GUIDE ON TDS PAYMENT TO CONTRACTOR
What is Section 194C?
Section 194C states that any person responsible for paying any sum to the resident contractor for carrying out any work (including the supply of labor), in pursuance of a contract between the contractor and the following:
- The Central Government or any State Government
- Any local authority
- Any corporation established by or under a Central, State or Provisional Act
- Any company
- Any co-operative society
- 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, developing or improvement of cities, towns, and villages or for both
- Any society registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India
- Any trust
- Any university or deemed university
- Any firm
What is the meaning of work for the purpose of Section 194C?
The expression, “work” in this section would include-
- Advertising
- Broadcasting and telecasting including the production of programs for such broadcasting or telecasting
- Carriage of goods and passengers by any mode of transportation, other than railways
- Catering
- Manufacturing or supplying of a product according to the requirement or specification of a customer by using the materials purchased from a such customer or its associate as defined in section 40A(2), But does not include manufacturing or supplying of a product according to the requirements or specifications of a customer by using the materials purchased from a person, other than such a customer.
Application Of Section 194C
The provisions outlined under Section 194C of the Income Tax Act are only applicable to either
- Works Contracts
- Labour Contracts
However, it is not applicable to any contract that deals with the sale of any goods or solely the supply of any goods or products.
TDS deducted as per Section 194C is applicable only under the conditions mentioned below:
- The contractor should be an Indian resident, as per the guidelines stated in Section 6 of the Income Tax Act
- Any payment that has been made to the contractor must be carried out by any person as mentioned under Section 194C
- The payment made must be done for the purpose of conducting any form of work, which may also include the supply of manpower for the purpose of conducting any kind of work.
- The payment in question must be carried out in accordance with the stipulations mentioned in the contract, to which both the payer as well as the contractor are privy to. The contract in question may be in either oral form or written form.
- The amount of payment made between the two parties should not be in excess of Rs 30,000 at any given point in time.
- If the total of all payment or credit amounts given to the contractor by the payer is found to be in excess of Rs 75,000 over the course of the financial year, then the payer will be required to ensure that deduction of TDS takes place from the total payment amount.
- If the total of all advance payments made to the contractor is found to be in excess of Rs 30,000, then the payer will be required to ensure that a deduction of TDS takes place from the total payment amount.
- If the total of all payments made to the contractor was initially found to not be in excess of Rs 30,000 but was later found to surpass this amount, then the payer will be required to ensure that deduction of TDS takes place from the total payment amount in accordance with previous payments made as well.
Non-Applicability Of Section 194C
The provisions outlined under Section 194C will not be applicable under the following conditions:
- If, through the carrying on of any type of business, the payer in question has accumulated a total turnover that does not exceed the stipulated limit of Rs 1 crore over the course of the financial year that was completed prior to the financial year during which the payment was made to the contractor.
- If, through the carrying on of any type of profession, the payer in question has accumulated a total turnover that does not exceed the stipulated limit of Rs 25 lakhs over the course of the financial year that was completed prior to the financial year during which the payment was made to the contractor.
- If the payment made by an individual or Hindu Undivided Family (HUF) was diverted towards any expenses of a personal nature that have been incurred by the individual or HUF.
Definition Of Contractor And Subcontractor As Per Section 194C
Under Section 194C of the Income Tax Act, a contractor and a subcontractor may be defined as follows:
- A contractor is referred to as any person who agrees to be a party to a contract involving any of the following entities for the purpose of conducting any form of work, which also includes supplying manpower to conduct such work:
- The Central or State Government
- A Corporation
- A Company
- A Localised Authority
- A Co-operative Society
- A Subcontractor is referred to as any person who agrees to be party to a contract involving a contractor mentioned above, for the purpose of the following:
- Conducting either all or part of the work, which the contractor has agreed to undertake
- Supplying manpower for all or part of the work undertaken by the contractor
Deduction Of TDS As Per Section 194C
As per the provisions of Section 194C of the Income Tax Act, a deduction of TDS will be made by the payer at any of the following times:
- When the payment is made to the contractor or the subcontractor when the amount has been credited to either of their bank accounts.
