The Income Tax Act's Section 194C deals with the tax deducted at source (TDS) that must be deducted from any payments made to a resident contractor or subcontractor. In simple words, it refers to anyone who has paid a resident contractor or subcontractor to complete any type of job. TDS must be deducted by the party or person who makes the payment to a contractor under the terms of this section.
Did You know?
If a transporter owns more than 10 goods carriages at any point throughout the year, you, as payers, are required to deduct TDS at the time of paying charges to the transporter of the goods at the rate of 1% or 2%, depending on the status of the transport contractor. Note: From May 14, 2020, to March 31, 2021, the rates mentioned above of 1% and 2% will be decreased to 0.75% and 1.50%, respectively. The person responsible for paying or crediting any amount to the transporter must file a declaration with the income-tax office and their PAN.
What Does “Work” Mean in the Context of Section 194c?
In this section, the term "work" refers to
- Telecasting, Broadcasting and program production
- Except for railways, every means of transportation of commodities or persons.
- Manufacturing or supplying a product in accordance with a client's demands, using materials acquired from the same customer or an affiliate. If the materials are obtained from someone else, it does not entail manufacturing or supplying a product.
Also Read: What is Section 195 –TDS on Non-Residents?
When Should the TDS Be Deducted?
TDS under section 194C has to be deducted when making payment or credit, whichever is earlier.
What does credit mean? Credit means entering the bill in the books of accounts. Even if it is recorded under Suspense head.
Therefore earlier of the two, i.e. payment or credit, is the point of taxation for section 194C.
What Is the Rate of TDS?
Nature of payment
TDS Rate if PAN available
TDS Rate if PAN is not available
Payment / Credit to resident individual or HUF
Payment/Credit to any resident person other than individual / HUF
Payment/ credit to Transporters
Circumstances Under which TDS U/s 194C is not deductible
In the following situations, no tax is required to be deducted:
- When the total amount paid or credited under a contract does not exceed ₹30,000, or
- The person responsible for paying such sums will not deduct TDS under this section if the total amount of such sums credited or paid or projected to be credited or paid during the financial year does not exceed ₹1,00,000.
- If the payment or amount credited to the contractor is for personal use, the individual or HUF is not required to deduct tax.
- No individual or HUF shall be obliged to deduct income tax on the amount credited or paid to the contractor's account if the amount is credited or paid solely for the individual's or HUF's personal use.
- On presenting his PAN to the person paying or crediting such amount, no deduction shall be made from any sum credited or paid or expected 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.
Exceptions to TDS on Payment to Contractor
- When the government provides materials, the question is whether the deduction will be based on the gross payment to the contractor or the net payment, which is the gross payment minus any deductions.
- Because of materials provided by the government, it will have to be decided based on the terms of the specific contract and the behaviour of the parties thereto.
- When a contractor agrees to build a building or a dam, and the government or another designated person agrees to supply all or some of the materials required for the job at the agreed-upon prices, the deduction will be based on the gross payment, minus any adjustments for material costs.
- The sum payable to the contractor in respect of the contract will only be the amount paid for such labour or services, and will not include the price of the materials supplied by the government or other specified persons.
- Consequently, depending on the contract conditions, TDS from payments made by the government or other designated people to any contractor will be 2% or 1% of the gross payment or, as the case may be, the net payment. For transactions between 14 May 2020 and 31 March 2021, the rate is 1.5% or 0.75%.
What is TDS on Transportation (Freight)
Any payment made to a transporter is liable to TDS deduction on freight expenses, according to Section 194C. Before transmitting the charge, the payer must minimise their income tax liability. Let's take a look at how much TDS is applied to transportation.
- If the payee is an individual or a Hindu Undivided Family, there is a 1% TDS on freight charges (HUF).
- If the payee is a partnership firm, business, trust, or association, there is a 2% TDS.
TDS is only applied if the payment per contract exceeds ₹30,000 or if the total of all contracts for the year surpasses ₹1,00,000.
TDS on Transportation Charges as per the Latest Amendments
According to the most recent modifications to sub-sections (6) and (7) of Section 194C, no TDS should be levied if the transporter possesses 10 or fewer carriages throughout the year and submits a PAN declaration.
The payer is responsible for deducting TDS on freight charges at the rates mentioned above if the transporter possesses more than 10 carriages at any time throughout the year. If the transporter fails to provide his PAN, a TDS of 20% must be assessed.
Important points for Transporter
- This modified sub-section will take effect on April 1, 2015.
- For these subsections, a transporter is a person in the business of plying, hiring or leasing goods carriages.
- Small transport operators with lesser than ten goods carriages will be eligible for the benefit of no tax deduction.
- The person responsible for paying or crediting any amount to the transporter must file a declaration with the income-tax office and their PAN.
Format of declaration
Declaration to be obtained on the letterhead of the Transport Contractor in case of non-deduction of tax at source u/s 194C (6) of the Income Tax Act, 1961
____________(Name of the entity)
____________( Address Line 1)
____________( Address Line 2)
____________( Address Line 3)
Sub: Declaration for Non- deduction of Tax at Source (TDS) under Section 194C (6) of the Income-Tax Act, 1961
This is to certify that:
- _____________ <<state the complete name of the Transport Vendor entity>> is a ___________.<<please state the form of the entity, like a company, partnership firm, sole proprietor, etc.>>
- The Permanent Account Number of _____________ <<state the complete name of the Transport Vendor entity>> is _________________. (state the PAN of the Transport Vendor entity). A self-attested photocopy of the same is attached hereto with this Declaration.
- _____________ <<state the complete name of the Transport Vendor entity>> is engaged in the business of plying, hiring, or leasing goods carriage for its business.
- _____________ <<state the complete name of the Transport Vendor entity>> does not own (whether Registered or as Beneficial Owner) more than ten goods carriage as on date.
- If the number of goods carriages owned (whether registered or as beneficial owner) by _____________ <<state the complete name of the Transport Vendor entity>> exceeds ten at any time during the Financial Year 2020-21, then _____________ <<state the complete name of the Transport Vendor entity>> undertake to intimate you immediately in writing of this fact.
- In the event of any default, _____________ <<state the complete name of the Transport Vendor entity>> undertakes to indemnify you for any costs, taxes, expenses, and any other liability that may arise upon you.
I, ___________________________ (state the name of the person signing the declaration), _____________ (state the designation of the person signing this declaration, like a Director, Partner, Sole Proprietor, Authorized Signatory, etc), acting for and on behalf of _________________ (state the complete name of the Transport Vendor entity), do hereby make the above declaration as required under subsection (6) of Section 194C of Income Tax Act 1961 for receiving payments from your company without deduction of tax at source (TDS). The above points of the Declaration are true and correct to my knowledge and belief, and no part of it is false, and nothing material has been concealed in it.
(Name and Designation of the Declarant)
Section 194C of the Indian Income Tax Act is one of the most essential clauses in the TDS chapter. Manufacturing, trading, wholesale, retail, export, service providers, and other industries are all influenced by this Act. Using the services of a transporter is necessary for every business, and this section deals with the aspects that relate to TDS on transportation charges.
We hope that this article has explained to you in detail the section 194C, TDS on transportation charges (freight), and the relevant provisions related to rate and limit.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.