Oct 157 min read

Exploring Section 194C: TDS Payment to Contractors

Q: Q2. At what time is TDS deducted under Section 194C?

TDS under section 194C is required to be deducted at the time of amount credited to the contractor and at the time of payment in cash or cheque.

When it comes to taxation in India, one important aspect for businesses to be mindful of is the payment of Tax Deducted at Source (TDS). Section 194C of the Income Tax Act specifically deals with TDS on payments made to contractors or subcontractors for carrying out any work, including supply of labor. Understanding the intricacies of this section is crucial for businesses to remain compliant and avoid penalties. This blog aims to explore the key provisions of Section 194C, including who it applies to, the rates of deduction, exemptions, and how to ensure proper filing and compliance with TDS norms under this section.

Gaining a thorough understanding of Section 194C is vital for managing your tax responsibilities efficiently.

What is Section 194C?

Section 194C of the Income Tax Act mandates that any person responsible for paying a resident contractor for carrying out specific types of work—including the supply of labor—must deduct tax (TDS) on such payments. This section applies to payments made under a contract between the contractor and the contractee. The following entities are considered contractees under Section 194C:

Central Government or any State Government
Local authorities
Corporations established under a Central, State, or Provincial Act
Cooperative societies
Authorities in India involved in housing or city planning
Societies registered under the Society Registration Act of 1860
Trusts
Universities or deemed universities
Firms

What is the Meaning of ‘Work’ under Section 194C?

The term "work" in Section 194C refers to:

Advertising
Broadcasting and telecasting, including program production
Carriage of goods and passengers by any mode of transport other than railways
Catering services
Manufacturing or supplying products tailored to a customer’s needs, where materials are provided by the customer or their associates. However, this does not include supplying products where materials are purchased by the contractor, even if they adhere to customer specifications.

What is a Sub-contractor according to Section 194C?

Subcontractors are individuals or entities hired by the main contractor to complete a portion of the project. They enter into a specific agreement with the main contractor that outlines the scope of work and terms of payment.

Exemptions to TDS payments under Section 194C

TDS under Section 194C is not applicable under the following conditions:

No TDS is required if the payment for a single contract is Rs. 30,000 or less.
If the aggregate payment to a contractor during a financial year does not exceed Rs. 1,00,000, no TDS is required.
Payments made for personal purposes do not attract TDS.
No TDS applies to payments made to government contractors providing goods and services to the central or state government.
TDS does not apply to the purchase of goods or materials, as this falls under Section 194Q, where the TDS rate is 0.1% for payments exceeding Rs. 50 lakhs.
For claiming these exemptions, the contractor must provide a valid PAN. Forms 15H or 15G can be used where applicable to avoid TDS deductions.

Documents Required for the Deduction of TDS Under Section 194C

When making payments to resident contractors for their services, you'll need to have certain documents in place to ensure accurate TDS deductions. These documents typically include:

Contractor's PAN Card

This document is an important one. PAN details need to be verified before making any payment. If the PAN card is not available, the TDS rate jumps to 20%, so ensuring you have this information is vital.

Contract or Agreement (Optional)

This contract signifies simple things. It includes scope of work, payment terms, and other relevant information. A verbal agreement is also a good choice but documentation makes it easy to manage the process.

Invoice

This document includes the details about the amount to be paid to the contractor for a particular work. It should be clearly, and accurately issued by the contractor.

Challan

Challan is an official document used to report and deposit the deducted TDS amount to the government treasury. Although it's not directly required for the deduction process itself, filing Form 26Q is essential for fulfilling your tax obligations.

TDS Certificate

After deducting TDS from payments made to contractors, you're required to issue a TDS certificate (Form 16A). This certificate provides important details about the payment, the TDS deducted, and other relevant information. The contractor needs to file their income tax return.

When does TDS under Section 194C Need to be Deducted?

