Decoding the Distinctions: Understanding the Difference between Professional and Technical Services

The Indian tax system has various provisions to ensure timely and accurate payment of taxes. Section 194J of the Income Tax Act, 1961, is one such provision that deals with the TDS (Tax Deducted at Source) on payments made to professionals and technical service providers. However, the line between technical service and professional service can often be blurry, leading to confusion and potential tax liabilities. In this article, we will explore the Difference between Professional & Technical Services under Section 194J of the Income Tax Act, of 1961.

Short Glimpse

The Tax Deducted at Source (TDS) has aided in the collection of taxes in the country by focusing on the source of income. TDS reduces the taxpayer’s tax burden when it comes time to file their income tax returns. This is because they can claim a credit for taxes deducted at source when completing their Income Tax Returns.

Professional fees or fees for technical services are one of the most essential and popular types of payments made by a corporate organization. Fees paid to a lawyer, doctor, engineer, architect, chartered accountant, interior decorators, advertisements, and other professionals are examples of professional fees. Technical services might comprise management, technical, or consulting services. 

Section 194J under Income Tax Act, 1961

Section 194J deals with the TDS on fees for professional or technical services. The term “professional services” refers to services provided by professionals such as doctors, lawyers, architects, and chartered accountants. On the other hand, “technical services” refer to services that require technical knowledge or expertise and are provided by professionals such as engineers, consultants, and software developers.

Section 194J states that any person who pays fees to a resident person for certain services is liable to deduct TDS. TDS, however, is to be deducted at the rate of 10% when the amount of payment in a year reaches Rs.30, 000/-.

Meaning of Professional Service under Section 194J

It refers to the services supplied by a person in the medical, legal, architectural, or engineering fields. Accountancy, advertising, interior decorating, technical consultation, and any other profession approved by the CBDT Board under Section 44AA are also included.

To date, CBDT has notified the professions of a film artist, company secretary, and authorized representatives in accordance with Section 44AA.

Under Section 194J, the CBDT has also alerted athletes, commentators, event managers, anchors, umpires and referees, physiotherapists, coaches and trainers, team physicians, and sports columnists.

Meaning of Technical Service under Section 194J

According to income tax rules, ‘fees for technical services’ comprise management, technical, and consulting services but do not include payments considered salary by the receiver of such income.

• Technical services may be defined as services that entail technical skill or expertise in technology.
• The scope of managerial services may be described as the operation and management of the client’s business.
• Consulting services are advisory services that provide clients with the essential guidance and counsel for their business.

According to the Supreme Court’s decision, technological service would encompass human-provided services. There would be no service offered by machines or robots.

Difference between Professional & Technical Services

The main difference between technical service and professional service is the nature of the service provided. While professional services are based on the knowledge and expertise of the professional, technical services are based on technical expertise and skill. For example, a lawyer provides professional services, while an engineer provides technical services.

However, it is important to note that there can be instances where a service can be both technical and professional in nature. For example, an architect may provide technical services related to designing and engineering structures, but their services may also involve professional expertise in areas such as project management and cost estimation.

Under Section 194J, the TDS rate for fees paid for technical services is 2% of the payment, while the TDS rate for fees paid for professional services is 10% of the payment. This difference in TDS rates reflects the difference in the nature of the services provided.

However, determining whether a service is technical or professional can be challenging, as there are no clear guidelines or definitions provided by the Income Tax Act, 1961. In such cases, it is advisable to seek the opinion of a tax expert or consultant to avoid any potential tax liabilities.

Under Section 194J, which payments are subject to TDS?

TDS is deducted on payments received for professional and technical services under Section 194J. This section takes into account the following payments:

• Professional fees for services in medical, architecture, law, or engineering.
• Fees charged for technical services rendered by consultants, technical consultants, managers, and so on.
• Royalty payments in exchange for literary works, scientific discoveries, inventions, patents, and so on.
• Compensation paid to a corporate director (excluding salary)
• Non-compete fees are payments given for reasons other than hiring for a project or consulting, such as sharing patents, licenses, franchises, trademarks, and so on.

