What is Section 194C?
Section 194C states that any person responsible for paying any sum to the resident contractor for carrying out any work (including the supply of labor), in pursuance of a contract between the contractor and the following:
- The Central Government or any State Government
- Any local authority
- Any corporation established by or under a Central, State or Provisional Act
- Any company
- Any co-operative society
- Any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the needs for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both
- Any society registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India
- Any trust
- Any university or deemed university
- Any firm
What is the meaning of work for the purpose of Section 194C?
The expression, “work” in this section would include-
- Broadcasting and telecasting including production of programs for such broadcasting or telecasting
- Carriage of goods and passengers by any mode of transportation, other than railways
- Manufacturing or supplying of a product according to the requirement or specification of a customer by using the materials purchased from such customer, But does not include manufacturing or supplying of a product according to the requirements or specifications of a customer by using the materials purchased from a person, other than such a customer.
What is a Sub-Contractor as per Section 194C?
A “sub-contractor” would mean any person:
- who enters into a contract with the contractor for carrying out, or
- for the supply of labor for carrying out the whole or part of the work undertaken by the contractor under a contract with any of the authorities or
- for the supply of, whether wholly or partly, any labor which the contractor has undertaken to supply in terms of his contract with any of the authorities mentioned under this section.
What is TDS to Sub-Contractor?
As per the provisions of Income Tax Act, any person (being a contractor and not being an individual or a Hindu Undivided Family):
- responsible for paying any sum to any resident
- in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labor for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labor which the contractor has undertaken to supply shall,
- at the time of credit of such sum to the account of the sub-contractor or
- at the time of payment thereof in cash or
- by the issue of a cheque or draft or by any other mode, whichever is earlier,
- deduct the amount equal to 1 % of the sum as income-tax on income comprised therein
Where is the Payment made to Sub-contractors, what Conditions must be Satisfied?
- Payment is made to a sub-contractor who is resident within the meaning of Section 6 of the Income Tax Act, 1961
- Payment is made by a resident contractor, not being an individual or a HUF
- Payment is made to carry out any work, including the supply of labor
- The amount of consideration of the contract in respect to which payment is made should not be less than Rs. 30,000
- The sum should be credited or paid by the contractor in respect of a contract undertaken by him with the specified bodies
When does TDS under Section 194C need to be deducted?
The person responsible for making payment to resident contractor/sub-contractor should deduct TDS,
- either at the time of crediting such sum to the account to the payee or
- at the time of payment thereof in cash or
- by an issue of a cheque or by any other mode, whichever is earlier.
Where any sum is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such amount, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Thus, the tax has to be deducted even if the amount payable to resident contractor/subcontractor is transferred to suspense account by the payer in his books.
What is the rate of TDS?
|S. 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:- No Surcharge, Education Cess, and SHEC shall be added. Hence, TDS shall be deductible at basic rates.
What are the Exceptions to TDS on Payment to Contractor?
1. Deduction of TDS in case of composite contract
(i) Where materials are supplied by the government, the question is whether deduction will be made with reference to gross payment to the contractor or the net payment, i.e., gross payment minus deductions, if any,
(ii) On account of materials supplied by the government, will have to be decided in the light of the terms of the particular contract and the conduct of parties thereto.
(iii) Where the contractor has undertaken to construct a building or a dam, and the government or other specified person has undertaken to supply all or any of the materials necessary for the work at the stipulated prices, the deduction will be related to the gross payment without excluding any adjustments on account of the cost of materials.
(iv) Where the contractor has undertaken only to provide the labour for the work, the ownership of the materials supplied remaining at all times with the government or another specified person, the sum payable to the contractor in respect of the contract will only be the amount paid for such labour or services and will, thus, not include the price of the materials supplied by the government or other specified persons.
Thus, the rate of TDS from payments made by the government or other specified persons to any contractor will be 2% or 1% of the gross payment or, as the case may be, the net payment, depending on the terms of the contract.
2. Deduction, when the party supplies materials to the contractor
(i) When materials are supplied no deduction is possible. Consequently, no TDS is required to be made. However, when payment is made either in cash or in kind to contractor/sub-contractor tax is required to be deducted.
Under what circumstances TDS u/s 194C is not deductible?
No tax is required to be deducted in the following cases:
- Where the sum paid or credited in pursuance of any contract does not exceed Rs. 30,000, or
- where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year does not exceed Rs. 1,00,000 the person responsible for paying such sums will not deduct TDS under this section
- Individual or HUF not to deduct tax if the payment or amount credited to the contractor is for personal use
(i) No individual or HUF shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for the personal purpose of such individual or any member of HUF
(ii) No deduction shall be made from any 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 business of plying, hiring or leasing goods carriages, on furnishing of his PAN, to the person paying or crediting such amount
Time Limit within which Tax is to Deposited
A. Where the payment is made by or on behalf of the Government – On the same day.
B. Where the payment is made in any other case than the government
(i) If the amount is credited in the month of March – On or before April 30th
(ii) In Other months – 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
In case of payments other than salary, TDS certificates are to be issued on the quarterly basis in Form No.16A. As per rule 31, every person responsible for deduction of tax from payments other than salary has to issue a quarterly TDS certificate in Form No. 16A. The certificate is to be issued by following 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|
As per CBDT Circular No. 1/2012, dated 9-4-2012, it is mandatory for all the deductors to issue TDS certificate in Form No. 16A by generating the certificate through TIN central system by downloading the certificate from the TIN website with a unique TDS certificate number. These provisions are applicable in respect of all sums deducted on or after 1-4-2012. The certificate so issued can be authenticated either by using the digital signature or manual signature.
TDS at a Lower Rate
According to Section 194C where the AO is satisfied that the total income of contractor or sub-contractor justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the AO shall, on application made by the contractor or sub-contractor in this behalf give to him such certificate as may be appropriate.
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