Section 194C of the Income Tax Act 1961 states that any person making payment to a resident person, who is carrying out any ‘work’ in terms of the contract between the ‘specified person’ and the resident contractor, is required to deduct TDS.
Meaning of Specified Person:
The ‘specified person’ mentioned above means the following –
- The Central or State Government;
- The local authority;
- The Corporation established by the Central, State or Provincial Act;
- The Company;
- The Trust;
- The Co-operative Society;
- The registered Society;
- The authority engaged either for the purpose of dealing with and satisfying the need for the housing accommodation or for planning, improvement, or development of cities, town, and village;
- The university established/incorporated by Central, State, or Provincial Act;
- The firm;
- The Government of a foreign state / a foreign enterprise or any association/body established outside India;
- The individual or HUF is liable to audit under section 44AB [Clause (a) or clause (b)] during the financial year immediately preceding the financial year in which the sum is credited or paid to the account of the contractor.
Further, it is mention here that the term ‘contract’ includes ‘sub-contract’.
Meaning of work:
The expression ‘work’ for this section includes the following –
- Carriage of goods/passengers by any mode of transport except railway;
- Broadcasting and telecasting (which also includes the production of programs for such broadcasting or telecasting);
- Manufacturing / supplying a product based on the requirement and specification of customers by using material purchased from the customer. However, it doesn’t include when the material is purchased from any person other than the customer.
Definition of Sub-Contractor:
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.
Rate of TDS to Sub-Contractor?
As per the provisions of the Income Tax Act, any person (being a contractor and not being an individual or a Hindu Undivided Family):
- responsible for paying any sum to any resident
- in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labor for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labor which the contractor has undertaken to supply shall,
- at the time of credit of such sum to the account of the sub-contractor or
- at the time of payment thereof in cash or
- by the issue of a cheque or draft or by any other mode, whichever is earlier
- deduct the amount equal to 1 % of the sum as income-tax on income comprised therein. The rate is 0.75% for transactions from 14 May 2020 until 31 March 2021.
Where is the Payment made to Sub-contractors, what Conditions must be Satisfied?
- Payment is made to a sub-contractor who is resident within the meaning of Section 6 of the Income Tax Act, 1961
- Payment is made by a resident contractor, not being an individual or a HUF
- Payment is made to carry out any work, including the supply of labor
- The amount of consideration of the contract with 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
Rates of TDS
When provisions of section 194C of the Income Tax Act gets attracted, the Deductor is required to deduct TDS at the following rates –
|Particulars||Rate of TDS|
|Payment made/credited to an individual or HUF||1%|
|Payment made/credited to a person other than an individual or HUF||2%|
However, in case the PAN is not furnished, the Deductor would be liable to deduct TDS @ 20% i.e. at the maximum marginal rate.
Exceptions to TDS on Payment to Contractor
Under the following circumstances, TDS is not required to be deducted –
- The amount paid or credited to the contractor in a single contract doesn’t exceed INR 30,000.
- The aggregate amount paid or credited during the financial year doesn’t exceed INR 1,00,000.
- The amount paid/credited to the account of the contractor engaged in the business of hiring, plying, or leasing goods carriage, where the contractor doesn’t own more than 10 goods carriage at any time during the previous year. The Contractor is required to furnish the declaration along with the PAN to the Deductor.
- The amount is paid or credited to the contractor by an individual / HUF for carrying out work in the nature of personal use.
Time of TDS deduction under Section 194C
If the Deductor is required to deduct TDS as per provisions of section 194C of the Income Tax Act, then, the Deductor is required to deduct TDS within earlier of the following dates –
- At the time of credit of sum to the account of the Contractor; or
- At the time of payment in cash or cheque or draft or any other mode.
Time Limit within which Tax is to be Deposited
The Deductor is required to duly deposit the deducted TDS within the following due dates –
|TDS payment for the months from April to February||Within 7 days from the end of the month in which TDS is deducted|
|TDS payment for the month of March||On or before 30th April|
|TDS payment to be done by Government Deductor (without production of challan)||On the same day|
Issue of TDS certificate
The Deductor is required to issue the TDS certificate in Form 16A within the following due dates –
|April to June||15th August|
|July to September||15th November|
|October to December||15th February|
|January to March||15th June|
Return filing of TDS
Every Deductor deducting TDS in terms of section 194C is required to file a quarterly return in Form 26Q within the following due dates –
|April to June||31st July|
|July to September||31st October|
|October to December||31st January|
|January to March||31st May|
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 an 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.
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 b. 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 c. Individual or HUF not to deduct tax if the payment or amount credited to the contractor is for personal use
- No individual or HUF shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for the personal purpose of such individual or any member of HUF
- 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, on furnishing of his PAN, to the person paying or crediting such amount
- Reduction in Rates of ‘Tax Deduction at Source’ and ‘Tax Collected at Source” – The TDS rates for all non-salaried payments to residents, and tax collected at source rate will be reduced by 25 percent of the specified rates from 14 May till 31 March 2021. Also, the last date for Filing of quarterly TDS returns for the Q1 and Q2 is 31st March 2021.
- Value to be considered for TDS deduction in the case where work includes manufacturing/supply of product as per the specification of the customer by using the material purchased from the customer.
In such case, the TDS would be deducted on –
|Particulars||Value for TDS deduction|
|Price of the material indicated separately in the invoice||Invoice value excluding the value of material|
|Price of the material not indicated separately in the invoice||Total invoice value|
- A certain important clarification is done by CBDT –
- FD Commission and brokerage are not covered under section 194C.
- Payment made to an electrician or payment made to a contractor for providing electrician service is covered under section 194C.
- Payment made to courier covered under section 194C.
- Payment made to a travel agent or an airline for the purchase of a ticket is not subjected to TDS under section 194C. However, if the plane, bus, or any other mode is chartered, then TDS is liable to be deducted under section 194C.
- Payment made to clearing and forwarding agents for the carriage of goods is liable to TDS under section 194C.