TDS u/s 194J for professional/technical services shall be deducted at the corresponding rate in all of the aforementioned instances prior to payment completion (subject to TDS exemption limit).

What is the TDS rate according to Section 194J?

Any payments designated as transactions under Section 194J are subject to the following taxation:

• If the professional/technical services provider provides a PAN (Permanent Account Number), a flat charge of 10% is applied to the transaction amount (payee).
• If the payee does not give a PAN (Permanent Account Number), a flat fee of 20% is applied to the transaction amount.
• The TDS rate for contact centre operators is lower, at 2% of the transaction value.

All of the rates listed above are subject to the minimum TDS exemption established in Section 194J.

Section 194J Deduction Threshold Limit

As of FY 2019-20, the minimum TDS exemption limit stated under Section 194J is Rs. 30,000 per annum for all people and businesses identified as suppliers of professional/technical services, including call centers. The sole exception in this regard is payments made to a company director, which are all liable to TDS regardless of transaction value/exemption limit.

Who is required to deduct TDS under Section 194J?

Every person who is required to pay for professional or technical services must deduct TDS under Section 194J if the annual threshold of Rs. 30,000 is attained.

There are a few exceptions:

• Individuals and HUFs are not required to deduct TDS when using services only for personal purposes.
• Individuals and HUFs operating on business with a turnover or gross receipt of less than Rs. 1 crore in the preceding year are exempt from TDS under Section 194J.
• Individuals and HUFs carrying on a profession whose total earnings do not exceed Rs. 50 lakh in the preceding year are exempt from TDS under Section 194J.

Time Limitations under Section 194J for Tax Payment

After deducting TDS under Section 194J, the deductor must deposit the amount deducted with the government. The following are the specifics of Section 194J’s TDS payment time limits:

• If the payment after TDS is made prior to the 1st of March of the applicable fiscal year, TDS must be deposited with the government by the 7th of the following month. For example, if TDS is deducted on December 1, 2018, the TDS payment must be submitted with the government by January 7, 2019.
• If the payment after TDS deduction is made in March of a fiscal year, the tax payment under Section 194J is due by April 30th of the same calendar year.

The Effects of a Delayed or Missing TDS Deposit Under Section 194J

Section 194J of the Income Tax Act, 1961 lists different penalties in the event that an individual or organization receiving services forgets to deduct TDS when making payment or delays TDS payments to the government. Some of the punishments that may be imposed are as follows:

• Reduced Tax Benefit in lieu of Expenditure: If an individual or company fails to deduct TDS, 30% of their spending for the services obtained will be disallowed for the fiscal year in which the transaction occurred. In practice, the full tax advantages of a tax assessee’s costs are thus permitted only after deduction and prompt payment of TDS to the government.
• Interest Levy Until Payment Date: In the event of a delay, the entity or individual must pay punitive interest on the outstanding TDS amount as follows:

1. If TDS is not deducted, interest at 1% per month or part of a month is charged from the date TDS was to be deducted to the date of actual deduction.
2. TDS Deducted but Not Deposited to the Government, Interest at 1.5% per month or part of a month is due from the date TDS was deducted until the date payment to the government is made.

Tax Deduction Rate under Section 194J

The following is the Tax Deduction Rate under Section 194J of the Income Tax Act, of 1961:

It is important to note that the above rates are subject to change as per the provisions of the Income Tax Act, 1961, and any amendments made from time to time. Additionally, the rates may also be impacted by any notifications or circulars issued by the Central Board of Direct Taxes (CBDT).

Takeaway

In conclusion, Section 194J of the Income Tax Act, 1961, deals with the TDS on fees for professional or technical services. While the main difference between technical service and professional service is the nature of the service provided, there can be instances where a service can be both technical and professional in nature. To avoid any confusion and potential tax liabilities, it is advisable to seek the opinion of a tax expert or consultant at Legal Window to determine the appropriate TDS rate for a particular service.