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July 13, 2020

Know all about TDS on Payments to contractors and sub-contractors under section 194C

by Mahesh Mara in Income Tax

Know all about TDS on Payments to contractors and sub-contractors under section 194C

Tax deduction at source is a means of collecting tax on income, dividends or asset sales, by requiring the payer to deduct tax due before paying the balance to the payee. In India, under the Indian Income Tax Act of 1961, income tax must be deducted at source as per the provisions of the Income Tax Act, 1961. In this article we will discuss Tax deducted at source on interest other than securities. Section 194C deals with TDS on Payments to contractors and sub-contractors.

When does section 194C TDS on Payment to Contractors applies?

Section 194C provides for deduction of tax at source from the payment made to resident contractors and sub-contractors.

Any person responsible for paying any sum to a resident contractor for carrying out any work (including  supply of labour for  carrying out any work) in pursuance of a contract between the contractor and the Central Government, a State Government, local authority, statutory corporation, a company, co-operative society, any statutory authority dealing with housing accommodation, any society registered under the Societies Registration Act, 1860, any trust or any university or any firm or any Government of a foreign State or foreign enterprise or any association or body established outside India or an individual, HUF, AOP or BOI whose total sales, gross receipts or turnover from the business or profession carried on by him exceed Rs. 1 crore or 50 Lakhs respectively during the immediately preceding financial year must deduct tax at source at the prescribed rate from such.

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When does section 194C TDS on Payment to Contractors does not applies?

No deduction is required to be made from the 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  the business of plying, hiring or leasing goods carriages, if he furnishes his PAN to  the deductor.

In order to convey the true intent of law, it has been clarified that this relaxation from the requirement to deduct tax at source shall only be applicable to the payment in the nature of transport charges (whether paid by a person engaged in the business of transport or otherwise) made to a contractor, who fulfills the following three conditions cumulatively:

a. Is engaged in the business of plying, hiring or leasing goods carriages

b. has furnished a declaration to this effect along with his PAN

c. owns ten or less goods carriages at any time during the previous year

What are the manner and rate of deduction of TDS under section 194C?

A. Manner of deduction of TDS:

Tax has to be deducted at the time of payment of such sum or at the time of credit of such sum to the account of the contractor, whichever is earlier.

Where any such sum is credited to any account in the books of account of the person liable to pay such income, such crediting is deemed to be credit of such income to the account of the payee and the tax has to be deducted at source. The account to which such sum is credited may be called “Suspense account” or by any other name.

However, no tax has to be deducted at source in respect of payments made by individuals/ HUF to a contractor exclusively for personal purposes.

No deduction will be required to be made if the consideration for the contract does not exceed Rs. 30,000. However, to prevent the practice of composite contracts being split up into contracts valued at less than Rs. 30,000 to avoid tax deduction, it has been provided that tax will be required to be deducted at source where the amount credited or paid or likely to be credited or paid to a contractor or sub-contractor exceeds Rs. 30,000 in a single payment or Rs. 1,00,000 in the aggregate during a financial year.

Therefore, even if a single payment to a contractor does not exceed Rs. 30,000 TDS provisions under section 194C would be attracted where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid to the contractor during the financial year exceeds Rs. 1,00,000.

B. Rate of TDS:

The rate of TDS under section 194C on payments to contractors would be 1% where the payee is an individual or HUF and 2% in respect of other payees. The same rates of TDS would apply for both contractors and sub-contractors.

The applicable rates of TDS under section 194C are as follows –

PayeeTDS rate
Individual / HUF contractor/sub-contractor1%
Other than individual / HUF contractor/sub-contractor2%
Contractor in transport business (if PAN is furnished)Nil
Sub-contractor in transport business (if PAN is furnished)Nil

What do you mean by work under section 194C?

Work includes –

a) Advertising;

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

c) Carriage of goods or passengers by any mode of transport other than by railways;

d) Catering;

e) Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer.

However, “work” shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person, other than such customer, as such a contract is a contract for ‘sale’. However, this will not be applicable to a contract which does not entail manufacture or supply of an article or thing (e.g. a construction contract).

It may be noted that the term “work” would include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. In such a case, tax shall be deducted on the invoice value excluding the value of material purchased from such customer if such value is mentioned separately in the invoice. Where the material component has not been separately mentioned in the invoice, tax shall be deducted on the whole of the invoice value.

Understanding with examples:

XYZ Ltd. has made following payments on various dates in financial year 2019-20 to ABC Ltd. towards work done under different contracts:

Contract NumberDate of paymentAmount
1.5.5.201920,000
2.6.6.201915,000
3.8.8.201925,000
4.10.12.201925,000
5.29.01.202017,000

As per section 194C(5), tax has to be deducted at source where the amount credited or paid or likely to be credited or paid to a contractor or sub-contractor exceeds Rs. 30,000 in a single payment or Rs.1,00,000 in aggregate during the financial year.

Therefore, in the given case, even though the value of each individual contract does not exceed Rs. 30,000, the aggregate amount exceeds Rs. 1,00,000. Hence, TDS is required to be deducted at source on the whole amount of Rs. 1,02,000 from the last payment of Rs. 17,000 towards Contract No.5 on account of which the aggregate amount exceeded Rs. 1,00,000.

Case 2:

Keeping all the conditions same. State what would be the position if the value of the contract no. 5 is Rs. 14,000 only and there was no further contract during the year?

As per section 194C(5), tax has to be deducted at source where the amount credited or paid or likely to be credited or paid to a contractor or sub-contractor exceeds ` 30,000 in a single payment or ` 1,00,000 in aggregate during the financial year.

No tax deduction is to be made if the value of the last contract is Rs. 14,000 as the aggregate amount in such case would only be Rs. 99,000, which is below the aggregate monetary limit of Rs. 1,00,000.

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