written by Khatabook | August 16, 2021

Guide On TDS Payment To Contractor (Section 194C)

TDS stands for tax deduction at source; TDS is a form of income tax deducted from money received in the form of rent, salary, commission, interest, and so on. TDS is needed to be deducted from any amount paid to contractors or subcontractors under Section 194CContinue reading to learn more about TDS on contractor, Section 194c, including the 194c limit, TDS rates, and more.

What is Section 194C?

According to Section 194C, a person is responsible for paying an amount to a resident contractor to complete any work provided to them. The terms of a contract under Section 194C are applicable between a contractor and the following parties:

  • The co-operative society
  • The State Government and Central Government
  • The local authority
  • The company
  • A corporation created by or under a federal, state, or provisional law.
  • A Trust
  • Any authority established in India under any law to engage with and meet housing needs, or for planning, development, or improvement of Villages, cities, or towns, 
  • The university or deemed university
  • The firm
  • Any society registered in any part of India under the Society Registration Act 1980 or any similar law to the Act.

What does "work" mean in the context of Section 194C?

The following are examples of what is meant by "work:"

  • Advertising
  • Telecasting and Broadcasting, as well as programme production for the same
  • Transportation of goods and persons by any means other than railways
  • Catering
  • Producing or supplying a product in accordance with a customer's request or specification
  • Utilising materials obtained, however, does not apply when the material is acquired from someone other than the consumer.

What is a TDS for contractors?

There are two types TDS on payment to a contractor that is indicated in this 194C section:

  • If the payment is made to a single individual - 1%
  • In all other circumstances - 2%.

In both circumstances, if the contractor doesn't have a PAN card, the TDS will be increased to 20%.

List of exceptions, i.e., situations in which TDS is not to be deducted under section 194C:

  • A single contract should not exceed Rs 30,000 in terms of payment to the contractor.
  • The resident individual must give the sum to the contractor for work done for personal use.

What does Section 194C define as a subcontractor?

Any of the following would be considered a "subcontractor:"

  • A person who signs a contract with a contractor to carry out the work for the provision of labour to complete the entire or a portion of the job under an agreement with the authorities. 
  • For the supply of any labour that the contractor has agreed to provide, in whole or in part, under the contract terms with any of the authorities listed in this section.

Also Read: Section 194I - TDS On Rent

What requirements must be met when paying contractors?

The below conditions must be satisfied while making the payment to the contractor:

  • Payment is made to a resident subcontractor as defined by Section 6 of the Income Tax Act of 1961.
  • Payment is provided for the completion of any work, including the provision of labour.
  • A resident contractor, rather than an individual, is liable for the payment.
  • The amount of the contract's consideration for which money is paid should be a minimum of Rs 30,000.
  • The contractor should pay the amount for a contract he has entered into with the listed bodies.

When do you have to deduct TDS under Section 194C?

In the following instances, the person in charge of paying the resident contractor should deduct TDS: 

  1. At the moment of crediting a sum of money to the payee's account or at the time of cash payment.
  2. By issuing a cheque or by any other means, whichever comes first.
  3. When a sum is credited to any account, whether it is referred to as a "Suspense account" or referred to by another name, the requirements of this section will apply if such crediting is regarded to be the credit of income to the payee's account. 
  4. As a result, even if the amount payable to the contractor is deposited to the suspense account in the payer's books, the tax must be deducted.

Exceptions to TDS on Contractor Payments

  • When the government provides materials, the concern is that the deduction will be based on the gross payment or the net payment. Because of government-supplied materials, the outcome will have to be determined based on the conditions of the specific contract and the parties' behaviour.
  • In a situation where a contractor has agreed to construct a building and the government or a third party has agreed to supply all or some of the materials required for the job at the agreed-upon rates, the deduction shall be made by the resident individual based on the gross payment, minus any modifications for material costs.
  • When the contractor has agreed to provide labour, however, the materials are provided by the contracting party. 
  • The amount owed to the contractor under the contract will only be the amount paid for providing services and will therefore exclude the cost of the supplies delivered.

What is the deadline for 194C of Income Tax deposit?

The deadline is the same day if the payment is made by or on behalf of the government or by someone other than the government:

  1. If the money is credited in March, it must be deposited by April 30th.
  2. In all other months, the deduction must be made within 7 days before the end of the month.

TDS certificate issues

TDS certificates in Form No.16A must be given every quarter for payments other than wages. Rule 31 requires that anybody responsible for deducting tax from non-salary payments submit a quarterly TDS certificate in Form No. 16A. The following dates are required for the certificate to be issued:

Quarter

Non-Government Deductor Due Date

Government Deductor Due Date

April - June

July 30th

August 15th

July - September

October 30th

November 15th

October - December

January 30th

February 15th

January - March

May 30th

May 30th

According to CBDT Circular No. 1/2012, issued 9-4-2012, all deductors must issue TDS certificates in Form No. 16A. It would be provided by downloading the certificate from the TIN portal with a TDS certificate number or by producing the certificate using the TIN central system. These provisions apply to all deductions made on or after January 1, 2012. A digital signature or a manual signature can be used to authenticate the certificate that has been issued.

