Section 194C Income Tax Act - TDS on Contractor Payments

1. Statutory corporations

1. Any local authority

1. Cooperative societies

1. Societies registered under the Societies Registration Act, 1980, or similar laws in India

1. Corporations established under the central act, the state act, or provincial act

1. Companies

1. Trusts

1. Foreign governments, enterprises, or associations outside India

1. Authorities constituted under Indian law for housing needs, urban planning, or development

1. Universities or deemed universities

1. Firms

1. Individuals, HUFs, AOPs, or BOIs with total sales exceeding Rs. 1 crore or Rs. 50 lakh in the previous financial year.

What is the Meaning of Work for the Purpose of Section 194C?

The term 'work' under Section 194C includes the following activities:

1. Broadcasting and telecasting including the production of programs foe such telecasting or broadcasting
2. Advertising

1. Catering services
2. Carriage of goods and passengers by any transportation, other than railways
3. Manufacturing or supplying a product according to a customer's requirement or specification using materials purchased from the customer or their associate (as defined in Section 40A (2)) but excludes manufacturing or supplying a product using materials purchased from someone other than the customer. 

What is a Subcontractor as per Section 194C

A 'sub-contractor' refers to any individual who:

1. Enters into a contract with a contractor to carry out work or

1. Provides labor for the execution of all or part of the work that the contractor has agreed to undertake under a contract with any of the specified authorities or

1. Supplies, whether fully or partially, any labour that the contractor is obligated to provide under their contract with any of the specified authorities mentioned in this section.

Conditions to be Satisfied:

1. Payment is made to a contractor or sub-contractor who qualifies as a resident under Section 6 of the Income Tax Act, 1961.

1. Payment is made by a specified person as outlined above.

1. Payment is made to carry out any work, including the supply of labour.

1. The contract's consideration amount should be at least Rs. 30,000.

1. The payment or credit should be made by the contractor concerning a contract they have undertaken with the specified bodies.

When Should TDS under Section 194C Be Deducted

TDS under Section 194C must be deducted by the person responsible for making payments to a resident contractor or sub-contractor under the following conditions:

1. At the time of crediting the sum to the payee's account.

1. At the time of payment, whether in cash, by cheque, or through any other mode, whichever occurs first.

1. If the sum is credited to any account, including a 'Suspense account' or any other name in the payer's books, it will be considered as credited to the payee's account. Therefore, TDS must still be deducted, even if the payable amount is transferred to the suspense account in the payer's records.

What is the Rate of TDS?

1. Payment or Credit to Resident Individual or HUF
   1. With PAN: 1% 

1. 14 May 2020 to 31 March 2021: 0.75%
   1.  Without PAN: 20%

1. Payment or Credit to Any Resident Person other than Individual or HUF
   1.  With PAN: 2%

1. 14 May 2020 to 31 March 2021: 1.5%
   1. Without PAN: 20% 

1. Payment or Credit to Transporters
   1.  With PAN: NIL

1. 14 May 2020 to 31 March 2021: NIL
   1. Without PAN: 20% 

Note: No surcharge, education fee, or SHEC will be added, so TDS will be deducted at basic rates. 

Documents Required for TDS Deduction Under Section 194C

For deducting TDS under Section 194C, which pertains to payments made to resident contractors for work, the following documents are essential:

1. Contractor's PAN Card: Essential for verifying the contractor's PAN details before making payments. If the PAN is not provided, the TDS rate will increase to 20%, making it crucial to obtain this information.

1. Contract or Agreement (Optional): While not mandatory, a written contract simplifies the process by outlining the scope of work, payment terms, and other details. Even though verbal agreements can also trigger TDS liability, documentation helps in managing the process effectively.

1. Invoice: This document specifies the amount paid for the work completed. It should be clear, accurate, and issued by the contractor.

1. Challan: Used for depositing the deducted TDS amount to the government treasury. While not required for the deduction itself, it is crucial for fulfilling tax compliance obligations.

1. TDS Certificate: After deducting TDS, issue a TDS certificate (Form 16A) to the contractor. This certificate provides details of the payment made, TDS deducted, and other pertinent information.

How to Calculate TDS Under Section 194C

To accurately calculate TDS under Section 194C, follow these guidelines:

1. Exclude Material Costs: Focus on the service component of the invoice, excluding any amounts related to the purchase or sale of materials or goods. TDS should be calculated on the service portion only.

