TDS Section 194C | Payment to Contractor

The present article briefly covers the important provisions and recent changes relating to "TDS on Payment to Contractors", which is covered u/s 194C of the Income Tax Act 1961.

Section 194C - Payments to contractors.

Any person responsible for paying any sum to any resident contractor for carrying out any "work" in pursuance of a contract between the "contractor" and a "specified person" shall, at the time of credit of such sum or at the time of payment, whichever is earlier, deduct TDS as per this section. The contractor includes "Sub-Contractor" for this section.

"Sub-contractor" means a person who entered into a contract with a contractor for conducting either all or part of work, which the contractor has agreed to complete or supplying manpower for all or part of the work.

"Specified Person" means,-

(a) the Central Government or any State Government; or

(b) any local authority; or

(c) any corporation established by or under a Central, State or Provincial Act; or

(d) any company; or

(e) any co-operative society; or

(f) any authority, engaged either to deal with and satisfy the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns, and villages; or

(g) 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

(h) any trust; or

(i) any university established or incorporated by Central, State or Provincial Act; or

(j) any Government of a foreign State or a foreign enterprise or any association/ body established outside India; or

(k) any firm; or

(l) any person, being an Individual or HUF or an association of persons or a body of individuals, if such person, has total sales, gross receipts or turnover from the business or profession carried on by him exceeding one crore rupees in case of business and fifty lakh rupees in case of the profession during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor.

The term "Work" shall include:-

(a) advertising;

(b) broadcasting and telecasting including production of programs for such broadcasting or telecasting;

(c) carriage of goods or passengers by any mode of transport other than by railways;

(d) catering;

(e) manufacturing / supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associates*. But shall not include, when material purchased from any person, other than such customer or its associates*.

Note:- Finance Act 2020, had inserted the word "associates" in sub-clause (e) since many assessee were using this escape clause by getting contract manufacturer to procure raw material from its associates or related parties. Now, material purchased from associates will also be considered for material supply. The meaning of "Associates" will remain the same as defined u/s 40A(2)(b) of the Act.

Let us try to understand this in a simplified manner as below:-

Now the "Value" on which the TDS is to be deducted, can be categorized as below:-

Rate of TDS on contractor, are applicable at the following rates u/s 194C:-

Rate of TDS u/s 194C mentioned as 1% in the case of payment made/credited to Individual/HUF and 2% is the case of payment made/credited to a person other than Individual/HUF.

Further, Section 206AA requires the deduction of TDS @ 20% if the PAN No is not provided by the deductee.

Recently, the whole world is stumbling with the COVID-19 pandemic crises and India is equally affected by this. In order to provide more funds at the disposal of the taxpayers for dealing with the economic situation arising out of COVID-19 pandemic. "Ministry of Finance" has recently announced that the rates of Tax Deduction at Source (TDS) for some non-salaried specified payments made to residents has been reduced by 25% for the period from 14th May 2020 to 31st March 2021. With effect to this, the rate of TDS rates are reduced, which can be summarized as follows:-

The Finance Act 2020, had put the extra liability on deductor to deduct "surcharge" over and above and in addition to the amount of TDS, where the payments exceed the certain limits provided therein. It mandates the section 194C along with some other sections to deduct surcharge, the rates, and limits of which can be summarized as below:-

Note: The above-mentioned surcharge are payable over and above the TDS liability of the deductor

Available exemptions, where the TDS will not be deducted u/s 194C

Most of the time, it remains confusion about the timing and amount in which assessee required to deduct TDS u/s 194C. Let us try to understand this by taking some different situations:-

Due date of Deposit of TDS u/s 194C:

Every Deductor deducting TDS u/s of section 194C is required to file a quarterly return in Form 26Q within following due dates –

Due date of Return filing requirements u/s 194C:

Every Deductor deducting TDS in terms of section 194C is required to file a quarterly return in Form 26Q within following due dates –

Note: As per Rule 31, the Deductor of the TDS needs to issue a certificate of TDS to the deductee u/s 203, within 15 days from the date of filing of return of TDS.

Consequences of non-compliances of section 194C:

1) Disallowance of Expense:The assessee is not eligible to claim the deduction of such expense from his PGBP income if TDS is not deducted on time and the amount of disallowance of expense is 30% of the payment of such amount.

However, if the TDS is deposited in the subsequent year then the expense will be allowed in the year of payment of TDS.

2) Levy of Interest u/s 201(1A):

3) Late filling Fees of Return u/s 234E:

Under Section 234E, Deductor will have to pay a fine of Rs 200 per day subject to a maximum amount equal to the TDS liability of the person.

4) Penalty :

In the wake of the lockdown, the department has waived off all the penalty provisions for the period between 20th March 2020 to 30th June 2020 as per the Ordinance 2020. In a normal period of the business, the penalty equals the amount that was failed to be deducted/collected or remitted may be imposed.

Additional Points to remember:-

1) Where any sum is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, in that case, provisions of this section shall apply accordingly.

2) Application u/s 197(1) can be made electronically, to the Assessing Officer, by the person for grant of a certificate for the deduction of income-tax at any lower rates or no deduction of income-tax, as the case may be. In such a case Assessing Officer may issue such certificate after fulfillment of certain conditions provided.

3) It is not mandatory at all the time to have a written contract to attract TDS u/s 194C. TDS can be deducted on the verbally agreed contracts.

4) Section 194C covers, payments to resident contractors or sub-contractors only. TDS on payment to non-resident contractors or sub-contractors will be governed by section 195.

5) Any payment paid by passengers to travel agents or airlines (on purchasing tickets) will not be liable to TDS u/s 194C. In the case where money paid by the agent to airlines, No TDS will be levied.

But TDS will be deducted when such payment is made for the "chartered hiring" of bus, plane, or any mode transport.

6) Any payment to the courier's service provider will be liable to TDS as it involves carriage of goods

7) Any amount of Invoice includes the GST and it is indicated separately, then in such case, the TDS will be levied on the value excluding the GST.

The author can also be reached at legal.ca.rakesh@gmail.com