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Section 194C - An overview (Effective 1.10.2009)
Section 194C of Income Tax Act, 1961 covers “Payment to Contractors and Sub-contractors”. Even if the words contractors and sub-contractors are given, it also covers other types like works contract, supply of labour, advertising, catering, contract manufacturing, etc.
Persons liable to deduct tax:
Following persons are liable to deduct tax under this section.
a. The Central Government and the State Government
b. Local Authority
c. A Corporation established by or under a Central, State or Provincial Act
d. A company
e. A co-operative society
f. Housing Boards
g. Authorities engaged in planning, development or improvement of cities, towns and villages,etc.
h. A society registered under the Societies Registration Act, 1860 or under any law corresponding to that Act in force in any part of India
i. A trust
j. An university
k. A firm
l. A HUF (Subject to Exception)
m. An Individual (Subject to Exception)
n. Association of Persons
o. Body of Individuals
Association of persons and Body of Individuals are included w.e.f. 1st June, 2008
Exception to Individuals and HUF’s
As regards to individuals and HUF’s there is one exception to the regard that these are required to deduct tax at source under this Section only if their sales turnover or gross receipts in the immediately preceding financial year exceeds Rs. 40 lakhs in case of business and Rs. 10 lakhs in case of profession. The individuals and HUF’s not coming such criteria need not deduct tax at source under this sections.
Contracts Covered in this Section
This section covers the following Contracts
1. Works Contracts
2. Supply of Labour
3. Advertising Contracts
4. Broadcasting and telecasting including production of programmes for such broadcasting or telecasting
5. Carriage of goods and passengers by any mode of transport other than railways
W.e.f. 1.10.2009 the following type of contract has also been covered under this section.
7. Manufacturing or supplying a product according to the requirement or specification of customer by using material purchased from such customer, but does 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.
Also w.e.f. 1.10.2009, if the payee furnishes his Permanent Account Number, then it is not necessary to deduct tax on the amount payable in the course of plying, hiring or leasing of goods carriage. The point here is to be noted that only the goods carriage is covered and not carriage of passangers.
It has to be noted that tax has to be deducted only on above mentioned types of contract and not on any other contract.
On what amount the tax has to be deducted?
This Section has been amended w.e.f 1.10.2009 to read as under.
“Tax shall not be deducted at source-
(i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or
(ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.
When the tax has to be deducted?
Tax has to be deducted on payment covered under this Section if:
1. A single payment exceeds Rs. 20000
2. Aggregate of payments during the financial year exceed Rs. 50000
Tax has to be deducted at the time of payment or credit whichever is earlier.
Illustrations on above:
1. Rs. 25,000/- paid on 3rd June, Rs. 5,000/- paid on 18th July, Rs. 19,000/- paid on 25th August.
In this case, tax has to be deducted only on Rs.25,000/- and not on all the payments.
2. Rs. 19,000/- paid on 3rd June, Rs.19,000/- paid on 18th July, Rs.11,000/- paid on 25th August.
In this case, tax has not to be deducted on any payment.
3. Rs. 15,000/- paid on 3rd June, Rs.15,000/- paid on 18th July, Rs.15,000/- paid on 25th August and Rs. 6,000 paid on 18th October.
In this case, tax has to be deducted on gross total of Rs. 50,000
In case none of the amounts exceed Rs.20,000/- but it is estimated that the gross amount to be paid during the year will exceed Rs.50,000/- then tax has to be deducted on every payment. However, if there is no such estimate but the payment eventually exceeds Rs.50,000/- then tax has to be deducted on the gross total amount on the time of payment when it exceeds Rs.50,000/-
Rates of Tax:
Prior to 1.10.2009 the rates of tax deduction were
1. Advertisement Contracts @ 1%
2. Other Contracts @ 2%
3. Sub-Contracts @ 1%
Further surcharge was applicable @ 10% in the following manner
1. In case of Indivudual, HUF, Association of Persons and Body of Individuals, if the payments exceed Rs.10 lakh,
2. In case of a company of a firm, if the payments exceed Rs. 1 crore, and
3. In case of an Artificial Juridical Person.
Education cess @ 2% and Secondary and Higher Education cess @ 1% on total of tax and surcharge was applicable
However, w.e.f. 1.10.2009 the rates are as under
1. If the payee is individual or HUF – 1%
2. For other payees – 2%
Further, no Surcharge, Education cess, and Secondary and Higher Education cess is not applicable.
Some other Constraints:
1. In case of Associated Cement Company Limited vs. Commissioner of Income Tax (1993) ITR 453 (SC), the Supreme Court held that reimbursement has also to be considered as part of payment and tax has to be deducted thereon as Section 194C is not for the income element comprised but on total payment.
2. In contracts that attract the provisions of service tax and service tax is levied on such bills or invoices, tax is to be deducted on the total amount of the invoice including the service tax amount.
3. The contract need not be in writing. It may be oral or an implied contract also.
The other provisions like due dates of payment, challan number for payment, form for deduction, quarterly return, etc. apply in common to all other Sections for TDS.
CA. Amol Gopal Kabra