Section 194C of the Income Tax Act deals with the withholding of taxes on payments made to contractors or subcontractors. This article explains the provisions and impact of Section 194C in detail.
What is Section 194C of the Income Tax Act?
Section 194C mentions that any person responsible for paying an amount to a resident contractor or sub-contractor for carrying out work (including labour supply) under a contract must consider the following entities:
- The Central Government or any State Government
- Any local authority
- Any statutory corporation
- Any corporation set up under a Central, State, or Provincial Act
- Any company
- Any co-operative society
- Any authority in India set up by law for housing, city planning, or development
- Any society registered under the Society Registration Act, 1980 or similar laws
- Any trust
- Any university or deemed university
- Any firm
- Any foreign government or enterprise, or any body set up outside India
- Any individual, HUF, AOP, or BOI whose total sales exceed Rs.1 crore (Rs. 50 lakhs for professionals) in the previous financial year
What does ‘Work’ mean for the purposes of Section 194C?
The term "work" in this section includes:
- Advertising
- Broadcasting and telecasting, including the production of programs for such broadcasting or telecasting
- Transportation of goods and passengers by any mode of transport, except railways
- Catering
- Manufacturing or supplying a product according to a customer's requirements or specifications, using materials bought from the customer or its associate (as defined in section 40A(2)). However, it does not include manufacturing or supplying a product based on a customer's requirements or specifications, using materials purchased from someone other than that customer
What is a sub-contractor as per Section 194C?
A "sub-contractor" refers to any person who:
- Signs a contract with the main contractor to carry out all or part of the work, or
- Provides labour for carrying out the entire or part of the work that the contractor has agreed to do under a contract with any of the authorities mentioned in this section, or
- Supplies, either fully or partially, any labour that the contractor is responsible for providing under his contract with any of the authorities listed
Who is required to deduct TDS?
TDS must be deducted by all individuals and entities who are required to pay any amount to a resident contractor for work under a contract. The following persons and entities must deduct TDS from contractor payments:
- The Central or State Government
- Any local authority
- Any corporation established by or under a Central, State, or Provisional Act
- Any company, whether listed on a recognised stock exchange or not
- Any co-operative society
- Any authority formed to meet the needs of housing, or to plan, develop, or improve cities, towns, or villages
- Any society registered under the Societies Registration Act, 1860, or similar laws
- Any trust set up for charitable or religious purpose
- Any university, whether deemed or otherwise.
- Any foreign government, foreign enterprise, or organisation established outside India
- Any partnership firm
- Any individual, Hindu Undivided Family (HUF), or Association of Persons/Body of Individuals (AOP/BOI), whose income exceeds specified limits during the previous financial year
- Any AOP/BOI whose accounts are required to be audited in the previous financial year
Time of TDS Deduction
TDS must be deducted either when the amount is credited to the payee’s account or when it is paid in cash, by cheque, or through any other method, whichever happens first. For this purpose, any amount credited to an account, whether called a "Suspense account" or by any other name in the payer’s books, is considered as income credited to the payee’s account.
TDS Rate for Contractors
Sl. no |
Type of payment |
TDS rate if PAN is available |
TDS rate from 14.05.2020 to 31.03.2021 |
TDS rate if PAN is not available |
1 |
Payment or credit to a resident individual or HUF |
1% |
0.75% |
20% |
2 |
Payment or credit to any resident person other than individual or HUF |
2% |
1.5% |
20% |
3 |
Payment or credit to transporters |
Nil |
Nil |
20% |
Threshold Limit for TDS Deduction Under Section 194C
- No TDS needs to be deducted if the payment for the contract is less than or equal to Rs. 30,000
- TDS will be deducted if the payment to the contractor exceeds Rs. 30,000 in a single transaction, or Rs. 1,00,000 in total during the financial year
- If a single payment to a contractor is less than or equal to Rs. 30,000, but the total payment made to the contractor during the financial year exceeds Rs. 1,00,000, TDS will still be deducted under Section 194C
What are the Exceptions to TDS on Payments Made to Contractors?
TDS Deduction in the Case of Composite Contracts
When materials are part of the supply, the question arises whether TDS should be deducted based on the gross payment to the contractor or the net payment (i.e., gross payment minus any deductions for materials supplied). This will depend on the specific terms of the contract and the actions of the parties involved.
If the contractor is responsible for constructing a building or dam and the specified person is supplying all or some of the materials at agreed prices, TDS will be deducted from the gross payment, without any adjustments for the cost of materials.
If the contractor is only providing labour for the work, with the materials remaining the property of the specified person, the payment to the contractor will be for labour or services only, and will not include the cost of materials supplied by the government or other specified persons.
Therefore, the TDS rate on payments made by the government or other specified persons to contractors will be 2% or 1% of the gross payment or net payment, depending on the contract terms. This is provided that the material value is separately mentioned on the invoice. If the value of the material is not listed separately, TDS will be deducted from the entire invoice amount.
Which vital documents do you require for the deduction of TDS under section 194C?
