Section 194C: TDS on Payment to the Contractor

Section 194C of the Income Tax Act deals with the TDS (Tax Deducted at Source) that is to be mandatorily deducted from all kinds of payments that have been made to any individual, who is a resident contractor or a subcontractor. Basically, it comprehends all the individuals who have paid a resident contractor or subcontractor to carry out any type of work. According to this section, when a payment is made to the contractor, TDS should be deducted by the individual or party who has made the payment.

Person according to Section 194C

According to Section 194C of the Income Tax Act, a ‘person’ can be explained as someone who enters into a contract with the contractor, to complete work in exchange for payment. A person can be any entity such as a firm, company, university, local authorised body, corporation, registered society, state government or central government, an authority incorporated for the purpose of fulfilling housing needs, etc. 

Work according to Section 194C

According to Section 194C of the Income Tax Act, the term ‘work’ can constitute any of the following--

1. Any kind of work related to advertising

2. Any kind of work related to catering

3. Any kind of work related to manufacturing and supply of any goods and services in accordance to the specifications and requirements of a client, wherein the manufacture of these goods takes place by utilising materials bought from the client itself and not from any other individual

4. Any kind of work related to the production, broadcast or telecast of any programs for the same purpose

5. Any kind of work related to the transport of goods, services and passengers through any means of transport with the exception of transport through railways

Contractor and Subcontractor 

According to Section 194C of the Income Tax Act, a contractor and a subcontractor can be defined as-

A contractor is generally referred to as any individual who agrees to be a party to a contract involving any of the entities such as central government or state government, corporation, company, localized authority, co-operative society for the purpose of conducting any kind of work, which also includes supplying the manpower to conduct that work.

A subcontractor is generally referred to as any individual who agrees to be a party to the contract involving the contractor mentioned above, for the purpose of conducting complete work or part of the work, which the contractor has agreed to undertake and providing manpower for complete work or part of the work undertaken by the contractor. 

Deduction of TDS 

According to the provisions of Section 194C of the Income Tax Act, deduction of the TDS will be made by the payer by the following-

1. When the payment is made to the contractor or the subcontractor in the form of liquid cash

2. When the payment is made to the contractor or the subcontractor in the form of a cheque

3. When the payment is made to the contractor or the subcontractor through credit to either of their bank accounts

4. When the payer credits or transfers any amount which is meant for the contractor or the subcontractor to a suspense account or any other account

5. When the payment to the contractor or the subcontractor happens through any other payment method

Rate of TDS 

According to the provisions of Section 194C of the Income Tax Act, the rate of TDS that is applicable depends on some conditions as mentioned below-

If the contractor or payee has PAN-

1. TDS of 1% of the amount will be deducted from all credits and payments made to HUF (Hindu Undivided Families) or resident individuals

2. TDS of 2% of the amount will be deducted from all credits and payments made to any party other than HUF (Hindu Undivided Families) or resident individuals

3. No TDS will be deducted from all credits and payments made to any transporters

If the contractor or payee does not have PAN-

1. TDS of 20% of the amount will be deducted from all credits and payments made to HUF (Hindu Undivided Families) or resident individuals

2. TDS of 20% of the amount will be deducted from all credits and payments made to any party other than HUF (Hindu Undivided Families) or resident individuals

3. TDS of 20% will be deducted from all credits and payments made to any transporters

Time Limit for depositing the tax

According to Section 194C of the Income Tax Act, the tax should be deposited within a prescribed time frame, depending on the payer. The time limits specifications are-

If the payment is made by the government or on behalf of the government then the tax should be deposited on the same day when the payment is made.

If the payment is not made by any government entity then-

1. The tax should be deposited on April 30th or any time earlier to this date if the amount was paid to the contractor in the month of March

2. If the amount was paid to the contractor in any month other than March, then the tax should be deposited within a time period of seven days after the end of that specific month during which the deduction has taken place

Exemptions 

In some situations deduction of TDS under Section 194C of the Income Tax Act will not be applicable such as-

1. If the amount paid to the contractor or the subcontractor in accordance with the stipulations of the contract does not exceed Rs.30,000 at any given time, then the payer is not liable to deduct TDS

2. If the amount paid to the contractor or the subcontractor was made before June 1st, 1972

3. If the total amount paid to the contractor or the subcontractor in accordance with the stipulations of the contract is not more than Rs.75,000 over the course of the financial year, then the payer is not liable to deduct TDS

4. If the amount was made before June 1st, 1973 in accordance with the stipulations of the contract entered into by either-

1. The contractor and the co-operative society

2. The contractor and the subcontractor with regards to work done by the contractor for the co-operative society

Non-Applicability 

The provisions mentioned in Section 194C will not be applicable in the following situations-

1. By carrying on of any kind of business, the payer has amassed a total turnover that is not more than the stipulated limit of Rs. One crore over the course of the financial year that was completed before the financial year during which the payment was to be made to the contractor

2. By carrying on of any kind of profession, the payer has amassed a total turnover that is not more than the stipulated limit of Rs.25 lakhs over the course of the financial year that was completed before the financial year during which the payment was to be made to the contractor

3. If the payment made by HUF (Hindu Undivided Family) or a person, who was diverted towards any expenses of a personal nature that have been sustained by the HUF or person.

Application of Section 194C

The provisions mentioned in Section 194C of the Income Tax Act are applicable only to the works contracts or labour contracts.

However, it is not applicable to all the contracts that deal with the sales of goods and services or solely on the supply of goods and services.

TDA deducted according to Section 194C is applicable only under the following conditions-

1. The contractor should be a resident of India, according to the guidelines mentioned in Section 6 of the Income Tax Act

2. Any kind of payment made to the contractor should be carried out by any individual as mentioned in Section 194C

3. The payment made should be done for the purpose of conducting any kind of work, which can also include the supply of manpower for the sake of conducting any type of work

4. The payment in question should be carried out in accordance with the stipulations of the contract, to which both the payer and the contractor are privy to. The contract in question may be in either written form or oral form

5. The amount of payment made between both the parties should not be more than Rs.30,000 at any given point of time

6. If the total of all the payment or the credit amounts are given to the contractor by the payer is found to be more than Rs.75,000 over the course of the financial year, then the payer should ensure that deduction of TDS has taken place from the total payment amount

7. If the total of all the advance payments made to the contractor is found to be more than Rs.30,000, then the payer should ensure that the deduction of TDS has taken place from the total payment amount

8. If the total of all payments made to the contractor is found to be not more than Rs.30,000 in starting, but afterwards if it surpasses this amount, then the payer should ensure that deduction of TDS has taken place from the total payment amount in accordance with the previous payments which are made