Section 194C-TDS on payment to Contractor

What is Section 194C of the Income Tax Act and its’ applicability?

Section 194C deals with the provisions for tax deduction at source at the time of payment to contractors/sub-contractors.

This section says that any person who pays money to the resident contractor (or subcontractor) for carrying out any work (including the supply of labor ) is required to deduct tax on such payment. The above condition also requires the existence of a contract between contractor and contractee.

The TDS has to be deducted when the one time payment amount exceeds Rs.30,000 or RS.1,00,000 in aggregate during the year. The tax deduction has to be done at 1%(incase of individual & HUF) and 2%(others).

Who is required to deduct TDS u/s 194C?

Any specified person making payment to a resident contractor for carrying out work is required to deduct TDS.

Specified person here means :

• Central or State Government
• Local Authority
• Corporation
• Company
• Co-operative Society
• Trust
• University
• Registered Society
• Firm

any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, except if such person, has total sales, gross receipts or turnover from business or profession carried on by him exceeding one crore rupees in case of business or fifty lakh rupees in case of profession] during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor;

What does work mean under section 194C?

The term ‘work’ includes:

• Advertising
• Broadcasting and telecasting (including the production of programs)
• Carriage of goods and passengers using any mode of transport (but not railways)
• Catering
• Manufacturing or supply of a product as per a customer's specification by using the material purchased from him/her. But does not include manufacturing or supplying a product according to a customer's specification by using material purchased from other than such customer.

What is the meaning of contractor and subcontractor?

Contractor means any person who enters into a contract with the central/state government; corporation; company; local authority, or a cooperative society to conduct any form of work (including the supply of manpower).

Subcontractor means a person who enters into a contract with a contractor for:

• Conducting either all or part of the work, which the contractor has agreed to complete
• Supplying manpower for all or part of the work taken by the contractor.

What is the TDS rate that needs to be deducted u/s 194C?

The rate of tax deduction u/s 194C is-

• - 1% (when payment is given to Individual/HUF) or
• - 2% (when given to others).

And the time of deduction is earlier of

• - The credit of income to the account of the payee (receiver) or
• - Actual payment (in cash, cheque, draft or other modes)

*Payment is made to a goods transport agency (in the business of plying, hiring, or leasing goods) that owns 10 or fewer carriages at any time during the previous year. Also, the contractor has to submit a declaration of the above along with PAN.

What is the limit for tax deduction u/s 194C?

TDS shall be deducted u/s 194C in the following cases:

Example to explain 194C applicability

When are the exemptions to TDS payments under Section 194C?

TDS under Section 194C is not required to be deducted in the following cases:

• The amount of payment made to the contractor in a single contract does not exceed Rs.30,000.If the aggregate amount of such contracts in a financial year exceeds Rs.1,00,000, TDS will be deducted.
• When any amount is paid to the contractor by an individual or HUF for carrying out work in the nature of personal use.
• When payment is made to a goods transport agency (in the business of plying, hiring, or leasing goods) that owns 10 or fewer carriages at any time during the previous year, the contractor must also submit a declaration of the above along with PAN.
• If payment is made to a non-resident contractor or sub-contractor.

How to calculate TDS under section 194C?

TDS is calculated on invoice value. Let’s understand with an example :
Example: A Ltd makes the below payments to Mr. A, a contractor during FY 2022-23

• Rs. 25,000 on 01-06-2022
• Rs. 30,000 on 05-08-2022
• Rs. 25,000 on 12-08-2022
• Rs. 28,000 on 20-12-2022

In above, single payment does not exceed Rs. 30,000 so no TDS is required to be deducted at that time but while making payment on 20-12-2022, aggregate payment in a financial year exceeds Rs. 1,00,000/- hence TDS will be deducted.

194C TDS calculation

How to calculate TDS in case of composite work u/s 194C?

As discussed above, when work includes manufacturing or supply of a product as per a customer's specification by using the material purchased from him/her. In such case, TDS will be deducted on:

• Invoice value excludes the material's price (if it is indicated separately in the invoice).
• Total invoice value when the price of the material is not indicated separately.

Some Special Considerations by Government on 194C Applicability

CBDT has made some special announcements relating to the implications of section 194C, which are as follows:

Payment to Travel Agents :

Any payment paid by passengers to travel agents or airlines (on purchasing tickets) will not be liable to TDS u/s 194C. If money is paid by the agent to airlines, No TDS will be levied. But TDS will be deducted when such payment is made for the chartered hiring of bus, plane, or any mode of transport.

Payment for Couriers :

Any payment to couriers will be liable to TDS as it involves the carriage of goods.

Payment for Serving food in restaurants :

TDS will not be deducted on payment made for serving food in a restaurant in the normal course of business.

TDS Deduction on GST Amount :

If any amount representing GST in an invoice is indicated separately, then TDS will be levied on value excluding such GST.

What is the time limit to deposit TDS u/s 194C?

It does not end with a deduction of TDS only; you have to deposit the TDS amount to the government timely.

What is the time limit to file TDS return u/s 194C ?

After depositing TDS to the government, quarterly TDS return in form 26Q is also required to be filed.Given below are the due dates :

When is the TDS Statement issued, and by whom u/s 194C?

TDS statement is issued by the who is required to deduct TDS. Form 16A is issued to the deductee (i.e., whose TDS is deducted from the income) quarterly. Given below are the due dates for issuing the TDS certificate :

What are the consequences of non-compliance with section 19C?

Levy of Interest: If the specified person does not deduct the TDS or deduct the TDS but is not deposited to the government on time, then interest is required to be paid on such amount.

Disallowance of expenses: Also, the person is not eligible to claim the deduction of such expenses from PGBP income if TDS is not deducted on time. The amount of disallowed expenses shall be 30% of the payment.

However, if TDS is deposited in subsequent years, then expenses will be allowed in the TDS payment year.