How to Deduct TDS On Service Contractor?

Overview 

Before deducting TDS u/s 194C, TDS on payments made to contractor or subcontractors, deductor has to make sure that there will be no such mistakes made while computing TDS on the amount payable to the contractor. Sometimes, GST is also counted under the TDS deductions on payment made to the contractor, which will ultimately lead the deductor towards severe consequences. Under Section 194C of the Income Tax Act of 1961, the TDS should be appropriately deducted in order to get correct accountability of tax of both payer and payee. In this blog, we will provide you with complete details about TDS computation of payments made to the contractor or subcontractors, TDS rates, and consequences of non-adherence to section 194C. 

Who is a contractor u/s 194C?

A contractor is a Resident individual who enters into a contract or agreement with a specified person who is liable to carry out any work, including the supply of manpower.

While subcontractor refers to an individual, who enters into an agreement or contract made by the contractor to complete a part of work that is specified under the contractual agreement. 

When Should TDS Be Deducted?

Read the details given below to about TDS deduction from payments made to contractors under Section 194C of the Income Tax Act of 1961: 

• Threshold limit:

Limit to deduct TDS on service contractor u/s 194C is ₹ 30,000 for single transaction and ₹ 1,00,000 for aggregate transactions during the financial year. TDS at prescribed rates (1%-individuals and HUFs, 2%-others) given u/s 194C is required to be deducted on the amount of contractor payments exceeding the threshold.

• TDS Rates for Payment Made to Contractor or Subcontractor:

TDS rates that are applicable under Section 194C, TDS on service contractor are as follows:

Note: If a payee fails to provide PAN details at the time of TDS deduction, then TDS rate will rise to 20% under this section.

• Time of TDS Deduction for TDS on service contractor:

Under Section 194C, TDS on service contractor is required to be deducted:

• At the time of credit of such sum to the account of the contractor or subcontractor; or
• At the time of payment of such sum to the contractor or subcontractor in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.

Payments and TDS filings u/s 194C

Here is the method to calculate the TDS on payments made to contractors, which is given as follows:

• Determine the correct TDS rate applicable on contractor payment: 

The first step is determining the correct TDS rate that is applicable on payments made for service contracts, as TDS rate u/s 194C, TDS on service contractor is categorized on the basis of payee.

If the payee is an Individual or HUF, TDS rate is 1% whereas if payee is other than individual or an HUF, TDS rate will be 2%.

• TDS is always exclusive of GST:

Before deducting TDS on contractor payments, it is important to note that no GST is included in the payable amount which requires TDS deduction. If the invoice value is inclusive of GST, TDS will be deducted on the original amount charged for services without GST.

• Calculate TDS based on applicable rate

Once you have excluded the GST from the original amount to be paid, the TDS would be calculated by following the below-mentioned formula:-

(Amount payable to contractor -Amount payable to contractor*TDS rate u/s 194C).

Example for TDS on Payments Made to Contractors or subcontractors: 

Let's say a company makes a payment of ₹ 70,800 to an individual contractor for a repair job. The invoice is inclusive of GST at the rate of 18%. TDS rate that is applicable is 1%

What will be the amount of TDS? 

Answer 

Total invoice amount: ₹ 70,800

GST Rate: 18%

Invoice amount excluding GST = ₹ 70,800/118% = ₹ 60,000, now ₹ 60,000 is the original amount for which TDS is required to be deducted.

TDS Rate: 1% 

TDS Amount = ₹ 60,000 * 1% = ₹ 600

Consequence for Non-Compliance of Section 194C, TDS on service contractor

Here are the penalties and Fines u/s 194C, TDS on service contractors:-

• TDS is not deducted: If a deductor has not deducted the TDS from the payment of such income, then it charges interest of @1% per month till the date TDS is deducted .
• TDS is deducted but not deposited: If a deductor has deducted the TDS from service contracts, but has not deposited the collected tax to the government, then it charges interest @1.5% from the date when TDS is deducted till the date of deposition
• Section 234E: The late filing will cause you to pay ₹200 per day, depending on the maximum tax due.

Conclusion 

To conclude TDS under Section 194C of the Income Tax Act of 1961, it considers that if the payment is made to a contractor, it is important to deduct tax at source (TDS) at the rate of 1% when a payee is an individual or HUF. When a payee is other than HUF or an individual, then TDS rate would be charged at the rate of 2% on the amount payable to contractors or subcontractors. It is important to note that the TDS should be deducted from the invoice amount exclusive of GST. Further, This section ensures that tax from such income is appropriately deducted and deposited with the government. Compliance with this section is essential for both payers and recipients to avoid penalties and interest.

Frequently Asked Questions 

1) Is TDS deducted from the total invoice amount including GST?

No, TDS is not deducted from the total invoice amount, including GST. The TDS would be deducted from the original amount, excluding GST.

2) What happens when the TDS is wrongly deposited?

Even if TDS is mistakenly deposited under the wrong section, one can follow these steps to correct the same:-

• Login to the TRACES website 
• Enter your TAN and Password
• Go to Statements/Payments
• Select Request for Challan Correction
• Enter the details of the Challan you want to correct 
• Submit the Request 

3) Can TDS be deducted even if the contractor doesn’t provide PAN?

Yes, the TDS can be deducted even if the contractor doesn’t provide PAN. But, TDS would be deducted at a higher rate of 20% than the standard TDS rate.

4) Is TDS applicable to advance payments to contractors? 

Yes, the TDS is applicable on advance payments to contractors. The TDS is calculated on the advance amount and deducted at the time of payment made to contractors.