Section 194C - TDS on payment to Contractors

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This is the most important Section under the whole TDS provisions, as this section is applied on most of the taxpayers who are responsible for TDS deduction and payment

Let’s first Read the Law

Payments to contractors.

Section 194C.

(1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—

(i) 1% where the payment is being made or credit is being given to an individual or a Hindu undivided family;

(ii) 2% where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family,

of such sum as income-tax on income comprised therein.

(2) Where any sum referred to in sub-section (1) is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(3) Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, tax shall be deducted at source—

(i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or

(ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.

(4) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.

(5) No deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed Rs.30000

Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds one lakh rupees, the person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section.

(6) No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, where such contractor owns ten or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number, to the person paying or crediting such sum.

(7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.

Explanation.—For the purposes of this section,—

(i) “specified person” shall mean,—

(a) the Central Government or any State Government; or

(b) any local authority; or

(d) any company; or

(e) any co-operative society; or

(f) any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; or

(g) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; or

(h) any trust; or

(i) any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or

(j) any Government of a foreign State or a foreign enterprise or any association or body established outside India; or

(k) any firm; or

(l) any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person,—

(A) does not fall under any of the preceding sub-clauses; and

(B) 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;

(ii) “goods carriage” shall have the meaning assigned to it in the Explanation to sub-section (7) of section 44AE;

(iii) “contract” shall include sub-contract;

(iv) “work” shall include—

(a) advertising;

(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

(d) catering;

(e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, being a person placed similarly in relation to such 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,

but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer or associate of such customer.

Interpretation of Law:

Legal Framework: Section 194C – Payments to Contractors

Subsection (1) of Section 194C stipulates that any individual responsible for disbursing payments to a resident contractor (referred to as the contractor within this section) for executing work contracts (inclusive of labor provision for such work) pursuant to a contract with a specified entity is obligated to deduct an amount during two potential instances – upon crediting the sum to the contractor’s account or at the time of actual payment, whether through cash, check, draft, or any other mode, whichever materializes earlier.

Rate Structure:

For payments or credits to an individual or a Hindu undivided family, the deduction amounts to 1% of the sum.
For payments or credits to any entity other than an individual or a Hindu undivided family, the deduction stands at 2% of the sum.

Extent of Application:

Subsection (2) outlines that if a sum subject to this provision is credited to an account, termed a “Suspense account” or any other nomenclature, in the payer’s account books, this shall be treated as credit of the income to the payee’s account. Consequently, the provisions of this section apply to such cases.

Specific Provisions:

Subsection (3) addresses payments made for specific types of work listed under sub-clause (e) of clause (iv) of the Explanation. In such cases, the tax deduction occurs either on the invoice value without material costs (if the invoice separates material value) or on the total invoice value (if the material value is not segregated).

Exemptions and Conditions:

Subsection (4) exempts individuals and Hindu undivided families from deducting income tax on sums paid or credited to contractors’ accounts exclusively for personal purposes.

Subsection (5) exempts deduction if the sum credited or paid to the contractor does not exceed Rs. 30,000. However, if the aggregate of such sums in a financial year surpasses Rs. 1 lakh, then the payer becomes liable for TDS under this section.

Subsection (6) excludes deduction when a contractor, engaged in plying, hiring, or leasing goods carriages and owning ten or fewer such carriages, submits a declaration to this effect along with their Permanent Account Number (PAN) to the payer.

Reporting Requirements:

Subsection (7) mandates the payer, responsible for payments under subsection (6), to provide prescribed particulars to the designated income-tax authority within the specified timeframe.

Interpretative Insights:

“Specified person” under the Explanation encompasses a diverse range of entities, including governments, local authorities, corporations, societies, trusts, universities, foreign governments, firms, and more.
“Goods carriage,” as defined by the Explanation to subsection (7) of section 44AE, holds specific relevance.
“Work” under this section encompasses a plethora of activities, from advertising and broadcasting to manufacturing and more.

Now Let’s Understand in Brief:

The Income Tax Act of India encompasses a wide array of provisions that regulate tax deductions at source, aiming to ensure timely collection of taxes by the government. One such provision is Section 194C, which pertains to tax deduction at source (TDS) on payments made to contractors and subcontractors.

Overview of Section 194C:

Section 194C of the Income Tax Act, 1961, deals with TDS on payments to contractors. The primary objective of this provision is to ensure that a certain percentage of the payment made to contractors is withheld by the payer and remitted to the government as tax. This helps in preventing tax evasion and aids in the seamless collection of revenue for the government.

Applicability of Section 194C:

Section 194C is applicable when a person (payer) makes payments to a resident contractor for any work carried out, including the supply of labour, goods, or services. The contractor may be an individual, a Hindu Undivided Family (HUF), a partnership firm, a company, or any other legal entity.

