Section 194C of the Income Tax Act governs the withholding of taxes on payments made to contractors or subcontractors. This article comprehensively covers the provisions and implications of Section 194C.
What is Section 194C?
Section 194C states that any person responsible for paying any sum to the resident contractor or sub-contractors for carrying out any work (including the supply of labor), in pursuance of a contract between the contractor and the following:
- The Central Government or any State Government
- Any local authority
- Any Statutory Corporation
- Any corporation established by or under a Central, State or Provisional Act
- Any company
- Any co-operative society
- Any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the needs for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both
- Any society registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India
- Any trust
- Any university or deemed university
- Any firm
- Any Government of a foreign state or foreign enterprise or any association or body established outside India
- Any person who is an individual, HUF, AOP or BOI, who has total sales from the business or profession exceeds 1 crore or 50 lakhs during the previous Financial year respectivley.
What is the Meaning of Work for the Purpose of Section 194C?
The expression, “work” in this section would include-
- Advertising
- Broadcasting and telecasting including production of programs for such broadcasting or telecasting
- Carriage of goods and passengers by any mode of transportation, other than railways
- Catering
- Manufacturing or supplying of a product according to the requirement or specification of a customer by using the materials purchased from such customer or its associate as defined in section 40A(2), But does not include manufacturing or supplying of a product according to the requirements or specifications of a customer by using the materials purchased from a person, other than such a customer.
What is a Sub-Contractor as per Section 194C?
A “sub-contractor” would mean any person:
- Who enters into a contract with the contractor for carrying out, or
- For the supply of labor for carrying out the whole or part of the work undertaken by the contractor under a contract with any of the authorities or
- For the supply of, whether wholly or partly, any labor which the contractor has undertaken to supply in terms of his contract with any of the authorities mentioned under this section.
Conditions to be Satisfied
- Payment is made to a contractor or sub-contractor who is resident within the meaning of Section 6 of the Income Tax Act, 1961
- Payment is made by a specified person as mentioned above
- Payment is made to carry out any work, including the supply of labor
- The amount of consideration of the contract in respect to which payment is made should not be less than Rs. 30,000
- The sum should be credited or paid by the contractor in respect of a contract undertaken by him with the specified bodies
When does TDS under Section 194C Need to be Deducted?
The person responsible for making payment to resident contractor/sub-contractor should deduct TDS,
- either at the time of crediting such sum to the account to the payee or
- at the time of payment thereof in cash or
- by an issue of a cheque or by any other mode, whichever is earlier. 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 amount, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Thus, the tax has to be deducted even if the amount payable to the resident contractor/subcontractor is transferred to the suspense account by the payer in his books.
What is the Rate of TDS?
| Sl. No | Nature of Payment | TDS Rate if PAN available | TDS Rates from 14.05.2020 to 31.03.2021 | TDS Rate if PAN not available |
|---|---|---|---|---|
| 1 | Payment / Credit to resident individual or HUF | 1% | 0.75% | 20% |
| 2 | Payment/Credit to any resident person other than individual / HUF | 2% | 1.5% | 20% |
| 3 | Payment/ credit to Transporters | NIL | NIL | 20% |
Note:- No Surcharge, Education Cess, and SHEC shall be added. Hence, TDS shall be deductible at basic rates.
Threshold Limit for Deduction of Tax at Source Under Section 194C
- No deduction will be required to be made if the payment for the contract does not exceed Rs.30,000.
- TDS would be deducted If the payments for the contractors exceeds Rs.30,000 in a single payment or 1,00,000 in the aggregate during the financial year.
- If a single payment to a contractor does not exceed Rs.30,000, TDS will also be deducted under Sec 194C, in which the total payment credited or paid to the contractor during the financial year exceeds Rs.1,00,000.
What are the Exceptions to TDS on Payment to Contractor?
Deduction of TDS in case of composite contract
- Where materials are part of the supply, the question is whether deduction will be made with reference to gross payment to the contractor or the net payment, i.e., gross payment minus deductions, if any,
- On account of materials supplied, will have to be decided in the light of the terms of the particular contract and the conduct of parties thereto.
- Where the contractor has undertaken to construct a building or a dam, specified person has undertaken to supply all or any of the materials necessary for the work at the stipulated prices, the deduction will be related to the gross payment without excluding any adjustments on account of the cost of materials.
- Where the contractor has undertaken only to provide the labour for the work, the ownership of the materials supplied remaining at all times with the specified person, the sum payable to the contractor in respect of the contract will only be the amount paid for such labour or services and will, thus, not include the price of the materials supplied by the government or other specified persons.
Thus, the rate of TDS from payments made by the government or other specified persons to any contractor will be 2% or 1% of the gross payment or, as the case may be, the net payment, depending on the terms of the contract.
Provided the material value is separately mentioned on the invoice. If the value of the material is not mentioned separately in the invoice, then the TDS shall be deducted from the whole of the invoice.
Under What Circumstances TDS u/s 194C is Not Deductible?
No tax is required to be deducted in the following cases:
- Where the sum paid or credited in pursuance of any contract does not exceed Rs. 30,000, or
- Where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year does not exceed Rs. 1,00,000 the person responsible for paying such sums will not deduct TDS under this section
- Individual or HUF not to deduct tax if the payment or amount credited to the contractor is for personal use
- No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages who owns ten or less goods carriages at any time during the previous year, on furnishing of his PAN along with declaration to this effect, to the person paying or crediting such amount
Time Limit Within which Tax is to be Deposited
- Where the payment is made by or on behalf of the Government – On the same day.
- Where the payment is made in any other case than the government
- If the amount is credited in the month of March – On or before April 30th
- In other months – Within 7 days from the end of the month in which the deduction is made.
Note: The payer is the person responsible for TDS.
Issue of TDS certificate
In case of payments other than salary, TDS certificates are to be issued on a quarterly basis in Form No.16A. As per rule 31, every person responsible for deduction of tax from payments other than salary has to issue a quarterly TDS certificate in Form No. 16A. The certificate is to be issued by the following dates:
Quarter | Due date |
April to June | 15th August |
July to September | 15th November |
October to December | 15th February |
January to March | 15th June |
As per CBDT Circular No. 1/2012, dated 9-4-2012, it is mandatory for all the deductors to issue TDS certificate in Form No. 16A by generating the certificate through TIN central system by downloading the certificate from the TIN website with a unique TDS certificate number. These provisions are applicable in respect of all sums deducted on or after 1-4-2012. The certificate so issued can be authenticated either by using the digital signature or manual signature.
TDS at a Lower Rate
According to Section 194C where the AO is satisfied that the total income of contractor or sub-contractor justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the AO shall, on application made by the contractor or sub-contractor in this behalf give to him such certificate as may be appropriate. The contractor or sub-contractor can then furnish the lower rate or nil TDS certificate to the deductor.
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