Section 194C of Income Tax Act: Section 194C is a provision in the Indian Income Tax Act that requires a person making payment to a contractor or subcontractor for work-related services to deduct tax at source. In simpler terms, if you pay a contractor for their services, you need to deduct a portion of the payment as tax and pay it to the government.
What is Section 194C?
Section 194C is a part of the Indian Income Tax Act that says if you pay money to a contractor or subcontractor for work-related services, you must withhold a certain percentage of that payment as tax and give it to the government.
Section 194C of the Indian Income Tax Act states that if a person is responsible for paying money to a resident contractor for work done (including the supply of labor) as part of a contract then tax must be deducted at source with are as follows:
- the Central Government,
- State Government,
- local authority,
- corporation,
- company,
- co-operative society,
- housing or development authority,
- registered society,
- trust,
- university or deemed university,
- or a firm.
What is the meaning of work for the purpose of Section 194C?
According to Section 194C of the Indian Income Tax Act, the term “work” includes various activities such as
- advertising,
- broadcasting,
- telecasting (including production of programs),
- transportation of goods and passengers (except by railways),
- catering, and
- manufacturing or supplying products as per customer specifications using materials purchased from the customer or their associate. However, it does not include manufacturing or supplying products using materials purchased from someone other than the customer.
What is a Sub-Contractor as per Section 194C?
As per Section 194C of the Indian Income Tax Act, a “sub-contractor” refers to
- a person who enters into a contract with the contractor to carry out some or all of the work agreed to by the main contractor,
- or supplies labor to carry out all or part of the work that the main contractor agreed to do for any of the authorities mentioned in this section.
- It also includes someone who supplies some or all of the labor that the main contractor has agreed to provide under their contract with the authorities.
What is TDS to Sub-Contractor?
Under the Indian Income Tax Act, if a person is a contractor and is not an individual or a Hindu Undivided Family, they must comply with certain provisions.
- If a person (who is a contractor and not an individual or a Hindu Undivided Family) is responsible for paying money to a resident as part of a contract with a sub-contractor,
- for either carrying out or supplying labor to carry out all or part of the work that the main contractor agreed to do,
- or for supplying some or all of the labor that the main contractor agreed to provide, they must follow certain provisions of the Income Tax Act.
According to the Indian Income Tax Act, the provisions that apply to a person responsible for paying any amount to a resident contractor for work done by a sub-contractor come into effect when the amount is credited to the sub-contractor’s account.
The provisions under the Indian Income Tax Act that apply to a person responsible for paying any amount to a resident contractor for work done by a sub-contractor also come into effect when the payment is made in cash.
Under the Indian Income Tax Act, a person responsible for paying any amount to a resident contractor for work done by a sub-contractor must deduct 1% of the sum as income-tax on the income included in the payment.
Where is the Payment made to Sub-contractors, what Conditions must be Satisfied?
As per Section 194C of the Indian Income Tax Act, if payment is made to a sub-contractor who is a resident as defined under Section 6 of the Income Tax Act, 1961, then the provisions of tax deduction at source will apply.
Under Section 194C of the Indian Income Tax Act, if the payment is made by a resident contractor who is not an individual or a Hindu Undivided Family (HUF), then the provisions for tax deduction at source will apply.
As per Section 194C of the Indian Income Tax Act, if the payment is made to carry out any work, including the supply of labor, then the provisions for tax deduction at source will apply.
According to Section 194C of the Indian Income Tax Act, the provisions for tax deduction at source will apply if the amount of consideration of the contract, in respect of which payment is made, is not less than Rs. 30,000.
Under Section 194C of the Indian Income Tax Act, the sum should be credited or paid by the contractor to a sub-contractor in respect of a contract undertaken by him with the specified bodies, such as the Central Government, State Government, local authority, corporation established by Central, State or Provisional Act, and other entities mentioned in the section.
When does TDS under Section 194C need to be deducted?
Under the Indian Income Tax Act, the provisions for a person responsible for paying any amount to a resident contractor for work done by a sub-contractor come into effect at the earlier of two events: either when the amount is credited to the sub-contractor’s account, or when the payment is made through a cheque, draft, or any other mode.
What is the rate of TDS?
| Sl. No | Nature of Payment | TDS Rate if PAN available | TDS Rate if PAN not available |
|---|---|---|---|
| 1 | Payment / Credit to resident individual or HUF | 1% | 20% |
| 2 | Payment/Credit to any resident person other than individual / HUF | 2% | 20% |
| 3 | Payment/ credit to Transporters | Nil | 20% |
Note:- NoSurcharge, Education Cess, andSHECshall be added. Hence, TDS shall be deductible at basic rates.
