Section 194C basically deals with TDS on Payment to Contractor and Sub-Contractor. 

Section 194C states that any individual responsible for paying any sum to the resident contract for carrying out any work (including the supply of labor), in pursuance of a contract between the contractor and the following:

  1. The Central Government or any State Government
  2. Any local authority
  3. Any company
  4. Any corporation established by or under a Central, State, or Provisional  Act 
  5. Any co-operative society
  6. Any authority that is constituted in India by or under any law, engaged either to deal with and satisfy the needs for housing accommodation, or for planning, development, or improvement of cities, towns, and villages or for both
  7. Any trust
  8. Any society that is already registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any part of India
  9. Any firm 
  10. Any university that is established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under Section 3 of the University Grants Commission Act, 1956 or
  11. Any Government of a foreign State or a foreign enterprise or any association or a regulatory body that is established outside India; or
  12. Any individual or a HUF or an association of the people of a body of individuals, in case such person-
  • Do not come under any of the preceding sub-clauses; and
  • Have liable accounts audit under clause (a) or (b) of section 44AB during the financial year immediately preceding the financial year in which the amount is added to the contractor’s account.

What is TDS?

TDS was mainly implemented to raise the tax from the very source of profits. According to this definition, any person (deductor) who should make payment of a defined nature to any other person (deductee) shall deduct tax at source and deposit it with the central government. The deductee shall earn credit for such tax sum when filing an income tax return on the basis of 26 AS or TDS certificate provided by the deductor.

Work here Constitutes of the following:

  1. Advertising
  2. Goods or passengers carriage by any mode of transport except railways;
  3. Broadcasting and telecasting involving programs production for such broadcasting or telecasting
  4. Catering;
  5. Manufacturing or supplying a product as per the customer requirement by using material bought from such customer;

However, it does not involve those products that are used for which the material is bought from another person and not the customer.

When does the liability to deduct TDS u/s 194C arise?

A liability to deduct TDS arises at the earlier of the below-mentioned:

  • The sum is credited to the account of the payee or 
  • Payment is done via cash/ cheque/ any other mode.

The rate at which TDS is required to be deducted u/s 194C:

  1. In the case where the payee is an individual/ HUF- The rate of TDS when PAN available is 1%; the Rate of TDS if PAN is not available is 20%.
  2. In the case where the payee is any person other than the individual/ HUF- The rate of TDS when PAN is available is 2%; the Rate of TDS when PAN is not available is 20%.
  3. In the case where the payee is transporter- The rate of TDS when PAN is available is NIL; the Rate of TDS when PAN is not available is 20%.

TDS deduction threshold:

TDS deduction liability arises when-

  • The value of a single invoice or payment to a single contractor is exceeding Rs.30,000 or
  • The aggregate value of all invoices or payments made during a specific financial year is exceeding Rs.1,00,000.

Section 194C Exceptions

There are certain exceptions to this section where requirements apply in case some conditions are fulfilled

  1. Payment to Contractor of Goods carriages

Where, at any point in time in the previous year, the contractor involved in the billing, recruiting, or leasing of goods carriages owns less than or equivalent to 10 goods carriages, TDS will not be deducted until that contractor provides that payer(s) a declaration with his PAN.

In any case excluding the one that is mentioned, the TDS deduction will be as per the original provisions.

      2. Composite Contract

  • In the case where materials are supplied by the government, the question remains that whether the deductibility shall be rendered, in the light of the terms of the contract and the actions of the parties concerned, concerning gross payment by the contractor or net payment, i.e., gross payment minus deductions, if there are any, based on materials supplied by the government.
  • In the case where the contractor undertakes to construct a building or dam and has undertaken to supply the government or all of the materials needed for the work at the particular amount, the deduction would be regarding gross payment, without removing all changes related to costs of materials.
  • In case the contractor has only undertaken to supply the work, ownership of the material supplied at any time by the government or by another specific entity, the sum that is charges charged to the contractor for the contract shall be only the amount paid for that work or services and shall not include, hence, the expense of the material rendered by the government or by other entities.

Time Limit Within Which Tax is to be Deposited

  1. Where payment is done by or on the government’s behalf – the same day.
  2. Where the payment is done in any case except the government
  3. In case the sum is paid in March – April 30th, or
  4. Before, April 30th – within 7 days from the end of the month in which the deduction is made.

While making payment of TDS post the applicable due date, interest @1.5% per month or part of the month is levied. Therefore, it is advisable to make payment of the TDS amount on a timely basis.

Minimum Amount of Payment for Deduction of TDS under Section 194C

In case the payment that is being made to the contractor is not exceeding Rs.30,000, No TDS is required to be deducted on payment to the contractor. But, in case the sum of all such payments made or to be made during a financial year is exceeding Rs.75,000; TDS shall be deducted under Section 194C at the rates specified above.

This limit of Rs.75,000 has been increased to Rs.1,00,000 and effective from the Financial Year 2017-17 onwards. 

When does TDS under Section 194C need to be deducted?

The individual responsible for making payment to the resident contractor/ sub-contractor must deduct TDS,

  1. Either at the time of crediting such sum to the account to the payee or 
  2. By an issue of a cheque or by any other mode, whichever is earlier
  3. At the time of payment thereof in cash

Where any sum is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such amount, such crediting shall be deemed to be the credit of such income to the amount of the payee and the provisions of this section shall apply accordingly. Therefore, the tax has to be deducted even if the amount payable to the resident contractor/ subcontractor is transferred to the suspense account by the payer in his books.

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Related Links

What is TDS? Steps to file TDS Return online

Details On TDS Penalty And Interest For Late Payment