Section 194C – TDS on Payment to Contractor

What is TDS?

TDS was implemented to raise the tax from the very source of profits. According to this definition, any person (deductor) who must make payment of a defined nature to any other person (deductee) shall deduct tax at source and deposit it with the central government. The deductee shall earn credit for such tax sum when filing income tax return on the basis of 26 AS or TDS certificate provided by the deductor.

Section 194C:

TDS u / s 194C takes account of contractors’ fees. A specified person * is hereby entitled to deduct tax from the sum paid by the contractor to conduct such work * *,in compliance with the contract between the specified person * and the contractor.

*Specified Person here includes:

• The Central Government or any State Government; or
• Any local authority; or
• Any established corporation under a Central, State or Provincial Act; or
• Any Company; or
• Any co-operative society; or
• Any authority, established in India by or under some statute, engaged either for the purpose of addressing and satisfying the need for housing, or for the purpose of planning, developing or improving cities, towns, and villages, or both;
• A 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
• Any trust; or

• 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
• Any Government of a foreign State or a foreign enterprise or any association or regulatory body established outside India; or
• A firm; or
• Any person, being an individual or a HUF or an association of people or a body of individuals, if such person,—

1. Do not fall under any of the preceding sub-clauses; and
2. Are liable accounts audit under clause (a) or (b) of section 44AB during the F.Y Immediately preceding the financial year in which the amount is added to the contractor’s account.

**Work here consists of the following:

(a) Advertising;

(b) Broadcasting and telecasting that involves programs production for such broadcasting or telecasting;

(c)  Goods or passengers carriage by any mode of transport other than by railways;

(d) Catering;

(e) Manufacturing or supplying a product according to the customer requirement by using material purchased from such customer,

But, it doesn’t involve those products used for which the material is purchased from another person and not the customer.

Here the term contract shall include sub-contract as well.

When does the liability to deduct TDS u/s 194C arise?

The liability to deduct TDS arises at the earlier of the following:

• The sum is credited to the account of the Payee or
• Payment is made whether in cash/cheque/any other mode

The rate at which TDS needs to be deducted u/s 194C:

Payee	Rate of TDS PAN Available	Rate of TDS If PAN Not Available
Individual/HUF	1%	20%
Any person other than Individual/HUF	2%	20%
Transporters	NIL	20%

TDS deduction threshold:

TDS deduction liability arises when- 

• The value of a single invoice or payment to a single contractor exceeds Rs.30,000 or
• The aggregate value of all invoices or payments made during a particular financial year exceeds Rs.1,00,000.

Section 194C Exceptions

There are some exceptions to this section where requirements apply if certain conditions are fulfilled

1. Payment to Contractor of Goods carriages

Where, at any point in the previous year, the contractor involved in the billing, recruiting or leasing of goods carriages owns less than or equivalent to 10 goods carriages, TDS will not be deducted as long as that contractor gives the payer(s) a declaration with his PAN.

Any case apart from the one mentioned, the TDS deduction will be as per original provisions.

2. Composite Contract

• Where materials are supplied by the government, the question is whether the deductibility shall be rendered, in the light of the terms of the contract and the actions of the parties concerned, concerning gross payment by the contractor or net payment, i.e. gross payment minus deductions, if any, based on materials supplied by the government.
• Where the contractor undertakes to construct a building or dam and has undertaken to supply the government or all of the materials required for the work at the specified amount, the deduction would be related to gross payment, without removing all changes about costs of materials.
• If the contractor has only undertaken to supply the work, ownership of the material supplied at any time by the government or by another particular entity, the sum charged to the contractor for the contract shall be only the amount paid for that work or services and shall not include, therefore, the expense of the material rendered by the government or by other entities.

Time Limit within which Tax is to be Deposited:

1. Where payment is made by or on the government’s behalf – the same day. 
2. Where the payment takes place in any case other than government
3. If the sum is paid in March – April 30th, or 
4. Before, April 30th – within seven days from the end of the month in which the deduction is made. 

Where the payment takes place in any case other than government If the sum is paid in March – April 30th, or before, April 30th – within seven days from the end of the month in which the deduction is made.

On making payment of TDS post the applicable due date, interest @ 1.5% per month or part of the month is levied. Hence, it is advisable to make the payment of the TDS amount on a timely basis.