What are the Exceptions to TDS on Payment to Contractor?
Deduction of TDS in case of composite contract
When the government supplies materials, the question is whether the deduction will be based on the total payment to the contractor or the payment after deductions have been made.
The decision regarding the impact of government-supplied materials on a contract will depend on the specific terms of the contract and how both parties have acted in accordance with it.
If the contractor has agreed to construct a building or dam, and the government or another specified party has agreed to provide some or all of the necessary materials at a specified price, then deductions will be based on the gross payment without excluding any adjustments for the cost of materials.
If the contractor has only agreed to provide labor for the project while the materials are owned by the government or another party, the payment to the contractor will only include the labor or service provided and not the cost of the materials. As a result, the rate of TDS for payments to the contractor will be either 2% or 1% of the total payment, depending on the terms of the contract.
Deduction, when the party supplies materials to the contractor
- If the government provides materials, no deduction can be made, so no Tax Deducted at Source (TDS) is necessary. But if payment is given to a contractor or subcontractor in cash or kind, then tax must be deducted.
Under what circumstances TDS u/s 194C is not deductible?
Tax deduction is not necessary in the following scenarios:
- Tax deduction is not required when the amount paid or credited under a contract is less than Rs. 30,000.
- If the total amount of payments made or to be made in a financial year does not exceed Rs. 1,00,000, then the person responsible for the payments does not need to deduct TDS under this section.
- If an individual or Hindu Undivided Family (HUF) makes a payment or credits an amount to a contractor for personal use, they are not required to deduct tax.
- If a contractor provides their Permanent Account Number (PAN) to the person making a payment or credit for the business of plying, hiring, or leasing goods carriages, then no tax deduction is necessary from any amount credited or paid or likely to be credited or paid during the previous year to the contractor’s account.
Specific time limit for depositing tax.
- If the payment is made by or on behalf of the government, the tax must be deposited on the same day.
- If the payment is made in a case other than the government, the tax must be deposited within a specific time limit.
- If the amount is credited in March, the tax must be deposited on or before April 30th.
- For amounts credited in months other than March, the tax must be deposited within 7 days from the end of the month in which the deduction is made.
Note: The payer is the person responsible for TDS.
Issue of TDS certificate
When it comes to payments other than salary, TDS certificates must be issued quarterly in Form No.16A. According to Rule 31, the person responsible for deducting tax from these payments must issue the certificate by specific dates:
| Quarter | Due date for Non-Government deductor | Due date for Government deductor |
|---|---|---|
| April to June | 30th July | 15th August |
| July to September | 30th October | 15th November |
| October to December | 30th January | 15th February |
| January to March | 30th May | 30th May |
According to CBDT Circular No. 1/2012, dated 9-4-2012, all deductors must generate TDS certificates in Form No. 16A through the TIN central system by downloading the certificate from the TIN website with a unique TDS certificate number. These requirements apply to all sums deducted on or after 1-4-2012. The TDS certificate must be authenticated with either a digital or manual signature.
TDS at a Lower Rate
Under Section 194C, if the Assessing Officer (AO) determines that the total income of the contractor or sub-contractor justifies a lower rate of deduction or no deduction of income-tax, the AO may provide the appropriate certificate upon request by the contractor or sub-contractor. The contractor or sub-contractor can then provide the certificate to the deductor to indicate the lower or nil TDS rate.
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Frequently Asked Questions
What is Section 194C?
Section 194C prescribes the provisions for TDS applicable to payments made to a resident contractor for work carried out between the resident contractor and a “specified person” such as the central or state government, a local authority, a company, etc.
When is TDS applicable to contractors?
If the payment made to a contractor is less than or equal to Rs. 30,000, then no TDS is required to be deducted. However, if the total amount of such payments made or to be made during a financial year exceeds Rs. 1,00,000, then TDS shall be deducted as per the provisions of Section 194C.
What is the rate of TDS under Section 194C- TDS on contractors?
When payment is made to an individual or HUF, the payer is required to deduct TDS at the rate of 1%. In case the payment is made to any other person, the TDS is required to be deducted at the rate of 2%, as per Section 194C of the Income Tax Act.
At what time is TDS deducted under Section 194C?
Under Section 194C, TDS must be deducted at the earlier of the following dates:
1. At the time of crediting the sum to the contractor’s account, or
2. At the time of payment in cash, by cheque, draft, or any other mode.
Is it mandatory to have a written contract to attract TDS u/s 194C?
A written contract is not necessary for this section. The deduction of TDS is required, even if the agreement was made verbally.