TDS on Payment to Contractors Section 194C of the Income Tax Act 1961

Applicability of Section 194C- TDS on Payment to Contractors

Section 194C provides for deduction of tax at source from the payment made to resident contractors and sub-contractors.

TDS shall be required to be deducted under Section 194C at a specified rate by any person responsible for paying any sum to any resident (hereafter referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and

  • The Central Government or any State Government or
  • Any local authority or
  • Any corporation established by or under a Central, State, or Provincial Act or
  • Any company or
  • Any co-operative society or
  • Any society registered under the Societies Registration Act, 1860 or
  • Any trust or
  • Any university established or incorporated by or under a Central, State, or Provincial Act and an institution declared to be a university under University Grants Commission Act, 1956 or
  • Any Government of a foreign State or a foreign enterprise or any association or body established outside India or
  • Any firm or
  • Any person, being an individual or a HUF (Hindu undivided family), AOP or BOI, who has total sales, gross receipts, or turnover from business or profession carried on by him exceeds Rs. 1 Crore in case of business or Rs. 50 lakhs in case of the profession during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor.

Meaning of “work” for section 194C

The term, “work” shall include

  • advertising;
  • broadcasting and telecasting including production of programs for such broadcasting or telecasting;
  • carriage of goods or passengers by any mode of transport other than by railways;
  • catering;
  • manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, being a person related to the customer in such manner as defined u/s 40A(2)(b). (Refer to Note below *)

*Note:  In this case, the TDS shall be deducted in the following manner:-

(i)  on the invoice value excluding the value of material, if such value is mentioned separately in the invoice or

(ii)  on the whole of the invoice value, if the value of the material is not mentioned separately in the invoice.

However, the term “work” shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer or associate of such customer.


TDS Rate on Payment to Contractors under Section 194C

TDS under section 194C shall be deducted at the following rates:-

S. No Rate of TDS Payment To (i.e Payee)
1 1% Individual or HUF
2 2% Any other persons other than Individual or HUF

 

Note: Section 206AA of the Indian Income-tax Act, 1961 (the Act) provides that if PAN is not furnished by the payee the TDS will be deducted at a rate of 20%.

Read other relevant Article: Section 206AB and Section 206CCA – Higher Rate of TDS/TCS for non-filers of ITR


Time of TDS Deduction

TDS shall be deducted at the earlier of the following:-

  • At the time of credit of such sum to the account of the contractor OR
  • At the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode.

Note: Where any sum is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.


Threshold Limit for TDS under section 194C

  • TDS shall not be deducted if the consideration required to be paid for the single contract does NOT EXCEED Rs 30,000.
  • However, TDS shall be deducted where the amount credited or paid or likely to be credited or paid (Refer to note 3 below) to the contractor or sub-contractor exceeds Rs 1 lakh in the aggregate during the financial year.
  • Therefore, even if a single payment to a contractor does not exceed Rs. 30,000, TDS provisions under section 194C would be attracted where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid to the contractor during the financial year exceeds Rs 1,00,000.
  • For example: There ars 3 bills of Rs 25,000, 15,000 and 45,000. Since the amount does not exceed Rs. 1 Lakh TDS shall not be deducted on Rs 85,000, However, TDS is required to be deducted on the Bill of Rs 45,000 since it exceeds the limit of Rs 30,000.

Notes:

  1. The About mentioned limit of Rs 30,000 or Rs 1 lakh is excluding the GST amount, if any, mentioned in the bill separately.
  2. TDS will be deducted on the whole amount if it exceeds Rs 1 lakh during the financial year.
  3. Here the word “Likely to be credited or paid” signifies that if at the start of the year or at any time during the year it is probable that the amount will exceed the Rs 1 lakh during the financial year, then TDS is required to be deducted from that point of time.

Non-applicability of TDS under Section 194C

(1.) TDS shall not be required to be deducted under section 194C if the amount credited or paid or likely to be credited or paid during the financial year to a contractor/sub-contractor who fulfills ALL the following 3 conditions

  • He is engaged in the business of plying, hiring, or leasing goods carriages* AND
  • He owns ten or less goods carriages* at any time during the financial year AND
  • He furnishes a declaration to this effect along with his PAN to the TDS deductor.

* Meaning of Goods carriage:

Goods carriage means –

(i) any motor vehicle constructed or adapted for use solely for the carriage of goods; or

(ii) any motor vehicle not so constructed or adapted when used for the carriage of goods.

The term “motor vehicle” does not include vehicles having less than four wheels and with engine capacity not exceeding 25cc as well as vehicles running on rails or vehicles adapted for use in a factory or in enclosed premises.

(2.) No individual or HUF shall be liable to deduct TDS on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of HUF.


Compliance after TDS Deduction

(1.) Deposit of TDS – Due date

The TDS deducted shall be deposited into the government account within 7 days from the end of the month in which the TDS was deducted.

(2.) Submission of TDS Returns

The deductor of TDS is also required to submit the TDS return on a quarterly basis. The due date of TDS return is as follows:

Quarter Relevant Period Due date of TDS Return
Quarter 1 1st April to 30th June 31st July
Quarter 2 1st July to 30 the September 31st October
Quarter 3 1st October to 31st December 31st January
Quarter 4 1st January to 31st March 31st May

 

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Read our other article on TDS