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Amendment in TDS Section 194J by Finance Act, 2020

amendment-in-tds-section-194j-by-finance-act-2020

Amendment in TDS Section 194J by Finance Act, 2020: Finance Act 2020 has introduced certain changes in TDS section 194J of the Income Tax Act in addition to amendments proposed by the Finance Bill, 2020.

Prior to the amendment proposed in the Finance Bill, 2020 there was only one rate of TDS of 10 per cent. Finance Bill, 2020 has introduced one more rate of two per cent for fees for technical services. Now one more payment has been brought under two per cent of TDS under section 194J and it is on royalty where such royalty is in the nature of consideration for sale, distribution or exhibition of cinematographic films.

Before the changes or amendments in section 194J by Finance Act, 2020 is discussed, it is imperative to discuss the existing provisions of section 194J of the Income Tax Act, 1961.

Section 194J provides for deduction of Income Tax at source (TDS) in respect of payments made to any resident any sum by way of the following at the specified rates.

Nature of Payments
Threshold Limit
Rate of TDS
If the payee is engaged only in the business of operation of call centre
Others
Fees for professional services
Rs. 30,000
2%
10%
Fees for technical services
Rs. 30,000
2%
10%
Any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company (Director Fees)
N.A.
2%
10%
Royalty
Rs. 30,000
2%
10%
Any sum referred to in clause (va) of section 28 (non-compete fees)
Rs. 30,000
2%
10%

When to deduct TDS: The payer shall deduct TDS at the time of payment or credit whichever is earlier.

Who is liable to deduct TDS under section 194J: Any person responsible for paying the above-mentioned sum is liable to deduct TDS under section 194J subject to the threshold limit. 

However, there is a special provision specified for an Individual and HUF. All Individuals and HUFs are not liable to deduct TDS under section 194J. Only those Individual or HUF shall be liable to deduct TDS under section 194J if total sales, gross receipts or turnover from the business exceeds Rs. 1 crore or Rs. 50 Lakh in case of profession carried on by him during the preceding previous year. This is as per the amendment introduced by the Finance Act, 2020. Prior to the amendment, the monetary limit was linked with section 44AB of the Income Tax Act, 1961. Now the link has been discontinued and the turnover or receipt limit is specified in section 194J itself.

Further such an Individual or HUF (having more than the specified turnover limit) shall not deduct TDS from any payment if the same is paid for personal purpose of such individual or HUF.

Amendment in TDS obligation on Turnover based limit delinked with Tax Audit Provision: It is proposed to enhance the tax audit threshold limit from Rs. 1 crore to Rs. 5 crore if at least 95 per cent of all the receipts and payments are carried on through any mode other than cash.


The amendment relating to extending threshold for getting books of accounts audited will have consequential effect on TDS/TCS provisions contained in sections 194A, 194C, 194H, 194I, 194J and 206C as these provisions fasten liability of TDS/TCS on certain categories of person, if the gross receipt or turnover from the business or profession carried on by them exceed the monetary limit specified in clause (a) or clause (b) of section 44AB.  


Therefore, it is proposed to amend these sections so that reference to the monetary limit specified in clause (a) or clause (b) of section 44AB of the Act is substituted with Rs. 1  crore in case of the business or Rs. 50 lakh in case of the profession, as the case may be.

Meaning of Certain Terms used in section 194J

Professional Services: Following professions are covered u/s 194J of the Income Tax Act, 1961:-

1. Legal
2. Medical
3. Engineering
4. Architecture
5. Accountancy
6. Technical consultancy
7. Interior decoration
8. Other notified professionals:-
a) Authorized Representatives
b) Film Artists
c) Certain sports-activities related persons
d) Company Secretaries
e) Information technology

Fees for technical services: as defined in Explanation 2 below Section 9(1)(vii) which defines ‘fees for technical services’ to mean any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

Royalty: as defined in Explanation 2 to Section 9(1)(vi)

Prior to the amendment by Finance Act, 2020 in section 194J distinguishing a payment whether it is in the nature of professional or technical fees or a royalty does not have any significance since the rate of TDS is 10% in any case. However, after the amendment, the distinction has become important due to a lower rate of TDS of 2% for payments in the nature of technical fees and royalty.

The memorandum to Finance Bill, 2020 explains the rationale for reducing the rate of TDS for section 194J.

Reducing the rate of TDS on fees for technical services (other than professional services).

Section 194J of the Act provides that any person, not being an individual or a HUF, who is responsible for paying to a resident any sum by way of fees for professional services, or fees for technical services, or any remuneration or fees or commission by whatever name called (other than those on which tax is deductible under section 192 of the Act, to a director), or royalty or any sum referred to in clause (va) of section 28, shall, at the time of payment or credit of such sum to the account of the payee, deduct an amount equal to ten per cent as income-tax.

