A complete guide on Section 194C TDS – on payment to contractors

Introduction

Section 194C of the Income Tax Act deals with the tax deducted at source (TDS) that is required to be deducted from any payments made to a resident contractor or a subcontractor. Do not worry if you have no idea about Section 194C TDS, This article will provide all the information related to the purpose of section 194C for Contractors and Sub-contractors, and other related information on TDS under Section 194C of the Income Tax Act.

Meaning of Section 194C TDS (Tax Deducted at Source)

According to Section 194C of the Income Tax Act, any person making a payment to a resident person who is carrying out any “work” under the terms of the contract between specified person and the resident contractor is required to deduct TDS (Tax Deducted at Source).

The term specified person refers to the following:

• Any Trust
• Local Authority
• The State government or Central government
• Any company
• Any Firm
• University or Deemed university
• Any authority established in India by or under any law for the purpose of dealing with and satisfying housing accommodation needs, or for the purpose of planning, development, or improvement of cities, towns, and villages, or both.
• Any company
• Any corporation formed as a result of a Central, State, or Provisional Act
• Co-operative society
• Any society registered under the Society Registration Act, 1980, or any similar law in any part of India.

The term Work refers to the following:

• Broadcasting and telecasting services, including the production of such broadcasting or telecasting programmes.
• Advertising services.
• Transportation of goods and passengers by means other than railways.
• Catering services.
• Manufacturing and delivering products to customers using materials supplied by them.
• Provision of labor for a construction contract.

Note: The GST (Goods and Service Tax) component should not be subject to taxation.

Briefing on TDS to Sub-contractor

According to the provisions of the Income Tax Act, any person (whether a contractor or a Hindu Undivided Family):

• Accountable for any sum owed to any resident
• According to a contract with the subcontractor for carrying out, or supplying labour for carrying out, the whole or any part of the work undertaken by the contractor, or for supplying whether wholly or partly any labour which the contractor has agreed to supply, the contractor shall,
  • At the time of crediting such sum to the subcontractor’s account or at the time of payment thereof in cash, by cheque or draft, or by any other mode, whichever is earlier.
• Deduct 1% of the total as income tax on the income contained therein.

TDS Rate for Contractors under Section 194C of the Income Tax Act

• 1% where a payment is made or credit is extended to an individual or a HUF.
• 2% wherever the payment or credit is to be made to another entity.
• If PAN is not specified in the preceding cases, the TDS rate will be 20%.

Important Note: Surcharges, education Cess, and SHEC (Secondary and Higher Education Cess) will not be imposed on taxpayers. TDS should be deducted at the standard rate.

Section 194C TDS is not deductible under certain condition

• The person responsible for paying such sums will not deduct TDS under this section if the sum paid or credited in pursuance of any contract does not exceed INR 30,000.
• Alternatively, if the aggregate of such sums credited or paid or likely to be credited or paid during the fiscal year does not exceed INR 1,00,000.
• If the payment or amount credited to the contractor is for personal use, the individual or HUF (Hindu Undivided Family) may not deduct tax.
  • No individual or HUF shall be liable to deduct income tax on any sum credited or paid to the contractor’s account if such sum is credited or paid solely for the personal benefit of such individual or any member of HUF.
  • On furnishing his PAN, no deduction shall be made from any sum credited or paid or likely to be credited or paid to the account of a contractor during the previous year in the course of business of plying, hiring, or leasing goods carriages to the person paying or crediting such amount.

Due date for the Issue of TDS Certificate

TDS certificates in Form 16A must be issued quarterly for payments other than salary. According to Rule 31, anyone who is responsible for deducting tax from payments other than salary must issue a quarterly TDS certificate in Form 16A. The certificate is due on the following dates:

FAQs on Section 194C TDS – on payment to Contractors

1. Should 194C TDS be deducted on the gross or net amount including GST?

TDS should be deducted from the invoice amount, excluding all other taxes such as GST.

2. When does TDS apply to contractors?

If the payment to the contractor is less than INR 30,000, no TDS is required to be deducted. TDS must be deducted under Section 194C if the total of all such payments made or to be made during a fiscal year exceeds INR 1,000,000.

3. Is TDS required to be deducted under Section 194C if a payment is made to a non-resident contractor?

Only payments to resident contractors or subcontractors are covered by Section 194C. TDS on payments made to non-resident contractors will be governed by Section 195.