1. Composite Contracts: For contracts involving both goods and services, deduct TDS based on the invoice value minus the cost of goods. Ensure the invoice specifies the value of goods. If this information is not provided, TDS should be deducted from the total invoice value.

1. Commission and Brokerage: Commission and brokerage on fixed deposits are not subject to Section 194C.

1. Clearing and Forwarding Agents: Payments made to clearing and forwarding agents for the carriage of goods fall under Section 194C.

1. Travel Payments: Payments to airlines or travel agents for regular ticket purchases are excluded. However, if the travel involves chartering a bus, aircraft, or other modes of transport, Section 194C applies.

1. Electrician Services: Payments for electrician services provided by contractors are covered under Section 194C.

Constitution Of ‘Work’ As Per Section 194C

Under Section 194C of the Income Tax Act, the term ‘work’ constitutes any of the following:

1. Any work related to the manufacture or supply of any good or product in accordance to the specifications and needs of a client, wherein the manufacture of the product takes place by utilising materials bought from the client in question and not from any other person.
2. Any work related to advertising
3. Any work related to catering
4. Any work related to the production, telecast or broadcast of any programs for the same purpose
5. Any work related to the transport of goods, products and passengers through any means of transport with the exception of transport via rail.

Definition Of Contractor And Subcontractor As Per Section 194C

Under Section 194C of the Income Tax Act, a contractor and a subcontractor may be defined as follows:

1. A contractor is referred to as any person who agrees to be party to a contract involving any of the following entities for the purpose of conducting any form of work, which also includes supplying manpower to conduct such work:
   1. The Central or State Government
   2. A Corporation
   3. A Company
   4. A Localised Authority
   5. A Co-operative Society
2. A Subcontractor is referred to as any person who agrees to be party to a contract involving a contractor mentioned above, for the purpose of the following:
   1. Conducting either all or part of the work, which the contractor has agreed to undertake
   2. Supplying manpower for all or part of the work undertaken by the contractor

Application Of Section 194C

The provisions outlined under Section 194C of the Income Tax Act are only applicable to either

1. Works Contracts
2. Labour Contracts

However, it is not applicable to any contract that deals with the sale of any goods or solely the supply of any goods or products.

TDA deducted as per Section 194C is applicable only under the conditions mentioned below:

1. The contractor should be an Indian resident, as per the guidelines stated in Section 6 of the Income Tax Act
2. Any payment that has been made to the contractor must be carried out by any person as mentioned under Section 194C
3. The payment made must be done for the purpose of conducting any form of work, which may also include the supply of manpower for the purpose of conducting any kind of work.
4. The payment in question must be carried out in accordance with the stipulations mentioned in the contract, to which both the payer as well as the contractor are privy to. The contract in question may be in either oral form or written form.
5. The amount of payment made between the two parties should not be in excess of Rs 30,000 at any given point in time.
6. If the total of all payment or credit amounts given to the contractor by the payer is found to be in excess of Rs 75,000 over the course of the financial year, then the payer will be required to ensure that deduction of TDS takes place from the total payment amount.
7. If the total of all advance payments made to the contractor is found to be in excess of Rs 30,000, then the payer will be required to ensure that deduction of TDS takes place from the total payment amount.
8. If the total of all payments made to the contractor was initially found to not be in excess of Rs 30,000, but was later found to surpass this amount, then the payer will be required to ensure that deduction of TDS takes place from the total payment amount in accordance with previous payments made as well.

Non-Applicability Of Section 194C

The provisions outlined under Section 194C will not be applicable under the following conditions:

1. If, through the carrying on of any type of business, the payer in question has accumulated a total turnover that does not exceed the stipulated limit of Rs 1 crore over the course of the financial year that was completed prior to the the financial year during which the payment was made to the contractor.
2. If, through the carrying on of any type of profession, the payer in question has accumulated a total turnover that does not exceed the stipulated limit of Rs 25 lakhs over the course of the financial year that was completed prior to the the financial year during which the payment was made to the contractor.
3. If the payment made by an individual or Hindu Undivided Family (HUF) was diverted towards any expenses of a personal nature that have been incurred by the individual or HUF.