Section 194C of the Act provides that any person responsible for paying any sum to a resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract shall at the time of payment or credit of such sum deduct an amount equal to one per cent in case payment is made to an individual or a HUF and two per cent in other cases. It is noticed that there are large number of litigations on the issue of short deduction of tax treating assessee in default where the assessee deducts tax under section 194C, while the tax officers claim that tax should have been deducted under section 194J of the Act.

Therefore to reduce litigation, it is proposed to reduce the rate for TDS in section 194J in case of fees for technical services (other than professional services) to two per cent from existing ten per cent. The TDS rate in other cases under section 194J would remain the same at ten per cent.

Therefore, the intention of the legislature to reduce the rate of TDS in section 194J is to bring the parity with section 194C for technical fees. Since in many cases fees for technical services may be classified under section 194C or section 194J, however, the difference in rates of TDS was inviting litigation. In order to reduce litigation, reduced rate for TDS in case of fees for technical services (other than professional services) to two per cent from existing ten per cent provided to align the same with the rate of TDS on works contract under section 194C.

The Finance Bill, 2020 proposed to reduce the rate of TDS under section 194J to 2% from existing 10% in respect of fees for technical services only. When the bill was enacted as Finance Act, 2020, it added one more payment under the umbrella of 2 per cent and that payment is in respect of royalty income arising to a person by way of sale, distribution or exhibition of cinematographic films. This will provide relief to the film distributors as currently tax is deducted at the rate of 10% on revenue they earn from sale, distribution or exhibition right of the film. Now, this will attract 2 per cent withholding tax.

In the nutshell, the rate of TDS following two nature of payments is reduced to 2 per cent instead of 10 per cent under section 194J from 01-04-2020 by the Finance Act, 2020:

1. Fees for technical services (not being in the nature of professional services).

2. Royalty where such royalty is in the nature of consideration for sale, distribution or exhibition of cinematographic films.

For others, the 10 per cent rate of TDS shall continue to apply. 

The text of the amendments to section 194J is reproduced below-

79. In section 194J of the Income-tax Act, in sub-section (1),–

(a) in the long line, for the words “ten per cent. of such sum”, the words and brackets “two per cent. of such sum in case of fees for technical services (not being a professional services, or royalty where such royalty is in the nature of consideration for sale, distribution or exhibition of cinematographic films and ten per cent. of such sum in other cases,” shall be substituted;

(b) in the second proviso, for the words, brackets, letters and figures “the monetary limits specified under clause (a) or clause (b) of section 44AB”, the words “one crore rupees in case of business or fifty lakh rupees in case of profession” shall be substituted.

Rate of TDS after amendment in section 194J by the Finance Act, 2020

Nature of Payments
Threshold Limit
Rate of TDS
If the payee is engaged only in the business of operation of call centre
Others
Fees for professional services
Rs. 30,000
2%
10%
Fees for technical services
Rs. 30,000
2%
2%
Any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company (Director Fees)
N.A.
2%
10%
Royalty
(in the nature of consideration for sale, distribution or exhibition of cinematographic films)
Rs. 30,000
2%
2%
Royalty-Others
Rs. 30,000
2%
10%
Any sum referred to in clause (va) of section 28 (non-compete fees)
Rs. 30,000
2%
10%

Note: In case PAN of the payee is not furnished to the deductor, the rate of TDS shall be 20 per cent. (Section 206AA).

Some words on a lacuna in the expression used in amended section 194J by Finance Act, 2020


A lacuna found in the expression used in the amendment as provided in the Finance Act, 2020. Readers may note that in clause (a) above there is a parenthesis which is placed before the word "not", but there is no end parenthesis given. In other words, the start of parentheses is not closed and inadvertently left open.

The Amendments as passed in the Lok Sabha stated to close the parenthesis after the word "services". Therefore, it seems there is a typographical error which needs to be corrected. The government has notified corrigenda to the Finance Act, 2020 on 15th April 2020 but nothing is mentioned for the above-mentioned error. Hence, the reading of the new provisions is giving absurd and unintended interpretations.

Further, a new unwanted character comma "," is used or placed after the word 'services'.

The provision, as per the amendment passed in the Lok Sabha, should have been drafted as described below-

(not being a professional services) or royalty where such royalty .......


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2 Comments

  1. Whether call centres services can termed as technical services?? Any you please guide.

    Thanks

    ReplyDelete
    Replies
    1. In general, No. But anyway rate of TDS is same for both now.

      Delete