TDS Under Section 194J: Professional Fees, Technical Services and the Two Rates

The two rates

Ten per cent applies to fees for professional services, royalty, non-compete payments and director's remuneration other than salary. Two per cent applies to fees for technical services, to royalty for the sale or exhibition of cinematographic films, and to payments to a call-centre operator.

Professional services means legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, advertising and other notified professions. Technical services means managerial, technical or consultancy services — the two overlap in practice, and the Supreme Court has held that a service is technical only where it involves human intervention.

The threshold

Thirty thousand rupees in a financial year, applied separately to each category — professional fees, technical fees, royalty and non-compete — rather than in aggregate.

Once the threshold is crossed, tax is deducted on the whole amount for the year, not merely the excess. Director's remuneration has no threshold at all.

GST and the deduction base

CBDT Circular 23/2017 provides that where GST is shown separately on the invoice, TDS is deducted on the amount excluding GST. Where it is not shown separately, tax is deducted on the gross amount.

This is one of the simplest ways to reduce an avoidable deduction, and it depends entirely on how the vendor presents the invoice.

What non-deduction costs

Interest at one per cent a month from the date tax was deductible to the date it was deducted, and one and a half per cent from deduction to deposit. Section 40(a)(ia) then disallows thirty per cent of the expenditure in computing business income.

The disallowance reverses in the year the tax is eventually paid, so it is a timing cost rather than a permanent one — but on a large professional fee it is a substantial one.

Frequently asked questions

### What is the TDS rate on professional fees?

Ten per cent under Section 194J for professional services, and two per cent for technical services, call-centre operators and film royalty. The threshold is thirty thousand rupees per category per financial year.

### Is TDS deducted on the GST component?

No, where GST is shown separately on the invoice. CBDT Circular 23/2017 confirms that TDS applies to the amount excluding GST in that case. Where GST is not separately indicated, tax is deducted on the gross amount.

### What if the vendor has no PAN?

Section 206AA requires deduction at the higher of the specified rate, the rate in force, or twenty per cent. The vendor also cannot claim credit for the tax without a PAN, so it is usually in both parties' interest to obtain one.