The key conditions for the applicability of Section 194C are as follows:

Payment Thresholds: The section applies when the aggregate of all payments made or to be made to the contractor during a financial year exceeds a specified threshold.
Nature of Work: The payments covered under this section relate to work contracts, including advertising, broadcasting, telecasting, carriage of goods or passengers by any mode of transport (excluding railways), manufacturing or supplying a product according to customer specifications, and more.

What is the Threshold limit to deduct TDS u/s 194C?

The following is the limit applicable under section 194C to deduct TDS:

The amount paid or credit is a single contract that exceeds Rs 30,000
The amount paid or credit during the financial year altogether exceeds Rs 1,00,000.

Example:

Let’s consider a scenario where a company, XYZ Ltd., hires a contractor, Mr. Contractor, for carrying out construction work on their premises. The total payment made to Mr. Contractor during the financial year is Rs. 25,000.

Since the payment to Mr. Contractor does not exceed the limit of Rs. 30,000, XYZ Ltd. is not required to deduct TDS under Section 194C for this payment. They can make the payment of Rs. 25,000 to Mr. Contractor without deducting any TDS.

However, if the total payment made to Mr. Contractor during the financial year were to exceed Rs. 30,000, then XYZ Ltd. would be required to deduct TDS at the applicable rates before making the payment to Mr. Contractor.

TDS Rate on Payment to Contractors U/s 194C

Once the conditions under section 194C are met, the deductor needs to deduct TDS at the following rate.

Type of Contractor/ Subcontractor	Rate of TDS
Any person who is an individual or a HUF	1%
Any person other than an individual or a HUF	2%
Any person who is a transporter	NIL

Example: Let’s say XYZ Constructions (a contractor) is hired by ABC Corporation to carry out construction work. The payment to XYZ Constructions during the financial year is Rs. 50,000.

Since XYZ Constructions is not an individual or HUF, and the payment exceeds Rs. 30,000 but does not exceed Rs. 1 Lakh, the TDS rate applicable is 2%.
The TDS amount to be deducted will be 2% of Rs. 50,000, which is Rs. 1,000.
ABC Corporation should deduct Rs. 1,000 as TDS and deposit this amount with the government within the stipulated time frame.

How is TDS calculated under Section 194C of Income Tax Act?

For the purpose of deducting TDS, you must always consider the invoice value excluding any consideration for the purchase or sale of any materials or goods. Hence, consider only the service component excluding any value of goods. You must consider the following points while calculating the amount on which TDS must be deducted under section 194C:

There might be a contract that involves a composite supply of goods as well as services. In such a case consider the invoice value excluding the price for the supply of goods. Here the invoice must clearly indicate the value of goods. However, in case the invoice does not indicate the value or price of goods supplied then you must deduct TDS on the total invoice value.
Commission and brokerage on fixed deposits are not included under section 194C
Section 194C includes any payment made to clearing and forwarding agent for carriage of goods
Any payment made to an airline or a travel agent for the purchase of a ticket is not included. However, if the bus, aircraft, or any other travel mode is chartered then section 194C is applicable
Any payment made to an electrician or a contractor for an electrician’s services is covered under section 194C.

Exemptions and Conditions:

There are a few exemptions and conditions under Section 194C:

Small Contractors: If the aggregate of all payments to the contractor during the financial year does not exceed the prescribed threshold limit (Rs.100000) TDS is not applicable.
Transporters: If payments are made to a transporter who is in the business of plying, hiring, or leasing goods carriages, and a valid PAN is furnished, TDS is not required to be deducted under this section.
Transport of Goods by Railways: Payments made to Indian Railways for the transportation of goods are not subject to TDS under this section.

What is the meaning of work for the purpose of Section 194C?

Section 194C of the Income Tax Act in India pertains to the deduction of tax at source (TDS) on payments made to contractors and subcontractors. The section specifies that a person responsible for paying any sum to a resident contractor for carrying out any work (including supply of labor for carrying out any work) in pursuance of a contract between the contractor and:

The Central Government or a State Government,
Any local authority,
Any corporation established by or under a Central, State, or Provincial Act, or
Any company, firm, cooperative society, association of persons or trust engaged in any business,

shall deduct an amount at the prescribed rates as TDS before making the payment to the contractor. This TDS needs to be deposited to the government within the stipulated time frame.

Meaning of “Work” under Section 194C: The term “work” under Section 194C refers to any kind of work carried out under a contract and includes activities such as:

Work Contracts: Construction, civil works, repairs, decoration, demolition, etc.
Advertising Contracts: Any advertising-related services provided under a contract.
Broadcasting and Telecasting Contracts: Services related to broadcasting and telecasting, including production of programs or advertisements.
Material Supply Contracts: Contracts for the supply of goods along with the provision of services related to such goods.

