Introduction of Section 194C of Income Tax Act, 1961
Section 194C is a most popular section among business houses as this section is largely involved in Business Scenarios. While making any payment , TDS is mandatorily required to be deducted by the person making the payment if he is liable to deduct the TDS. The rate at which the Tax is to be Deducted depends on the nature of payment made by the Payer and in this article on “Section 194C of Income Tax Act 1961: TDS on Payment to Contractors/Sub-Contractors we would be focusing on the Applicability, Non- Applicability, Threshold, Time of Deduction, Rate of TDS etc. Person working in the accounts section of any company must be having in-depth knowledge about the provisions of Section 194C TDS on payment to contractors.
Section 194C Applicability: TDS on Payment to Contractors/Sub-Contractors
Section 194C of the Income Tax Actrequires any person to Deduct TDS while making payment to a resident person, who is carrying out any ‘work’ in terms of the contract between the ‘specified person’ and the resident contractor, is required to deduct TDS.
Now we need to firstly identify the transactions on which Section 194C is applicable. If any payment is being made to the contractor under the below mentioned situations then it is liable for deduction of Tax at Source:
- For carrying out any work, payment is made;
- Supplying of labor for carrying out any work
- Other items listed in the definition of work.
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Definition of Work as per Section 194C of Income Tax Act, 1961
The definition of word “Work” used is explained below:
“Work” Must Include
- Advertising;
- Telecasting and broadcasting including the production of programs for such telecasting and broadcasting;
- Other than railway, carrying of passengers or goods by any mode of transport;
- Catering;
- Supplying or manufacturing a product as per the specification or requirement of a customer by using material bought from such customers
NOTE: The Definition does not include supplying or manufacturing a product as per the specification or requirement of a customer by using material bought from a person, other than such customer. Section 194C shall not apply to Contract for Sale.
Now lets us understand the meaning of CONTRACT OF SALE VS. CONTRACT FOR SALE.
| Particulars | Explanation |
| Supplying or manufacturing a product as per the specification or requirement of a customer by using material purchased from such customer, | Assume that for stitching, a shirt manufacturer supplies clothes to a tailor as per the specifications provided by the shirt manufacturer. In this situation, shirt manufacturer is the principal manufacturer and tailor is Job Worker. Shirt manufacturer is liable to deduct TDS u/s 194C on payments to be made to the tailor for stitching clothes. This is a Contract of Sale. |
| Supplying or manufacturing a product as per the specification or requirement of a customer by using material purchased from a person, other than such customer | This is a simple contract for sale. If the tailor buys clothes from the open market and then stitches shirts as per the specifications of shirt manufacturer, then this is a sale contract between shirt manufacturer and tailor. Here, shirt manufacturer does not supply clothes to the tailor. Tailor is free to buy clothes from any person. In this situation, TDS is not applicable. |
Specified Person under Section 194C who are required to deduct TDS
- Any person, being an individual or a HUF(Hindu undivided family) or an AOP(association of persons) or a BOI(body of individuals), who is liable to get its Books of accounts Audited u/s Section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor. NOTE: Under Section 44AB a Business/Professional is required to get its Books audited if the Turnover/Gross Receipts is greater than INR. 1 crore or INR. 50 lakh as the case may be.
- any partnership firm
- the Central Government or any State Government
- any local authority
- any corporation established by or under a Central, State or Provincial 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 need 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 Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India
- any trust
- any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956)
- any Government of a foreign State or a foreign enterprise or any association or body established outside India.
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Points to be noted:
A.In case of contract of manufacturing or supplying product, TDS shall be deductible on the value excluding the value of material, if such value is mentioned separately in the invoice. If not mentioned separately then TDS shall be deducted on the whole amount of invoice.
B.Sub-contract is also included in Contract.
C. Assessee can apply to assessing officer for no TDS or TDS at lower rate under Section 197.
D.Deductor must be the resident person only.
E. Tax is to be deducted even if contract is for supply of labour.
Time of Deduction
Tax is to be deducted when the amount is paid to or credited to the account of such contract or sub-contractor, whichever is earlier.
