Section 194C: TDS On Payment To Contractor & Subcontractor

Overview

Under Section 194C, the tax is to be deducted at source when making any payment to a resident contractor or subcontractor for carrying out any work. This means that the government receives the share of taxes from the income earned by the contractors and subcontractors. For types of services, TDS deductions have to be made at the rate of 1% in the case of individuals and HUFs and at the rate of 2% for others. Also, no TDS is applicable if a single contract amounts to Rs. 30,000 and the aggregate of the contract in the previous year is up to Rs. 1,00,000. In this article, we have provided you with the entire details on the Section 194C tax deduction at source made to contractors and subcontractors.

What is Section 194C - TDS On Payment to Contractor and Subcontractor?

Under Section 194C of the Income Tax Act 1961, the tax is to be deducted at the source of payment made to the resident contractor and subcontractor. This tax has to be deducted at source when paying any sum to a contractor on a work when an amount exceeds Rs 30,000 on a single transaction or aggregate of Rs. 1,00,000 in a financial year.

The TDS should be deducted at source if any person is responsible for paying sum to a resident contractor or subcontractor in pursuit of contractual agreement between contract and the:

• the central government, or
• the state government, or
• any statutory corporation, or
• any company, or
• any cooperative society, or
• any society registered under the Societies Registration Act, or
• any statutory authority dealing with housing accommodation or for the purpose of planning, development, improvement of cities, towns, or villages or both, etc., or
• any trust, or
• any firm, or
• any university established or incorporated by or under the Central or State Government
• any person who is an individual, HUF, AOP or BOI, whose gross sales or total receipts exceed Rs 1 crore in the case of business and Rs. 50 lakh in the case of profession

Applicability of TDS Under Section 194C Of Income Tax Act 1961

• Payment is made to the resident contractor or subcontractor defined under Section 6 of the Income Tax .
• Payment is made to carry out any work , including supply of labor.
• Payment is made by the specified person as mentioned above.
• The amount of consideration of the contract in respect to which payment is made should not be less than Rs. 30,000, or the aggregate amount should not exceed Rs. 1,00,000 per annum.
• Cold storage charges, which involve providing refrigeration facilities as well as storage facilities, shall also be subject to TDS u/s 194-C as a contract charge only and not u/s 194-I (rent).

Non-Applicability of TDS u/s 194C

The TDS under section 194-C is not applicable under the following circumstances : -

• Payment is made to a transporter contractor ( u/s 44AE ) owning not more than 10 vehicles at any time during the Previous year , only if
• The transporter furnishes a declaration to this effect along with his PAN.
• Contracts for rendering professional services will get covered u/s 194-J and hence , No TDS u/s 194-C.
• Any sum paid or credited to the account of the contractor by an individual or HUF and such sum is incurred exclusively for personal purposes of such individual or HUF. therefore no TDS u/s 194-C.
• Payer is an individual or HUF , where total sales or gross turnover from business or profession does not exceed 1 crore / 50 lakhs during the preceding financial year then not required to deduct TDS.

Definition of Work u/s 194C

Under Section 194C of the Income Tax Act of 1961, work includes:

• advertising
• broadcasting and telecasting, including production of programs for such broadcasting and telecasting.
• Catering contracts
• carriage of goods and passengers by any mode of transport (other than railways)
• manufacturing and supplying a product according to the requirements and specifications of a customer by using material purchased from/supplied by such customer or its associate being a person related to the customer in such a manner as defined u/s 40A(2).

Note: In case of job work, TDS shall be applied to the invoice value, excluding the value of material purchased from the customer or associate , provided bifurcation is given in the invoice. If no bifurcation is given, then TDS shall be applied to the entire invoice value.

Rate of TDS u/s 194C

The rate of TDS payment to a contractor is 1% u/s 194C when the payee is an individual or HUF. and TDS @ 2% is deducted from the payment made to the other person (other than individual or HUF).

The rates applicable under Section 194C are as follows:

However, if PAN is not furnished, Tds rate will be 20% for all assessees.

Threshold Limit for Deduction of TDS u/s 194C

Here is the threshold limit for deduction of TDS u/s 194C:

• No such deduction will be required if the payment made to the contractor doesn’t exceed Rs. 30,000 in a single transaction.
• No such deduction would be made when a payment does not exceed the aggregate of Rs. 1,00,000 during the financial year.
• Exceeding the respective limits, such as Rs. 30,000 and Rs. 1,00,000 in a single or during the financial year, then TDS would be deducted at 1% or 2% accordingly as per the given section (194C) .
• However, even if the contractor doesn’t exceed Rs. 30,000 in a single payment, if the aggregate transactions counted more than Rs. 1,00,000 during the financial year, then TDS would be applicable as per the rates given.

Definition of Goods Carriage

The meaning of Goods Carriage under Section 194C of the Income Tax Act 1961:

• Any motor vehicle constructed or adapted for use solely for the carriage of goods; or
• 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.

Time of Deduction u/s 194C

The tax at source would be deducted under Section 194C at the time of credit of the sum to the account of the contractor, or at the time of payment thereof in cash, by issue of a cheque or draft or by any other mode, whichever is earlier.

Time of Deposition u/s 194-C

• 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.

Important Points to be Kept in Mind While Deducting TDS u/s 194C

Following are the important points to be kept in mind while deducting TDS u/s 194C:

• This section is only applicable to ‘work contracts’ or ‘labor contracts’ and does not cover the contracts for ‘sale of goods'.
• Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc., cannot be regarded as contracts for carrying out any "work,” and, accordingly, no deduction of income-tax is to be made from payments relating to such contracts under this section. Separate provisions for fees for professional services have been made under section 194J.

Penalties u/s 194C

Here are the penalties and fines for TDS on payments made to contractors.

• TDS is not deducted: If a deductor has not deducted the TDS from the payments made to contractors/subcontractors, 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 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.
• Late filing of Form 26Q: In case of failure of filing Form 26Q within the prescribed due dates , a late fees of Rs.200/day will be levied , subject to maximum amount of TDS u/s 234E

Why Choose Bizfoc for TDS?

At Bizfoc, we specialize in providing you the best accounting services in filing your TDS. Here are the reasons why we are known for our services to our clients on filing TDS:

• Assist in suggesting the right documents for TDS filing.
• Providing valuable insights on sections of TDS computations
• Prescribe forms as per the necessity
• Helps in accurate computations for TDS computations and returns
• Tailored advice and guidelines for TDS filing

In general, we assist the client to solve their queries and doubts regarding the documentation, procedures, and fees for filling out the form. Other than making your filing successful, we help you make a better decision by covering every aspect of what you actually need to get your TDS.

Conclusion

Under Section 194C of the Income Tax Act 1961, the TDS is deducted @1% (for individuals/HUF) and @ 2% ( for others ) on payments made to resident contractors by any person other than an individual, HUF, AOP, or BOI on amounts exceeding Rs. 30,000 per contract or Rs. 1,00,000 per annum. Individuals/HUF who are liable for tax audits can make TDS deductions under this section. However, no TDS is required to be deducted if payment is made to a contractor (u/s 44AE) who furnishes a declaration along with his PAN and contracts for rendering professional services.

For seeking professional advice regarding the TDS deduction, you need to consider CA experts and professionals to get your filing TDS safely and accurately.

Frequently Asked Questions