In essence, any service that falls within the scope of a contract and involves the application of labor or the provision of materials can be considered “work” under this section.

Example: Let’s say ABC Pvt. Ltd., a company engaged in construction, hires XYZ Constructions, a resident contractor, to carry out construction work for a new office building. The contract specifies that XYZ Constructions will provide labor, materials, and equipment for the construction project.

In this scenario:

ABC Pvt. Ltd. is the person responsible for paying the sum to XYZ Constructions.
XYZ Constructions is the resident contractor.
The work involved is the construction of the new office building.

According to Section 194C, ABC Pvt. Ltd. is required to deduct TDS at the prescribed rates from the payments they make to XYZ Constructions for the construction work. This TDS amount must be deposited with the government within the specified time frame.

Example: TDS Exemption Threshold and Aggregate Amount

Let’s consider a situation involving Company X and Contractor Y. Company X has hired Contractor Y to provide Contractor services for a series of projects. The payments made by Company X to Contractor Y during a financial year are as follows:

First Payment: Rs. 20,000
Second Payment: Rs. 25,000
Third Payment: Rs. 30,000

Calculation of Aggregate Amount: The aggregate of the above payments is Rs. 20,000 + Rs. 25,000 + Rs. 30,000 = Rs. 75,000.

In this case:

Threshold Consideration: The threshold for exemption from TDS under Section 194C is Rs. 30,000.
Aggregate Amount: The aggregate of payments made in the financial year is Rs. 75,000.

Since the aggregate amount of Rs. 75,000 does not exceed the threshold of Rs. 1 lakh, Company X is not required to deduct TDS on any of the payments made to Contractor Y. All the payments can be made without any TDS deduction.

Scenario Change:

Now, let’s consider that during the same financial year, Company X makes an additional payment to Contractor Y for a new project:

Fourth Payment: Rs. 40,000

Updated Calculation of Aggregate Amount: The aggregate of all payments is now Rs. 20,000 + Rs. 25,000 + Rs. 30,000 + Rs. 40,000 = Rs. 115,000.

In this case:

Threshold Consideration: The threshold for exemption from TDS under Section 194C is Rs. 30,000.
Updated Aggregate Amount: The aggregate of payments made in the financial year is now Rs. 115,000.

Since the updated aggregate amount of Rs. 115,000 exceeds the threshold of Rs. 1 lakh, Company X becomes liable for TDS under Section 194C. This means that Company X should deduct TDS from the payments made to Contractor Y according to the applicable rates before making the payments on whole of the amount of Rs.115000.

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1. Is a contract for sale covered under section 194C? No, according to section 194C, a contract for sale or manufacture of a product as per the buyer’s specifications is not considered “work.” Even for composite job work, the value of materials mentioned in the invoice should be excluded when calculating TDS.

2. If I make a payment to a contractor for personal use, is TDS applicable? No, if you are an individual or a Hindu Undivided Family (HUF) making a payment to a contractor for personal use, section 194C does not apply.

3. I am a transporter and have provided my PAN. Will TDS be deducted under section 194C? No, if you are a transporter who has furnished your PAN to the payer, section 194C does not apply. However, the payer must provide payment information to you within the specified form and deadline set by the income tax authority.

4. Does section 194C apply to NRIs (Non-Resident Indians)? No, section 194C is not applicable to NRIs. Both parties involved, the contractor and the payer, must be residents of India.

5. Is having a contract a requirement for the applicability of section 194C? Yes, a primary requirement for section 194C’s applicability is the existence of a contract between the two parties. Without a contract, whether in the main contract or as a subcontractor, TDS is not applicable under section 194C.

6. What is the purpose of section 194C? Section 194C aims to ensure that a certain portion of payments made to contractors is withheld as tax at source, preventing tax evasion and facilitating the government’s revenue collection process.

7. Can section 194C be applied to payments to foreign entities? No, section 194C specifically applies to payments made to resident contractors. Payments to foreign entities are subject to different tax withholding provisions.

8. How is TDS calculated under section 194C? To calculate TDS under section 194C, apply the relevant TDS rate (1% or 2%) to the payment made to the contractor. Consider the thresholds, exemptions, and contractor type when calculating the amount.

9. Are there any reporting requirements for payments under section 194C? Yes, the payer is required to provide information about payments made to the contractor within a specified form and deadline set by the income tax authority.

10. Can a contractor avoid TDS by providing a declaration of non-taxability? No, unlike certain other sections, providing a declaration of non-taxability does not exempt contractors from TDS under section 194C.

11. Is TDS applicable when making payments to subcontractors under section 194C? Yes, TDS is applicable even when payments are made to subcontractors under the provisions of section 194C. The same TDS rates and rules apply.