The Central Board of Direct Taxation has made several crucial clarifications.

  • Section 194C does not cover FD commissions or brokerage.
  • Section 194C applies to payments paid to an electrician or to a subcontractor for delivering electrician services.
  • Section 194C also applies to payments made to couriers.
  • Section 194C exempts payments made to a travel company or an airline to purchase a ticket from TDS.
  • TDS is subject to be deducted as per section 194C if the plane, bus, or other means is chartered.
  • TDS applies to payments made to clearing and forwarding agencies for the conveyance of goods under section 194C.

Reduced TDS

The Assessing Officer (AO) must be satisfied that the overall revenue of the contractor or subcontractor authorizes the deduction of income tax at a lesser rate or promises no deduction of income tax under Section 194C.  The contractor can then provide the deduction with the lower rate or nil TDS certificate.

Also Read: TDS on Fees for Professional or Technical Services under Section 194J

Conclusion

Given that paying tax to contractors is required under Section 194c, it is critical to understand the requirements, exceptions, deadlines, issues, and TDS rates. We hope this Guide on TDS has been useful in grasping the concept of Section 194C.

FAQs

Is TDS under section 194C applicable to contracts for sale?

The provisions of S. 194C do not apply to sales contracts. It is said that "work" does not involve manufacturing or supplying a product to a client's requirement or specification using raw materials obtained from someone other than the customer; as such, an agreement is a sale contract.

Is Section 194C applicable to individuals and HUFs to deduct tax on payments to contractors?

Individuals or HUFs having total receipts/sales and turnover from the business or the profession carried on by them in the preceding financial year surpassed the monetary 194C TDS limit stated under section 44AB (a) or (b) must deduct tax at source, according to the provision to section 194C(2).

Is section 194C applicable to all contracts?

As per Section 194C of the Income Tax Act, a person is responsible for providing a fee to a resident individual who has carried out "work" in terms of a contract. This contract should be between the specific individual and the resident contractor. They are obliged and required to deduct TDS. 

Do the rules of Section 194C apply if the assessee has a separate contract for the supply of commodities?

Section 194C cannot be used to deduct tax at source on payment for supply of material simply because it is a component of a composite transaction in which three different agreements are entered into - one for the supply of commodities, one for installation works, and one for civil engineering work.

For section 194C of the Act, what is the scope of an advertising service agreement?

The Act contains no definition of the term "advertising." The Finance Minister clearly stated on the Floor of the House during the evaluation of the Finance Bill 1995 that the revised provisions of tax deduction at source will apply when a client pays an advertising firm, not when an advertising firm pays the media, which incorporates both print media and electronic media.

The deduction must be done at the rate of 1%. It was also emphasised that if an advertising agency pays their photographers, models, artists, and other employees, the tax is taken at 5% as it would be for professional and technical services as per section 194C of the Act.

When advertising companies present a consolidated statement that includes fees for artwork and other associated activities, as well as payments paid to media, at what rate is tax deducted?

The deduction must be made at a rate of 1% under section 194C. While paying photographers, artists, models, actors, and others, advertising firms will be required to deduct tax at a rate of 5%. Costs incurred for producing programmes for broadcasting, telecasting or developing advertising content, will be subject to a TDS of 2%. 

Is rent for furniture and fixtures tax deductible?

Yes. Rent for furniture and fittings is tax-deductible.

When and by whom should TDS be deducted?

TDS must be deducted at the time of payment by anyone making certain payments under the Income Tax Act. However, if the payment is made as an individual or a HUF whose accounts are not needed to be audited, no TDS will be deducted. Individuals and HUFs who pay rent in excess of Rs 50,000 TDS at a rate of 5% will be deducted even if their account is not subject to a tax audit, but they don't need to apply for TAN.

Is it necessary to deduct tax at source when a tenant makes a non-refundable deposit?

Because the deposit constitutes considering using the land on the building, tax has to be deducted at the source (TDS), where the renter submits a non-refundable deposit. As a result, it falls under the definition of rent as specified in Clause 194-I. If the deposit is refundable, however, no tax will be deducted at the source. It is also stated that if the deposit bears interest, the tax levied on the interest shall be governed by Section 194A of the Income Tax Assessment act.

Is rent for plant and machinery tax deductible?

Yes. Rent for plant and machinery is tax-deductible.

Is payment to a recruiting firm covered by Section 194C?

Section 194C applies to any contract for the performance of any job, including the provision of labour, payments to recruitment firms are in the form of services rendered payments. As a result, the provisions of Section 194C are not applicable. TDS will be applied to the payment under Section 194J of the Act.

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