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Section 194C Guide to TDS on Contractor Payment

Section 194C Guide to TDS on Contractor Payment

Section 194c guide to TDS

Introduction

TDS stands for tax deducted at the source which gives authority and responsibility to certain persons making specified payments such rents, salary, professional fees to deduct a certain amount as a tax before making such payment. For different types of payment, there are different TDS rates which are covered by more than 20 sections of the act.

Section 194c of the Income Tax Act was brought into force in 1972 and has had several amendments to meet the changes. This section deals with payment or credit to a resident contractor or sub-contractor.

TDS Deducted by Whom and from Whom

As per the provisions of Section 194c, if any person in the presence of a contract between specified person and resident contractor, carries out any work, which may include a supply of labour, and is liable for payment, any person making such payment shall deduct the tax at source at a specified rate, irrespective of the mode of payment.

Who is a specified person[1]? The following persons are categorized as a specific person:

  1. The Central Government or any State Government
  2. Any local authority
  3. Any corporation established by or under a Central, State or Provisional Act
  4. Any company
  5. Any co-operative society
  6. Any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the needs for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both
  7. Any society registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India
  8. Any trust
  9. Any university or deemed university
  10. Any firm

Section 194c within its meaning covers the work of broadcasting and telecasting, catering, advertising, carriage of goods and passengers by any mode other than railways, a supply of labour and manufacturing or supplying the product.

TDS to Contractors

According to this section, there are two TDS on payment to a contractor which are specified:

  • 1 per cent in case the payment is made to an individual or HUF
  • 2 per cent in all other cases.

These rates are applicable if PAN is available. In case the contractor does not have a PAN card, then the TDS shall increase to 20 per cent in both the cases[2]. TDS is always deducted from the basic rate which is exclusive of surcharge and cess.

TDS Contractual limit

  • In case the amount to be paid to the contractor does not exceed Rs. 30,000/-, there shall be no deduction of TDS under section 194c.
  • If the total amount paid or to be paid to a contractor during a financial year exceeds Rs. 1,00,000/- with effect from the financial year 2016-17 (Earlier it was Rs. 75,000), TDS rate on contractors as per 194c shall apply.

The TDS deducted needs to be deposited with the government of India and a receipt in form 16A/ Form 16B has to be issued at the end of each financial year.

TDS on Sub-Contractors

A sub-contractor will be defined as any person entering into a contract with the contractor for carrying out any work, for the supply of labour either in whole or in part thereof.

The information technology act states that any contractor (not individual or HUF) if contracts with a sub-contractor for any work shall deduct 1 per cent of the sum as TDS as income tax at either of the following time,

  • Payment in cash
  • By way of issuing of cheque or draft or any other mode
  • By way of credit to the account of the sub-contractor.

Conditions: For deduction of TDS for sub-contractor certain conditions must be satisfied:

  1. Payment should be made to a sub-contractor who is a resident of India;
  2. Payment should be in lieu of carrying out any work;
  3. Payment should be made by the contractor;
  4. Payment should be more than Rs.30,000/- (in a single contract) or the total amount paid in a year should be more than Rs. 1 lakh.

TDS on transport contractors in NIL for payment/ credit to transporters.

Non-Applicability of the Section

This section has certain exceptions to its applicability which are:

  • Section194c shall not be applicable on a payment made by contractee to the contractor for a license fee.
  • If the payment is being made for the personal use of individual or HUF by an individual or HUF, then no TDS shall be deducted.
  • Payment is made by a person under section 44AB who are not required to conduct a tax audit, shall not deduct any TDS for payment to the contractor.
  • TDS shall not be deducted for a sub-contractor individual who does not own more than two goods carriages during the year.
  • The payment made by travel agents to the airlines shall not deduct TDS.

Non-Compliance with the Provision of Section 194c

  • In case if the deductor fails to deduct the tax amount, interest is charged at 1 percent per month from the date it was supposed to be deducted to the date it is deducted.
  • In case the deductor deducts the tax but fails to deposit it, interest is charged at 1.5 percent from the date the tax was supposed to be paid to the date when the tax is actually paid.

[1] Explanation of section 194c

[2] Section 206AA of the IT Act

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