When making payments to resident contractors or subcontractors, the person responsible for the payment must deduct TDS at the earliest opportunity. This means the deduction should occur:

When the payment is credited to the contractor's account.
When the payment is made in cash.
When a cheque or other payment method is issued.

If the payment is first transferred to a suspense account in the payer's books, this is still considered a credit to the contractor's account, and TDS must be deducted.

TDS Rate

Sr. No.	Payment nature	Tds rate if PAN available	TDS Rates from 14.05.2020 to 31.03.2021	Tds rate if PAN is not available
1	Payment to resident individual or HUF	1%	0.75%	20%
2	Payment to a resident person other than any individual or HUF	2%	1.5%	20%
3	Payment to transporters	NIL	NIL	20%

Circumstances under which TDS/ Section 194C is not deductible

No tax is deducted under the following cases-

Where the amount paid for any contract is not beyond Rs. 30,000

When the amount aggregate of every sum is credited during the financial year. And the amount should be beyond Rs. 1 lakh

The individual will not deduct tax if the payment given to the contractor is for personal use

If a goods transport agency owns 10 or fewer vehicles, no TDS needs to be deducted from payments made to them for their services. However, the agency must provide their PAN and a declaration stating the number of vehicles they own to the person making the payment.

Penalties for Non-Compliance with Section 194C TDS rules

The payer is needed to file the TDS return every quarter. In form 26Q detailed information about TDS deducted, deposits etc. If you fail to comply with the section 194C provisions, then penalties and late fees are charged.

If you fail to deduct TDS or deposit the deducted amount on time, you'll face a late filing fee of Rs. 200 per day of delay. However, the maximum fee cannot exceed the total TDS amount.

Additionally, if you don't file the TDS return within the due date, you'll be subject to a penalty of at least Rs. 10,000, which can go as high as Rs. 1,00,000.

Conclusion

When businesses or individuals make payments to contractors for work or services, they are often required to deduct Tax Deducted at Source (TDS) under Section 194C of the Income Tax Act. This is a crucial tax obligation that helps the government collect income tax revenue.

FAQs

Q1. Is TDS deductible on sales promotion expenses?

Yes, it is deducted on sales promotion expenses. It can be done based on a contract or payment for professional services.

Q2. At what time is TDS deducted under Section 194C?

Tds under section 194C is required to be deducted at the time of amount credited to the contractor and at the time of payment in cash or cheque.

Q3. What is a Subcontractor as per Section 194C?

A subcontractor is a person who enters into a contract with a contractor to carry out a supply of labor according to the terms of the contract.

Q4. What is the logic behind TDS deduction?

TDS (Tax Deducted at Source) plays a crucial role in ensuring a steady stream of income for the government. By withholding taxes at the source of payment, TDS helps to track income more effectively and deter tax evasion. This mechanism simplifies the tax collection process, making it easier for both taxpayers and the government to manage their financial obligations.

Q5. What are the types of contracts under section 194C?

Section 194C covers various types of contracts. Like work contracts, advertising contracts, broadcasting and telecasting contracts, carriage of goods and passengers contracts, etc.

Q6. What is the time limit to file the TDS under Section 194C?

The time limit for filing TDS under Section 194C depends on the type of payment. TDS must be remitted on the same day the payment is made to the contractor or subcontractor. For payments credited in March, TDS must be remitted on or before April 30th.

Q7. How is TDS required to be deposited with the Central Government?

The person who deducts the tax from the payment made to the contractor deposits the tax with the central government. Through challan before the deadline specified. These deposits can be made at any RBI or SBI branches.

Q8. What are the extra charges or cess that may be added at the time of deduction of TDS?

There are no extra charges like education, or service tax applicable for TDS deduction under section 194C.

Q9. Is a contract for sale covered under section 194C?

No, it is not covered under section 194C. The provision clearly states that work does not include a contract for the sale of a product as per the buyer’s specifications. Even if the TDS amount calculated for composite job work is required to exclude the value of the materials indicated in the invoice.