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It is proposed to amend the definition of “work” under section 194C to provide that in a contract manufacturing, the raw material provided by the assessee or its associate shall fall within the purview of the ‘work’ under section 194C. Associate is proposed to be defined to mean a person who is placed similarly in relation to the customer as is the person placed in relation to the assessee under the provisions contained in clause (b) of sub-section (2) of section 40A of the Act.

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
  • Individual/HUF/AOP/BOI required to get accounts audited u/s 44AB (a) and (b)

Individual and HUF who are not required to get their accounts audited are not required to deduct TDS under this section.


What does work mean under section 194C ?

The term ‘work’ includes:

  • Advertising
  • Broadcasting and telecasting (including the production of programmes)
  • Carriage of goods and passengers using any mode of transport (but not railways)
  • Catering
  • Manufacturing or supply of a product as per the specification of a customer by using the material purchased from him/her. But does not include manufacturing or supplying a product according to the specification of a customer 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 work, which the contractor has agreed to complete
  • ;
  • Supplying manpower for all or part of work taken by the contractor.

What is the TDS tax rate & time of deduction of TDS 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
Particular Rate of TDS (if PAN available) Rate of TDS (if PAN not available)
Payment given to resident Individual/HUF 1% 20%
Payment given to
  1. Trust
  2. Company, firm
  3. Cooperative Society
  4. Registered Society
  5. Government, Local Authority
  6. University, Cooperation


2%


20%
Contractor in transport business*  Nil 20%
Sub-Contractor in transport business*  Nil 20%
*Payment is made to a goods transport agency (in the business of plying, hiring or leasing goods) which owns 10 or fewer carriages at any time during the previous year. Also, the contractor has to submit a declaration of above along with PAN.

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

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

Particulars Amount
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 ?
1 12-05-2019
28-06-2019
25-10-2019
20-12-2019
Rs.25,000/-
Rs.32,000/-
Rs.20,000/-
Rs.25,000/-
No
Yes (single exceed Rs. 30,000)
No
Yes (aggregate exceed Rs.1 lakh)
2. 12-04-2019
25-05-2019
20-06-2019
20-12-2019
Rs.30,000 /-
Rs.20,000 /-
Rs.20,000 /-
Rs.30,000 /-
No
No
No
No (aggregate payment not exceeds Rs. 1 lakh)
3. 20-04-2019
25-05-2019
Rs.1,05,000/-
Rs.5,000/-
Yes
Yes

When is Section 194C not applicable ?

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

  • The amount of payment made to the contractor in a single contract which does not exceed Rs.30,000.If the aggregate amount of such contracts in a financial year exceeds Rs.1,00,000 then 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) which owns 10 or fewer carriages at any time during the previous year. Also, the contractor has to submit a declaration of 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 below payments to Mr. A, a contractor during FY 2019-20

   - Rs. 25,000 on 01-06-2019
   - Rs. 30,000 on 05-08-2019
   - Rs. 25,000 on 12-08-2019
   - Rs. 28,000 on 20-12-2019

In above, single payment does not exceed Rs. 30,000 so no TDS required to be deducted at that time but while making payment on 20-12-2019, aggregate payment in a financial year exceeds Rs. 1,00,000/- hence TDS will be deducted.

Date Amount TDS Applicability
01-06-2019 25,000 No TDS (Single or aggregate payment  not exceeds threshold)
05-08-2019 30,000 No TDS (Single or aggregate payment not exceeds threshold)
12-08-2019 25,000 No TDS (Single or aggregate payment not exceeds threshold)
20-12-2019 28,000 TDS is required to be deducted since aggregate payment become Rs. 1,08,000/- which is more than Rs. 1 lakh
194C TDS calculation
Particulars Amount
Total payment  1,08,000
TDS @ 1%  1080
Net payment on 20-12-2019
(28,000-1,080)
26,920

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 the specification of a customer by using the material purchased from him/her. In such case, TDS will be deducted on:

  1. Invoice value excluding the price of material (if it is indicated separately in the invoice).
  2. Total invoice value, when the price of the material is not indicated separately.

Some Special Considerations by Government on 194C Applicaibility

CBDT has made some special announcements relating to 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. In the case where money 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 transport.

Payment for Couriers Any payment to couriers will be liable to TDS as it involves carriage of goods.

Payment for Serving food in restaurants On payment made for serving food in a restaurant in the normal course of business, TDS will not be deducted.

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 deduction of TDS only, you have to timely deposit the TDS amount to the government.

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 ?

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

Particulars Due Date
April - June 31st July
July-September 31st October
October-December 31st January
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 deducted from the income) quarterly. Given below are the due dates of issuing TDS certificate :

Particulars Due Date
April - June 15th Aug
July-September 15th November
October-December 15th February
January - March 15th June

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

Levy of Interest : If the specified person does not deduct the TDS or deduct the TDS but 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 payment

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


Frequently Asked Questions

Q- Is TDS deductible on sales promotion expenses?

Ans: Yes, it is deductible.Sales Promotion expense can be done in lieu of a contract or as a payment for professional services. In both the cases, although, there will be different sections of TDS applicable but TDS will be applicable.


Q- Is it mandatory to have a written contract to attract the TDS under Section 194C?

Ans: No. It is not mandatory at all times 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?

Ans: 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.

Ans: 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?

Ans: TDS should be deducted on the invoice value excluding all the other taxes like GST.


Q- Is TDS deductible on mobilization advance?

Ans: Yes, TDS is applicable on mobilization as it covers under u/s 194C.


Q- Under which TDS section will office maintenance charges appear?

Ans: Office maintenance charges come under contract,therefore TDS u/s 194 will be deducted.


Q- Does an importer have to deduct TDS on shipping cost?

Ans: 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)?

Ans: TDS should be deducted under 194C as it is a contract.


Q- What is the logic behind deducting TDS on membership and subscription fees?

Ans: 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- Does an importer have to deduct TDS on shipping cost?

Ans: Importer is not required to deduct TDS.


Q- Whether payment to a recruitment agency can be covered by section 194C ?

Ans: 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 ?

Ans: 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 ?

Ans: Yes, TDS is required to be deducted u/s 194C on catering services.

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CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.