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Section 194C-TDS on payment to Contractor
Section 194C covers the TDS that is deducted from specific payments made to contractors and subcontractors. Hence, a proper and detailed understanding of the section is required to avoid future unseen problems in your business. Let us understand further.
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
- Co-operative Society
- Registered Society
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:
- Broadcasting and telecasting (including the production of programs)
- Carriage of goods and passengers using any mode of transport (but not railways)
- 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)
|Section 194C TDS Rate Chart|
|Sl. No||Nature of Payment||TDS Rate if PAN available||TDS Rates from 14.05.2020 to 31.03.2021||TDS Rate if PAN not available|
|1||Payment / Credit to resident individual or HUF||1%||0.75%||20%|
|2||Payment/Credit to any resident person other than individual / HUF||2%||1.5%||20%|
|3||Payment/ credit to Transporters||NIL||NIL||20%|
*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:
|Single payment of a contract||Exceeds Rs. 30,000|
|Aggregate payment of a contract||Exceeds Rs. 1,00,000|
Example to explain 194C applicability
|Case||Date of payment||Amount||Is TDS u/s 194C deducted?|
Yes (single exceed Rs. 30,000)
Yes (as the deduction already started)
Yes (aggregate exceeds Rs.1 lakh)
deduction required on prev.
25000 also which not deducted at first
No (aggregate payment does not exceed Rs. 1 lakh)
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.
|01-06-2022||25,000||No TDS (Single or aggregate payment not exceeding the threshold)|
|05-08-2022||30,000||No TDS (Single or aggregate payment not exceeding threshold)|
|12-08-2022||25,000||No TDS (Single or aggregate payment not exceeding the threshold)|
|20-12-2022||28,000||TDS is required to be deducted since aggregate payment becomes Rs. 1,08,000/- which is more than Rs. 1 lakh|
194C TDS calculation
|TDS @ 1%||1080|
|Net payment on 20-12-2022
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.
|Particular||Time limit to deposit TDS|
|If amount is paid or credited in the month of March||On or before 30th April|
|If amount is paid or credited in the month other than March||Within 7 days from the end of the month is which deduction is made|
What is the time limit to file TDS return u/s 194C ?
|April - June||31st July|
|January - March||31st May|
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 :
|April - June||15th Aug|
|January - March||15th June|
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.
Frequently Asked Questions
Q- Is TDS deductible on sales promotion expenses?
Yes, it is deductible. Sales Promotion expenses can be done in lieu of a contract or as a payment for professional services. In both cases, although there will be different sections of TDS, TDS will be applicable.
Q- Is it mandatory to have a written contract to attract the TDS under Section 194C?
No. It is not always mandatory to have a written contract to attract sec 194C. Even if agreed verbally, TDS can be deducted.
Q- If we take a service from a manpower supply provider, which provides technical consultancy, do we need to deduct the TDS under 194C or 194J?
Since the services are provided under contract, TDS should be deducted under 194C.
Q- What is the Section 194C showing on my Form 26AS? My tenant had made some tax deduction in this section for the commercial office which I have rented out to them.
Tenant need to deduct TDS u/s 194I and not in 194C.
Q- Should the TDS under 194C be deducted on the gross amount or net amount including GST?
TDS should be deducted on the invoice value excluding all the other taxes like GST.
Q- Is TDS deductible on mobilization advance?
Yes, TDS is applicable on mobilization as it covers under u/s 194C.
Q- Under which TDS section will office maintenance charges appear?
Office maintenance charges come under contract, therefore, TDS u/s 194C will be deducted
Q- Does an importer have to deduct TDS on shipping cost?
Importer is not required to deduct TDS.
Q- For a contractor agreement to provide incineration services, how much TDS should be deducted (either 194C or 194J)?
TDS should be deducted under 194C as it is a contract.
Q- What is the logic behind deducting TDS?
Through the TDS mechanism, a continuous flow of receivables are made possible for the government. Apart from that TDS makes it possible to track the income and also tax evasion can be prevented by the same.
Q- Whether payment to a recruitment agency can be covered by section 194C ?
Section 194C covers supply of labour also. Payments to recruitment agencies are in the nature of payment for services. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
Q- Whether TDS is required to be deducted u/s 194C if payment is made to a non-resident contractor ?
Section 194C only covers payments to resident contractors or sub-contractors. TDS on payment to a non-resident contractor will be governed u/s 195.
Q- Whether TDS is required to be deducted u/s 194C if payment is made for catering services?
Yes, TDS is required to be deducted u/s 194C on catering services.