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

Section 194J breaks in two different rates 2% and 10% for fees for technical services and fees for professional services respectively

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 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 same at ten per cent.

This amendment will take effect from 1st April, 2020.

[Clause 79]

Extract of Relevant Clauses of Finance Bill, 2020

Clause 79

“Clause 79 of the Bill seeks to amend section 194J of the Income-tax Act relating to fees for professional or technical services.

Sub-section (1) of the said section provides that any person, not being an individual or a Hindu undivided family, 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, to a director of a company, or royalty or any sum referred to in clause (va) of section 28, shall, at the time of credit or payment of such sum to the account of the payee to deduct an amount equal to ten per cent. as income-tax.

It is proposed to amend the said sub-section so as to provide that any person, not being an individual or a Hindu undivided family, 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, to a director of a company, 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 two per cent. of such sum as income-tax in case of fees for technical services (not being professional services) and ten per cent. of such sum in any other case.

The second proviso to the said sub-section provides that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section.

It is proposed to amend the said proviso so as to provide that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under the said section.

These amendments will take effect from 1st April, 2020.”

Extract of Relevant Amendment Proposed by Finance Bill, 2020

79. Amendment of section 194J.

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 service) 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.

Source- Finance Bill 2020 / Union Budget 2020-21

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