is Rs. 30,000, which means that no TDS is required to be deducted at the source if the amount paid or payable during the year does not exceed Rs. 30,000.

Threshold Limit Is Inapplicable

  • TDS must, however, be deducted regardless of the amount of the payment paid to the director.
  • Section 194J imposes a time limit for depositing TDS.

The following requirements must be observed regarding the time restriction for submitting TDS under the section:

  • If the TDS deduction is made by the government or on its behalf under Section 194J, the deposit must be made on the same day.
  • In other circumstances, TDS must be deposited within a week after the end of the month in which the tax deduction was made.
  • If the payment is made on the last day of the fiscal year, the TDS deposit must take place within two months after the end of the fiscal year to which it was credited.
  • If the assessing officer approves, some unique instances may be allowed to deduct TDS every quarter.

Rate Of TDS

TDS On Professional And Technical Services

The TDS rate is 10%, but in the following instances, the rate is reduced to 2%:

Technical Service Fees

Where such royalty is equivalent to payment for the sale, distribution, or showing of cinematographic films in the situation of a payee who is only engaged in the operation of a call center. This means that TDS is levied at a rate of 10% on fees paid for professional services and a rate of 2% on fees paid for technical services. Because the TDS rate for professional services and technical services differs, it is necessary to investigate the distinction between the two.

Now let’s glance at the definitions of both as they are defined in the Act for this provision –

The definition of “professional services”

“Professional services” include: 

  1. a) the legal profession, 
  2. b) the medical profession, 
  3. c) the engineering profession, 
  4. d) the architectural profession, 
  5. e) the accounting profession, 
  6. f) technical consultancy, 
  7. g) interior decoration, 
  8. h) advertising, 
  9. I) the profession of “authorized representatives,” 
  10. j) the profession of “film artist,” 
  11. k) the profession of “company secretary,” and 
  12. l) the profession of “information technology.”

The Act also defines the terms “approved representatives” and “film artist.”

TDS On Professional And Technical Services

The CBDT has classified the following sports-related services as “Professional Services”: 

  1. a) Sports Persons, 
  2. b) Umpires and Referees, 
  3. c) Coaches and Trainers, 
  4. d) Team Physicians and Physiotherapists, 
  5. e) Event Managers, 
  6. f) Commentators, 
  7. g) Anchors, and 
  8. h) Sports Columnists.

However, the term “profession” as a whole has a fairly broad meaning, but it is described extensively in this section.

The definition of “fees for technical services”

“fees for technical services” refers to any payment (including any lump sum payment) for the provision of any of the following services:

  1. Administrative services
  2. Technical support
  3. Advisory services
  4. Provision of technical or other personnel services

Excluding i. consideration for any construction, assembly, mining, or similar undertaking, and ii. consideration chargeable under the heading ‘Salaries.’

As a result, a comprehensive definition of “fees for technical services” with a much broader scope is supplied.

Section 197 allows taxpayers to apply to the assessor for no TDS or TDS at a reduced rate.

  • No tax is necessary to be deducted if the amt. of such sum, or 
  • the accumulation of the amounts of such sums credited or paid or likely to be paid or credited during the fiscal year, 
  • does not exceed 30,000 in the case of fees for professional services, 
  • 30,000 in the case of fees for technical services, 30,000 in the case of royalty, or 
  • 30,000 in the case of the sum referred to in section 28 (VA)

The amounts are computed independently for each of the aforementioned categories.

Conclusion

  • If the services described in the definition of “Professional services” are performed by a professional (an individual) or partnership firms including LLP, as they can pursue a profession in their capacity, it is deemed a professional service and the TDS rate applicable is 10%. However, if the same services are given outside of the course of a profession, i.e. by a corporation, trust, society, artificial judicial person, or similar organization, they will come under the category of “fees for technical services” and a beneficial TDS rate of only 2% will apply.
  • Whereas the law does not provide a clear distinction between the two, the same may be interpreted differently based on the circumstances or scenario at hand. For example, the services of a Chartered Accountant, doctor, lawyer, architect, engineer, and so on are considered professional services and are subject to a higher TDS of 10%. When implementing an ERP system within an enterprise, an IT company is considered a technical service and must pay a TDS of 2%.
  • Legislators’ motivation for instituting varying TDS rates is understandable. As a result, the profit margin is larger. Furthermore, the entire liability for the service given is borne by a single individual. As a result, they have a high-profit margin. As a result, a higher TDS rate is levied. On the other hand, because of the large investment in company overheads and infrastructure in the supply of technical services, profit is substantially lower, and hence a lower rate of TDS is applied.