TDS on Payment to Contractors or Sub-Contracors (Section 194C)

1. Who is responsible to deduct TDS from paymnet to Contractors or Sub-Contractors under Section 194C

2. When TDS under Section 194C has to be deducted

3. TDS Rates under Section 194C for the financial year 2018-19 & 2019-20

4. When TDS under Section 194C is Not Deductible [Section 194C(5)]

5. “Work” as defined in Section 194C - [Clause (iv) of Explanation (iv) to section 194C(7)]

The provisions of Section 194C are given below : -

1. Who is responsible to deduct TDS from paymnet to Contractors or Sub-Contractors under Section 194C

Any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between a specified person and the resident contractor is required to deduct tax at source.

Specified Person [Explanation to Section 194C] - Meaning of -

Tax is deductible under section 194C(1) only if payment is made in pursuance of a contract between a Specified Person and a Resident Contractor.

The following are “specified persons” for this purpose:

1. the Central Government or any State Government; or

2. any local authority; or

3. any corporation established by or under a Central, State or Provincial Act; or

4. any company; or

5. any co-operative society; or

6. 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; or

7. any society registered under the Societies Registration Act, 1860 or under any law corresponding to that Act in force in any part of India; or

8. any trust; or

9. 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; or

10. any foreign Government or a foreign enterprise or any association or body established outside India (applicable from October 1, 2009); or

11. any firm; or

12. any individual or HUF whose books of account are required to be audited under section 44AB(a)/(b) during the immediately preceding financial year and sum credited/paid is not exclusively for personal purposes; or

13. (with effect from June 1, 2008) AOP/BOI whose books of account are required to be audited under section 44AB(a)/(b) during the immediately preceding financial year.

2. When TDS under Section 194C has to be deducted

Tax is to be deducted either at the time of credit of such sum to the account of the payee, or at the time of payment thereof in cash or by issue of cheque or by any other mode, whichever is earlier.

For this purpose, any sum credited to any account, whether called “Suspense account” or by any other name in the books of account of the payer, is treated as credit of such income to the account of the payee. Accordingly, tax has to be deducted if amount payable to resident contractor or sub-contractor is transferred to a “Suspense account” by the payer in his books of account.

3. TDS Rates under Section 194C for the financial year 2018-19 & 2019-20

With effect from October 1, 2009, the following TDS rates will be applicable under section 194C—

OTHER POINTS - The following points should be noted—

1. Surcharge or health and education cess is not applicable.

2. If the recipient does not furnish his PAN to the deductor, tax will be deducted (with effect from April 1, 2010) at the rate of 20 %. PAN of the deductee should be mentioned in any correspondence and document which is exchanged between the deductor and deductee.

3. In the case of work contract being manufacturing or supplying product according to the specification of customer (by using material purchased from such customer), TDS shall be deducted on the invoice value excluding the value of material purchased from such customer, if such value is mentioned separately in the invoice. Where the material component has not been separately mentioned in the invoice, TDS shall be deducted on the whole of the invoice value.
4. Will Tax be Deductible at Source on the GST amount charged in the bill?

   No tax is to be deducted on the "GST on services" component if separately charged in the bill. GST for these purposes shall include IGST, CGST, SGST and UTGST

4. When TDS under Section 194C is Not Deductible [Section 194C(5)]

The provisions are given below— 

(A) Provisions applicable from October 1, 2004 - In insignificant Cases -

Tax is required to be deducted at source where the amount credited or paid to a contractor or sub-contractor exceeds Rs. 30,000 in a single payment during a financial year.

In other words, tax shall not be deductible under section 194C if the following two conditions are satisfied—

1. the amount of any (single) sum credited or paid (or likely to be credited or paid) to the contractor does not exceed Rs. 30,000; and

2. 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 (Rs. 75,000 during July 1, 2010 to May 31, 2016). 

(B) Payment or Credit to Transport Operators (applicable during October 1, 2009) -

If recipient (maybe an individual, firm, company, or any other person) is a transport contractor (who is in the business of plying, hiring or leasing goods carriages) and satisfies the following conditions, tax is not deductible –

From June 1, 2015 - Recipient owns 10 (or less than 10) goods carriages at any time during the financial year. He gives a declaration

to this effect to the deductor. Besides, he furnishes his PAN to the deductor.

Deductors who make payments to transporters without deducting TDS (as they have quoted PAN) will be required to intimate these PAN details to the Income-tax Department in the prescribed format (i.e., Form No. 26Q). 

(C) Payment for Personal purposes - Individual or HUF not to Deduct Tax if the payment or amount credited to Contractor is for Personal use [Section 194C(4)]:

No individual or Hindu undivided family 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 personal purposes of such individual or any member of Hindu undivided family.

(D) Where the tax is either not to be deducted or to be deducted at lower rate [Section 197 Rule 28 and 28AA]:

Any person to whom interest is payable may make an application in Form No. 13 to the Assessing Officer and obtain such certificate from him, as may be appropriate, authorising the payer not to deduct tax or to deduct tax at a lower rate.

As per section 206AA(4), no certificate under section 197 for deduction of tax at Nil rate or lower rate shall be granted unless the application made under that section contains the Permanent Account Number of the applicant.

5. “Work” as defined in Section 194C - [Clause (iv) of Explanation (iv) to section 194C(7)]

The expression “work”, shall include ...

1. advertising,

2. broadcasting and telecasting including production of programmes for such broadcasting or telecasting,

3. carriage of goods and passengers by any mode of transport other than by railway, and

4. catering.

5. With effect from October 1, 2009, the expression “work” shall also include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer.

   However, it will not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.