Section 194C | TDS On Service Contractor

Section 194C | TDS On Service Contractor

Section 194C guides the tax to be deducted at source (TDS) when making payments to a contractor or subcontractor. Under a service contract, one party agrees to give services to the other party in exchange for payment, on such payments to the contractor or subcontractor Tax is deducted at source (TDS) at applicable rates defined under Section 194C TDS on service contractor.

Want to know more about the TDS on service contracts? In this article, we will provide you with all the necessary details about how to deduct & deposit TDS on labor contracts and applicable rates under Section 194C of the Income Tax Act, 1961.

What is Section 194C | TDS On Service Contractor?

As per Section 194C, TDS on service contractor refers to the provision mentioned in the Income Tax Act of 1961, which legally binds the contract between two parties where one party agrees to provide specific services to other parties in exchange for payment. TDS on service contractor u/s 194C covers contracts for rendering all services, excluding contracts for rendering professional services like lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc., and cannot be regarded as contracts for carrying out any “work” u/s 194C; therefore, no deduction of TDS is to be made from payments related to such contracts under this section. Contracts for rendering professional services will be covered under Section 194J, TDS, on professional and technical services.

Applicability of TDS on service contracts u/s 194C?

The TDS on service contractor should be deducted at source for service contracts u/s 194C by any person (other than Individuals, HUF, AOP, BOI) responsible for paying any sum to a resident contractor or subcontractor in pursuit of a contractual agreement, which can be between the contractor and the following:

• the central government, or
• any state government, or
• any statutory corporation, or
• any company, or
• any cooperative society, or
• any society registered under the Societies Registration Act, 1980 or
• any body constituted by law dealing with housing accommodation or for 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 or deemed to be university,
• any individual, HUF, AOP, or BOI, whose total gross sales or total receipts exceed Rs 1 crore in the case of business and Rs. 50 lakh in the case of profession during the previous financial year

Definition of Work as Per the Income Tax Act of 1961

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

• advertising
• broadcasting and telecasting, including the production of programs
• catering services
• 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 their associate being a person related to the customer in such a manner as defined u/s 40A(2)(b).

Note: There are different scenarios with job work about the applicability of TDS deduction u/s 194C. TDS on Job Work is applicable based on different scenarios. To get a better understanding of the applicability of TDS on service contractors u/s 194C on job work, refer to the tables given below, which cover all the different scenarios concerning job work.

Case scenario 1

Case scenario 2

Threshold Limit for TDS on Service Contractor | 194C

Here is the threshold limit for deduction of TDS u/s 194C, TDS on service contractor:

• Deductions will not be required if the payment made to the contractor does not exceed Rs. 30,000 in a single transaction. It's important to note that the ₹ 30,000 limit is to be seen on a contract basis.
• Deduction will not be made when a payment does not exceed the aggregate of Rs. 1,00,000 during the financial year.

Therefore TDS on service contractor u/s 194C is required to be deducted when payment made to contractor or subcontractor exceeds the threshold limit of ₹ 30,000 in a single transaction or aggregate amount paid exceeds ₹ 1,00,000 in the current financial year.

Note: However, even if the contractor's payments do not exceed the threshold limit of ₹ 30,000 in a single transaction, still TDS on service contractor u/s 194C is required to be deducted if the aggregate amount credited or paid to the contractor exceeds the threshold of ₹ 1,00,000 in the current financial year.

Rate of TDS u/s 194C | TDS on service contractor

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

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

Documents Required for TDS on Service Contractors

Here are the documents required for TDS on service contractors:

• PAN Card of the service contractors
• Contract Agreement
• Invoice/ Bill
• Payment proof
• TDS Certificate (Form 16A)

Time of TDS Deduction for TDS on Service Contractor

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

• At the time when such a sum is to be credited to the account of the contractor; or
• At the time of when such a sum is to be paid to the contractor in cash or by issue of a cheque or draft or by any other mode, whichever is earlier

Time to Deposit TDS on Service Contractor

TDS on service contractors is deducted and must be deposited with the central government. The time to deposit TDS on the service contractor is given below:

If TDS is deducted on behalf of the Government, it is deposited on the same day.

For example, tax on service contracts is deducted on 15th December and needs to be deposited on or before 7th January. Tax on a service contract is deducted on 21st March; it needs to be deposited on or before 30th April.

Non-applicability of TDS on Service Contractor u/s 194C

• Transport contractor | 194C(6)
  • A contractor owns 10 or less than 10 goods carried at any time during the previous year.
  • A contractor has furnished a declaration to this effect along with the PAN details.
  • A contractor is engaged in the business of plying, hiring, or leasing goods carriages.
• TDS on service contractor u/s 194C is not required to be deducted if any sum is paid or credited to the account of the contractor by Individuals & HUF and such sum is exclusively incurred for personal purposes of such individual & HUF member.
• TDS on service contractor u/s 194C is not required to be deducted if the said contract is for professional services, which is covered u/s 194J | TDS on professional and technical services.
• TDS on service contractor u/s 194C is not required to be deducted if:-
  • A single contract amounts to ₹ 30,000; or
  • The aggregate amount of the contract is up to ₹ 1,00,000 during the financial year

Penalties and Fines for TDS on Service Contractor u/s 194C

• 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.

Some Important points to remember while Deducting TDS on service contractor u/s 194C

• This section is only applicable to ‘work contract’ or ‘labor contract’ and does not cover the contract on ‘sale or goods'.
• There is no such contract that is regarded as the ‘contract’ for carrying out any work u/s 194C when the contract is for rendering professional services such as lawyers, physicians, surgeons, engineers, architects, accountants, etc. In other words, such professional services are not included in the deducted tax at source in the amount payable to any contractor.
• If the transportation charges are paid to a third-party transporter, then TDS shall be made u/s 194C. However, no TDS is required to be deducted while making payment to the transporter, which owns up to 10 vehicles at a time in the previous financial year, and furnishing a declaration to this effect along with the PAN details.
• Cold storage charges, which involve providing refrigeration facilities as well as storage facilities, shall also be subject to TDS u/s 194C, TDS on service contractors as a contract charge only, and not u/s 194I, TDS on rent and building. Therefore, TDS is required to be deducted from services of cold storage facilities only under Section 194C | TDS on service contractors.

Why Choose Bizfoc for TDS?

• suggesting the right documents for TDS filing.
• valuable insights on sections of TDS computations
• prescribing required forms as per the necessity
• helps in accurate TDS computations and returns
• tailoring advice and guidelines to suit your specific TDS needs.

We are committed to assisting our clients to solve their queries and doubts regarding documentation, procedures, and fees with regard to Income Tax filings. Besides making your filing successful, we help you make better decisions by covering every aspect of what you might need.

Conclusion

Under the Income Tax Act of 1961, Section 194C | TDS on service contractors directly refers to residential contractors and subcontractors, where contracts either can be labor contracts or work contracts. Contracts both, but not contracts for ‘sale of goods’. 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.

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