Before paying a contractor or a subcontractor, certain essential documents are required for TDS calculations under Section 194C:
- Contract or agreement: This document outlines the scope of work, duration, amount payable, and other relevant details. It is essential for determining the applicability and amount of TDS.
- PAN Card: The contractor’s Permanent Account Number (PAN) is necessary for making TDS deductions. Verifying the PAN details before payment is crucial, as the TDS rate increases to 20% if PAN details are unavailable.
- Invoice: The contractor must provide an invoice for the completed project or rendered services. The invoice should include the contractor’s name, address, nature of work, amount payable, and GST information.
- Challan: After deducting tax from the payments, remit it to the government. Generate a challan using Form 26Q and deposit the TDS amount with an authorized bank.
- TDS certificate: After deducting and depositing the tax amount, issue a TDS certificate (Form 16A) to the contractor. This certificate must include details such as the TDS amount, contractor’s PAN, and nature of the work performed.
Learn more about GST and its implications on business transactions.
Contracts for which TDS must be deducted
Under Section 194C, TDS must be deducted for contracts involving the execution of any work, including supply of labour under a contract. This applies to various types of contracts, such as advertising, broadcasting, telecasting, carriage of goods and passengers by any mode of transport other than railways, and catering. The obligation to deduct TDS arises if the payment exceeds Rs. 30,000 in a single transaction or Rs. 1,00,000 in aggregate in a financial year. It ensures tax collection on income earned through these contracts.
Exemption from TDS for contractors
Certain payments are exempt from TDS under Section 194C. Payments made to contractors engaged in the business of plying, hiring, or leasing goods carriages are exempt if they provide their PAN. Additionally, payments made by individuals or HUFs not subjected to tax audit in the previous year are exempt. If the payment amount does not exceed Rs. 30,000 per transaction or Rs. 1,00,000 annually, TDS is not required. These exemptions aim to reduce the compliance burden on small contractors and specific transactions.
How to calculate TDS on payments to contractors?
Calculating TDS on payments to contractors involves determining the applicable TDS rate, which is generally 1% for individual or HUF payers and 2% for others. First, verify the contractor’s PAN to avoid a higher TDS rate. Multiply the payment amount by the applicable TDS rate to determine the tax amount. For example, if a contractor's payment is Rs. 50,000 and the TDS rate is 2%, the TDS amount will be Rs. 1,000. Ensure the correct amount is deducted and deposited with the government within the stipulated timeframe.
What are the eligibility criteria for TDS on contractor payments?
The criteria for tax deducted at source on payment to contractors in India are as follows:
- Profession: TDS applies to payments made to contractors by individuals, HUFs, and all types of businesses and professions.
- Threshold limit: The TDS threshold limit for Section 194C applies only when the contractor’s one-time payment exceeds Rs. 30,000 or Rs. 1,00,000 in aggregate in a financial year.
- Type of payment: TDS is deducted from payments made to contractors executing work on a contractual basis, such as civil construction, fabrication, and supply of labour.
- Nationality: The contractor should be an Indian resident.
Learn more about business requirements and regulations.
Types of contracts covered under Section 194C
Section 194C covers various types of contracts for TDS deduction. These include contracts for construction, repair, and maintenance of buildings and infrastructure, supply of labour, and manufacturing or supply of products according to the customer’s specifications. Advertising contracts, broadcasting and telecasting contracts, and contracts for carriage of goods or passengers by any mode of transport other than railways are also covered. The wide range of contracts ensures comprehensive tax compliance and revenue collection from diverse business activities.
Penalties for non-compliance with Section 194C TDS rules
Non-compliance with Section 194C TDS rules can result in significant penalties. Failure to deduct TDS or incorrect deduction can lead to interest charges on the unpaid amount. Additionally, the deductor may face penalties for non-payment, late payment, or incorrect filing of TDS returns. Penalties can include fines up to Rs. 1 lakh and prosecution under the Income Tax Act. Timely and accurate compliance is crucial to avoid these legal and financial repercussions.
Conclusion
Understanding and adhering to Section 194C of the Income Tax Act is crucial for businesses to ensure compliance with tax regulations and avoid penalties. Proper documentation and timely TDS deductions help streamline tax processes and enhance financial transparency.
Explore funding options with Bajaj Finserv Business Loan
For financial support and funding options, consider exploring a business loan to help your business grow and thrive. Here is how you can apply for the Bajaj Finserv Business Loan:
- Click on the 'APPLY' button on this page.
- Enter your 10-digit mobile number and OTP.
- Fill in the application form with your basic details, such as your full name, PAN, date of birth, and PIN code.
- Once you enter all your details, please click on ‘PROCEED’ to visit the loan selection page.
- Enter the loan amount that you need. Choose from our three business loan variants – Term, Flexi Term, and Flexi Hybrid.
- Choose the repayment tenure- you can select tenure options of
12 months to
96 months and click on ‘PROCEED’. - Complete your KYC and submit your business loan application.
Our representative will guide you on the next steps. The loan amount will be transferred to your bank account on the successful verification of your documents.