- When the payment made to the contractor or the subcontractor is in the form of cash.
- When the payment made to the contractor or the subcontractor is in the form of a cheque.
- When the payment made to the contractor or the subcontractor takes place through any other payment method.
- When the payer transfers or credits any amount meant for a contractor or subcontractor to a ‘Suspense Account’ or any other account.
Rate Of TDS As Per Section 194C
As per the provisions of Section 194C of the Income Tax Act, the rate of TDS that is applicable depends on certain conditions mentioned below:
If the payee or contractor possesses PAN:
- TDS of 1% of the amount will be deducted from any payments or credits made to resident individuals or Hindu Undivided Families (HUFs).
- TDS of 2% of the amount will be deducted from any payments or credits made to any party other than resident individuals or Hindu Undivided Families (HUFs).
- No TDS will be deducted from any payments or credits made to any transporters.
If the payee or contractor does not possess PAN:
- TDS of 20% of the amount will be deducted from any payments or credits made to resident individuals or Hindu Undivided Families (HUFs)
- TDS of 20% of the amount will be deducted from any payments or credits made to any party other than resident individuals or Hindu Undivided Families (HUFs)
- TDS of 20% will be deducted from any payments or credits made to any transporters.
Exemptions Under Section 194C
Certain circumstances exist under which the deduction of TDS under Section 194C of the Income Tax Act will not be applicable. These are as follows:
- If the amount paid to the contractor or subcontractor in accordance to the stipulations of the contract is less than Rs 30,000 at any given time, then the payer will not be liable to deduct TDS
- If the total amount paid to the contractor or subcontractor in accordance to the stipulations of the contract is less than Rs 75,000 over the course of the financial year, then the payer will not be liable to deduct TDS
- If the amount paid to the contractor or subcontractor was made prior to the 1st of June 1972
- If the amount was paid prior to the 1st of June 1973 in accordance to the stipulations of the contract entered into by either
- A contractor and a co-operative society
- A contractor and a subcontractor with regards to work conducted by the contractor for the co-operative society.
What are the Exceptions to TDS on Payment to Contractors?
Deduction of TDS in case of composite contract:
- When the government provides materials, it is unclear whether the contractor will be paid in full or in net payment, which is the sum of the gross payment and any deductions.
- Due to information provided by the government, a decision will need to be made in light of the terms of the specific contract and the actions of the parties thereto.
- When the government or another designated party has agreed to supply all or a portion of the materials required for the work at the agreed-upon prices, and the contractor has agreed to build a building or a dam, the deduction will be applied to the gross payment without excluding any adjustments on account of the cost of materials.
- The sum payable to the contractor in relation to the contract will only be the amount paid for such labour or services and will, therefore, not include the price of the materials supplied by the government or other specified persons when the contractor has only agreed to provide labour for the work and the ownership of the materials supplied remains at all times with the government or another specified person.
Under What Circumstances TDS u/s 194C is not deductible?
In the following cases, no tax needed to be deducted:
- When the total amount paid or credited in accordance with any contract is less than or equal to Rs. 30,000, or
- The person responsible for paying such sums will not deduct TDS in accordance with this section when the total amount of such sums credited or paid or projected to be credited or paid during the financial year does not exceed Rs.1,00,000.
- If the money is credited or sent to the contractor’s account only for the benefit of the individual or any member of the HUF, neither they nor the HUF shall be permitted to deduct income taxes from the amount.
- On providing their PAN to the contractor paying or crediting the amount, no deduction shall be made from any sum credited or paid, or anticipated to be credited or paid, during the previous year to the account of a contractor during the course of business of operating, hiring, or leasing goods carriages