Threshold Limit in section 194C
| Particulars | Threshold Limits |
| Single payment or credit | INR. 30,000 |
| Aggregate of the amount paid or credited or likely to paid during the whole year | INR. 1,00,000 |
Rate of TDS under Section 194C
| Sl. No | Nature of Payment | TDS Rate if PAN available | TDS Rates from 14.05.2020 to 31.03.2021 | TDS Rate if PAN not available |
|---|---|---|---|---|
| 1 | Resident Individual or HUF | 1% | 0.75% | 20% |
| 2 | Company, Firm, LLP, or to any other resident person other than Individual/HUF | 2% | 1.5% | 20% |
| 3 | Transporters (Less than 10 Vehicle) | NIL | NIL | 20% |
| 4 | Transporters (More than 10 Vehicle) | 1% or 2% according to recipient status as above | 0.75% or 1.5% according to recipient status as above | 20% |
- TDS is to be deducted on Basic Rates without including any Surcharge, Education Cess, and SHEC.
- Tax is deductible on the amount excluding GST, if the amount of GST shown separately.Notification no. 01/2014
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Non-applicability/Exceptions/When TDS is not Deductible under Section 194C TDS on Payment to Contractor
- Amount paid towards the Contract is NOT EXCEEDING the Threshold amount i.e. Single Payment below INR 30,000/Aggregate Payment in a FY is below INR 1,00,000.
- Payment or credit is being made to TRANSPORTER for transportation (If the Transporter owns 10 or less than 10 Vehicles at any time during the Financial year & he furnishes a Declaration u/s 194C(6) in the Prescribed format alongwith Self Attested Copy of PAN ,then No TDS is to be Deducted)
- Payment made to a a resident contractor for PERSONAL PUROPOSES is not subject to TDS.
- Payment is made to bank listed in the Second schedule to the RBI act excluding foreign bank for
- Bank guarantee commission
- Cash management service charges
- Depository charges on maintenance of DEMAT accounts
- Charges for warehousing services for commodities
- Underwriting service charges
- Clearing charges (MICR charges)
- Credit card or debit card commission for transaction between the merchant establishment and acquirement bank – Notification no. 56/2012, dated 31stDecember, 2012
- If the Payment is made for CONTRACT FOR SALE i.e. Supplying or manufacturing a product as per the specification or requirement of a customer by using material purchased from a person, other than such customer .
Deduction of TDS u/s 194C 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. The contractor or sub-contractor can then furnish the lower rate or nil TDS certificate to the deductor.
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, Deductor of Tax from payments other than salary is required to issue a quarterly TDS certificate in Form No. 16A. The certificate is to be issued by the 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 the Deductors are mandatorily required to issue TDS certificate in Form No. 16A by generating the certificate through Traces Website (www.tdscpc.gov.in) with a unique TDS certificate number. The certificate so issued can be authenticated either by using the digital signature or manual signature.
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FAQ’s
FAQ1: What is Section 194C?
Section 194C of the Income Tax Actrequires any person to Deduct TDS while making payment to a resident person, who is carrying out any ‘work’ in terms of the contract between the ‘specified person’ and the resident contractor, is required to deduct TDS.
FAQ2: What is the Threshold limit to deduct TDS u/s 194C?
TDS is required to be deducted:
If Single Payment exceeds INR 30,000
If Aggregate of Payments made in a Financial Year exceeds INR 1,00,000.
FAQ3: What is the rate of TDS if payment is made to Resident Individual/HUF?
TDS is to be Deducted @ 1% (0.75% for period between 14-05-2020 till 31-03-2021)
FAQ4: What is the rate of TDS if payment is made to Company, Firm, LLP, or to any other resident person other than Individual/HUF?
TDS is to be Deducted @ 2% (1.5% for period between 14-05-2020 till 31-03-2021)
FAQ5: Whether TDS under section 194C is to be Deducted on payment is made to transporter who owns less than 10 Vehicles at any time during Financial Year?
If the Transporter owns 10 or less than 10 Vehicles at any time during the Financial year & he furnishes a Declaration u/s 194C(6) in the Prescribed format along with Self Attested Copy of PAN then No TDS is to be Deducted.
Hope this article would provide clarity with respect to the Provisions of Section 194C of Income Tax Act, 1961.
Read:
Section 194J of Income Tax Act: TDS on Fees for Professional or Technical Services-With FAQ’s
Section 194Q Analysis: TDS on Purchase of Goods-Applicability, Threshold, Rate (With 35 FAQ’s)
Latest TDS Rate Chart for FY 2021-22 (AY 2022-23)|Pdf Download
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