New Amendment in TDS – What You Need To Know About Section 194J and 194C?

Tax Deducted at Source (TDS) plays a crucial role in the Indian tax system as it ensures income taxes are collected at the source. In this regard, an amendment has recently been suggested to clarify TDS provisions under Section 194C and Section 194J of the Income Tax Act. This amendment directly tackles the confusion that led to incorrect deductions of TDS. In a quick read through this blog, we will discuss the New TDS rules under Section 194C and 194J, the effect on taxpayers and provide some insights on how you can remain compliant.

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Understanding Section 194C And Section 194J

Section 194C: Payments to Contractors

TDS payment to contractors is controlled by section 194C. The rates of TDS applicable for payments made under this section are one per cent in the case of individuals or Hindu Undivided Families (HUFs), and two per cent for others. This also includes activities like advertisement, broadcasting, telecasting, carriage of goods and passengers, or catering.

Section 194J: Fees for Professional or Technical Services

TDS fees for professional or technical services fall under section 194J while providing their services. Technical services excluding professional services are taxed at %2 while professional services royalties and non-competition fees are taxed at %10. Legal service providers include medical practitioners; engineers; architects; accountants; and technical consultants among others who fit such categories.

Ambiguity And The Need For Amendment

Existing Issue

One key issue with these sections (section 194C & section 193) is partly overlapping applications leading to confusion among deductors/deductees. However, according to Section (2) of Article (3) misinterpretation by other people not explicitly stated under Section 74 such as “work” has resulted in wrong deductions happening thus creating compliance issues within us.

Proposed Amendment

To cure this anomaly, the amendment seeks to exclude the sum mentioned in Section 194J from “work” as defined under Section 194C. This change will ensure that such payments do not fall into the “works” category under Section 194C, hence avoiding incorrect deductions of TDS.

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Implementation And Impact

Effective Date

The proposal is expected to be effective from 1st October 2024, thus giving taxpayers enough time to make changes to their practices.

Amendment Details

The amendment made to Section 194C makes it clear that any amount under Section 194J should not be regarded as being part of “work” for purposes of TDS within the meaning of Section 194C. The intention behind this alteration is to bring about more clarity and avert possible mistakes in TDS treatment.

Implications For Taxpayers

This is a critical amendment for businesses and individuals making payments to contractors or professionals. It will affect them as follows:

• Clarity in TDS Application: The new regulations allow taxpayers to determine what falls within section 193 payments and those that are covered by section 194J, therefore minimising errors.

• Compliance: Ensuring accurate taxpayer deductions, so that penalties can be avoided as well as disputes arising with tax authorities.

• Administrative Ease: The amendment simplifies the administrative process of deductors thereby making compliance with the Income Tax Act easier.

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How To Apply The New TDS Rules

As such an amendment comes into force, businesses and individuals must understand how New TDS rules under Sections 194C and 194J work out and adapt accordingly. Here are some compliance tips;

• Review all contracts/proper payables & apply the correct section for TDS.

• Software should be updated for accounting and tax purposes to account for the changes.

• There is a need to seek advice from tax practitioners to ensure that the new regulations are fully complied with.

• To reduce errors, there should be regular reviews of TDS deductions.

Conclusion

It is indeed commendable that the Indian government has introduced Section 194C and Section 194J amendments under the TDS. In simple words, it takes care of any kind of wrong deductions just by removing Section 194J sums from the definition “work” as outlined in Section 194C. As a result, this change comes into force on October 1, 2024, whereupon taxpayers and professionals need to become aware of its new provisions so as not to violate any rules thereby causing problems.

For more detailed information, you can visit the official press release here. For more Tax related information visit Jaagruk Bharat.