Section 194C: TDS on Payment to Contractors

This section of TDS is very important as it hits millions of people in India. Hence, a proper and detailed understanding of the section is here-

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

    As per this section, any specified 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 person deducting TDS shall validly hold TAN to deposit the tax deducted to the government under this section.
    Now after reading the above answer, the question coming to everyone’s mind is

  • Who is a Specified Person, Contractor, and Subcontractor?
    1. Specified person means central or state government; local authority; corporation; company; cooperative society; trust; university; registered society; firm; individual/HUF/AOP/BOI required to get accounts audited u/s 44AB (a) and (b).
    2. Contractor in general terms 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).
    3. 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 does ‘work’ mean?

    The term ‘work’ includes:

    1. Advertising
    2. Broadcasting and telecasting (including the production of programmes)
    3. Carriage of goods and passengers using any mode of transport (but not railways)
    4. Catering
    5. 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 rate & time of tax deduction u/s 194C?

    The rate of tax 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).

    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 any resident person other than Individual/HUF 2% 20%
  • TDS in case of Specific Work / Deduction of TDS in case of composite work

    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.
  • In the following situations, No TDS will be deductible-
    1. If the amount of payment made to the contractor in a single contract does not exceed Rs.30,000.
    2. But if the aggregate amount of such contracts in a financial year exceeds Rs.1,00,000 then TDS will be deducted.
    3. If any amount paid to the contractor by an individual or HUF for carrying out work in the nature of personal use.
    4. If 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.
  • Time limit to deposit TDS
    Particular Time limit to deposit TDS
    If amount is credited in the month of March On or before 30th April
    If amount is credited in the month other than March Within 7 days from the end of the month is which deduction is made

    After depositing TDS to the government, quarterly TDS return is also required to be filed.

  • Some Special Considerations by Government

    As we said above, section 194C impacts millions of people around India and this raised many confusions among taxpayers. Hence, CBDT has made some special announcements relating to implications of section 194C which are as follows:

    1. 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.

    1. Any payment to couriers will be liable to TDS as it involves carriage of goods.
    2. On payment made for serving food in a restaurant in the normal course of business, TDS will not be deducted.
    3. If any amount representing GST in an invoice is indicated separately then TDS will be levied on value excluding such GST.

Frequently Asked Questions

Q- Is TDS deductible on sales promotion expenses?

Ans: Yes it is deductible.Sales Promotion expense can be categorised as an expense in the nature of payment 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 only on the gross amount excluding all the other taxes.

Q- Is TDS deductible on mobilization advance?

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

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

Ans: Office maintenance charges comes under contract,there 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: The logic behind deduction of TDS is to track income and. TDS for membership will only apply in case of private instituions.

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

Ans: Importer is not required to deduct TDS.

CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of 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.