Deduction Of TDS As Per Section 194C

As per the provisions of Section 194C of the Income Tax Act, deduction of TDS will be made by the payer at any of the following times:

1. When the payment is made to the contractor or the subcontractor when the amount has been credited to either of their bank accounts.
2. When the payment made to the contractor or the subcontractor is in the form of cash.
3. When the payment made to the contractor or the subcontractor is in the form of a cheque.
4. When the payment made to the contractor or the subcontractor takes place through any other payment method.
5. When the payer transfers or credits any amount meant for a contractor or subcontractor to a ‘Suspense Account’ or any other account.

Rate of TDS As Per Section 194C

As per the provisions of Section 194C of the Income Tax Act, the rate of TDS that is applicable depends on certain conditions mentioned below:

If the payee or contractor possesses PAN:

1. TDS of 1% of the amount will be deducted from any payments or credits made to resident individuals or Hindu Undivided Families (HUFs).
2. TDS of 2% of the amount will be deducted from any payments or credits made to any party other than resident individuals or Hindu Undivided Families (HUFs).
3. No TDS will be deducted from any payments or credits made to any transporters.

If the payee or contractor does not possess PAN:

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

Where is the Payment made to Sub-contractors, what Conditions should be Satisfied?

1. A subcontractor is paid who is deemed to be a resident under Section 6 of the Income Tax Act, 1961.
2. Payment is done by a resident contractor, not being a Hindu Undivided Family (HUF) or an individual.
3. To complete any task, including the provision of labour, payment is provided.

1. The contractor must either credit or pay the amount in relation to a contract he agreed into with the designated bodies.
2. The contract's consideration must not be less than Rs.30,000 in order for payment to be made.

Time Limit as Per Section 194C With Regards to Deposit of Tax

Section 194C of the Income Tax Act, stipulates that tax must be deposited within a specified time frame, depending on who the payer is. The time limits specified are as follows:

1. If the payment is made by the government or on the government’s behalf then the tax must be deposited on the same day the payment is made
2. If the payment is made by any other non-government entity then:
   1. The tax must be deposited on the 30th of April or any time prior to this date if the amount was paid to the contractor during the month of March
   2. If the amount was paid to the contractor during any month other than March, then the tax must be deposited within a time frame of seven days after the end of that particular month during which the deduction took place

Exemptions Under Section 194C

Certain circumstances exist under which the deduction of TDS under Section 194C of the Income Tax Act will not be applicable. These are as follows:

1. If the amount paid to the contractor or subcontractor in accordance to the stipulations of the contract is less than Rs 30,000 at any given time, then the payer will not be liable to deduct TDS
2. If the total amount paid to the contractor or subcontractor in accordance to the stipulations of the contract is less than Rs 75,000 over the course of the financial year, then the payer will not be liable to deduct TDS
3. If the amount paid to the contractor or subcontractor was made prior to the 1st of June 1972
4. If the amount was paid prior to the 1st of June 1973 in accordance to the stipulations of the contract entered into by either
   1. A contractor and a co-operative society
   2. A contractor and a subcontractor with regards to work conducted by the contractor for the co-operative society.

What are the Exceptions to TDS on Payment to Contractors?

Deduction of TDS in case of composite contract: 

1. When the government provides materials, it is unclear whether the contractor will be paid in full or in net payment, which is the sum of the gross payment and any deductions.
2. Due to information provided by the government, a decision will need to be made in light of the terms of the specific contract and the actions of the parties thereto.

1. When the government or another designated party has agreed to supply all or a portion of the materials required for the work at the agreed-upon prices, and the contractor has agreed to build a building or a dam, the deduction will be applied to the gross payment without excluding any adjustments on account of the cost of materials. 
2. The sum payable to the contractor in relation to the contract will only be the amount paid for such labour or services and will, therefore, not include the price of the materials supplied by the government or other specified persons when the contractor has only agreed to provide labour for the work and the ownership of the materials supplied remains at all times with the government or another specified person.

Circumstances Where TDS Under Section 194C Is Not Required

1. No TDS is required if the payment or credit under any contract does not exceed Rs. 30,000.

1. TDS is not necessary if the total amount credited or paid to the contractor during the financial year does not exceed Rs. 1,00,000.

1. Individuals or HUFs are exempt from deducting tax if the payment to the contractor is for personal use.

1. TDS does not need to be deducted from payments made to contractors engaged in plying, hiring, or leasing goods carriages who own ten or fewer vehicles during the previous year, provided they submit their PAN and a declaration to this effect.