Section 194C of Income Tax Act: TDS on Payments to Contractors

What is Section 194C - TDS on Contractor Payments

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 the contractor and the contractee. The contractee can include the following -

• Central Government or any State Government
• Any local authority
• Corporations established under Central, State, or Provisional Act
• Company
• Cooperative society
• Authority in India for housing or city planning
• Society registered under the Society Registration Act of 1980
• Trust
• University or deemed university
• Firm

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.

A specified person here means:

• Central or State Government
• Local Authority
• Corporation
• Company
• Co-operative Society
• Trust
• University
• Registered Society under the Societies Registration Act
• HUF/AOP/BOI
• Firm

Note: Any individual, Hindu undivided family, association of persons, or body of individuals with total sales, gross receipts, or turnover not exceeding one crore rupees for business or fifty lakh rupees for profession in the preceding financial year may credit or pay the contractor's account.

What is Considered 'Work' Under Section 194C of the Income Tax Act?

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 engages in a contractual agreement with the contractor to perform or provide labor for the execution of all or a portion of the work undertaken by the contractor under a contract with any of the authorities or to supply labor in whole or in part, as specified in the contractor's agreement with any of the authorities mentioned in this section.

• 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.

Conditions to be Satisfied

• Payment is made to a contractor or sub-contractor who can be called a resident within the meaning of Section 6 of the Income Tax Act, 1961.
• A specified person makes the payment.
• Payment is made for carrying out any work, including the supply of labor.
• The amount of consideration in the contract against which payment is being made should not be less than Rs.30,000.
• The contractor should pay the sum in respect of what he has undertaken.

What is the TDS rate & time of deduction of TDS u/s 194C?

*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.

When Should TDS u/s 194C be Deducted?

The person responsible for paying a resident contractor or subcontractor must deduct TDS either:

• When crediting the amount to the payee's account or
• When making the payment in cash, by cheque, or any other mode, whichever occurs earlier.

If the amount is credited to a "Suspense Account" or any similar account in the payer's books, it will still be considered as credited to the payee's account. In such cases, the provisions of this section will apply, and TDS must be deducted even if the payment is recorded in a suspense account.

When is TDS u/s194C Not Deductible?

• No TDS is required if a single payment under a contract is ₹30,000 or less.
• No TDS is required if the total payments to a contractor in a financial year are ₹1,00,000 or less.
• Individuals or HUFs do not have to deduct TDS if the payment is for personal use.
• No TDS is required for contractors engaged in plying, hiring, or leasing goods carriages if:
• They own 10 or fewer goods carriages during the previous year.
• They provide their PAN and a declaration confirming this to the payer.

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

What are the exceptions to TDS payments under Section 194C?

TDS Deduction in Composite Contracts

When materials are included in a contract, the TDS deduction depends on the terms of the contract and the conduct of the parties:

• Gross Payment Basis:
  If the contractor undertakes to construct a building, dam, or similar project and the specified person supplies materials at stipulated prices, TDS will be deducted on the gross payment without excluding material costs.
• Labour-Only Contracts:
  If the contractor provides only labour, and the ownership of materials remains with the specified person, TDS will apply only to the payment made for labour or services, excluding the material cost.
• TDS Rate:
  • The rate of TDS is 2% or 1% of the gross or net payment, based on the terms of the contract.
  • If the value of materials is mentioned separately on the invoice, TDS will apply only to the net payment (excluding material costs).
  • If the material value is not separately mentioned, TDS will be deducted on the entire invoice amount.

Documents Required for the Deduction of TDS Under Section 194C

When it comes to deducting TDS under Section 194C of the Income Tax Act, which applies to payments made to resident contractors for carrying out work, there are a few key documents you'll need:

Essential Documents:

• Contractor's PAN Card: This is absolutely crucial. You need to verify the contractor's PAN details before making any payment. If the PAN is unavailable, the TDS rate jumps to 20%, so ensuring you have this information is vital.
• Contract or Agreement (Optional): While a written contract isn't strictly mandatory, having one simplifies things. It clearly outlines the scope of work, payment terms, and any other relevant details. Even a verbal agreement can trigger TDS liability, but documentation makes it easier to manage the process.
• Invoice: This details the amount paid to the contractor for the specific work done. It should be clear, accurate, and issued by the contractor.
• Challan: This is the form used to deposit the deducted TDS amount to the government treasury. While not strictly required for deduction itself, it's an important part of complying with your tax obligations.
• TDS Certificate: Once you deduct TDS, you'll need to issue a TDS certificate (Form 16A) to the contractor. This document details the amount paid, TDS deducted, and other relevant information.

How to calculate TDS under section 194C

To compute TDS accurately, it is essential to consider the invoice value, excluding any amounts related to the purchase or sale of materials or goods. Focus solely on the service component, excluding any value associated with goods. When calculating the TDS amount under section 194C of the Income Tax Act, keep the following points in mind:

• In cases involving a contract with a composite supply of goods and services, consider the invoice value excluding the cost of goods. Ensure that the invoice clearly specifies the value of goods. If the invoice lacks this information, TDS should be deducted from the total invoice value.
• Commission and brokerage on fixed deposits are not covered by section 194C of the Income Tax Act.
• Payments to clearing and forwarding agents for the carriage of goods fall under the purview of section 194C.
• Payments to airlines or travel agents for ticket purchases are not included unless the bus, aircraft, or other mode of travel is chartered, in which case section 194C applies.
• Payments to electricians or contractors for electrician services are covered by section 194C of the Income Tax Act.

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 the above, a 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, work includes manufacturing or supplying 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?

When the payment is made by or on behalf of the Government, it should be processed on the same day. In cases outside government transactions:

• If the amount is credited in March, the deadline is on or before April 30th.
• For other months, the deduction should be completed within 7 days from the end of the month in which it occurred.

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

After depositing TDS to the government, a 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 194C?

Failure to adhere to Section 194C of Income Tax Act may lead to repercussions, including interest, penalties, and potential prosecution.

Neglecting to deduct or deposit TDS within the stipulated timeframe can result in an interest rate of 1% per month or part thereof, along with penalties ranging from Rs. 10,000 to Rs. 1 lakh.

Maximize your contractor payments and minimize TDS headaches. Our strategic guidance helps you optimize deductions and credits within TDS regulations. Claim what's yours and book an online CA Book eCA today!