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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,-

TDS Section 194C   Payment to Contractor

(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:-

   

When the material is "purchased" from the same customer or its associates

When the material is "not purchased" from the same customer or its associates

• Provisions of section 194C will apply

• Provisions of section 194C will not apply

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

   

If the value of the material is "mentioned separately" in the invoice

If the value of the material is "not mentioned separately" in the invoice

(Invoice value - Value of material)

(Whole Invoice value)

Eg. Mr. A has raised the invoice to Mr. B, having a total value of INR 50,000/- and separately mentioning the value of the material of INR 20,000. In this case, the TDS u/s 194C is to be deducted on INR 30,000/- only.

Eg. Mr. P has raised the invoice to Mr. Q, having a total value of INR 50,000/- and not separately mentioning the value of the material of INR 20,000. In this case, the TDS u/s 194C is to be deducted on whole INR 50,000/-.

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:-

   

Contractor to whom payment is being made

Rate of TDS (When PAN is Quoted)

Rate of TDS (When PAN is not Quoted)

01/04/2020 to 13/05/2020

14/05/2020 to 31/03/2021

Payment is being made or credited to an Individual or HUF

1%

0.75%

20%

Payment is being made or credited to a person other than an individual or HUF

2%

1.50%

20%

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:-

   

Individual or HUF or Association of Persons or Body of individuals, whether incorporated or not or every artificial juridical person, being a "NON- RESIDENT"

When such payments or aggregate of such payments (subject to deduction of TDS) paid or likely to be paid -

Rate of Surcharge

• ExceedsFifty lakh rupees but does not exceed one crore rupees

• 10% of such tax

• Exceeds one crore rupees but does not exceed two crore rupees

• 15% of such tax

• Exceeds Two crore rupees but does not exceed five crore rupees

• 25% of such tax

• Exceeds Five crore rupees

• 37% of such tax

 

Every company, other than a domestic company

When such payments or aggregate of such payments (subject to deduction of TDS) paid or likely to be paid -

Rate of Surcharge

Exceeds one crore rupees but does not exceed ten crore rupees

• 2% of such tax

ExceedsTen crore rupees

• 5% of such tax

 

Every Co-operative society or Firm, being a NON-RESIDENT"

When such payments or aggregate of such payments (subject to deduction of TDS) paid or likely to be paid -

Rate of Surcharge

Exceeds One crore rupees

• 12% of such tax

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

   

• Where any amount credited or paid or likely to be credited or paid in a single contract if such sum does not exceed INR 30,000.

• Where the aggregate of any amounts credited or paid or likely to be credited or paid during the financial year does not exceed INR 1,00,000.

• No Individual or HUFshall be liable to deduct TDS, where such sum is credited or paid exclusively for "personal purposes" of such Individual/HUF.

It is pertinent to note that section 194M is introduced by the Government w.e.f. September 1, 2019, and according to section 194M any Individual or HUF (other than those who are required to deduct TDS u/s 194C/194H/194J) required to deduct TDS on payment of any sum to a residenton account of any work, brokerage or professional fees, if the aggregate of such sum exceeds Fifty Lakh rupees during a financial year. The rate of TDS u/s 194M is 5% of such amount.

Therefore, after 194M, even if the person is paying any sum on account of work done for personal use and not deducting TDS u/s 194C, is now required to deduct TDS u/s 194M if such amount exceeds 50 Lakh Rupees.

• Where any amount credited or paid or likely to be credited or paid during the previous year to the contractor engaged in the business of plying, hiring or leasing of "goods carriages".

and

Such a contractor owns ten or fewer goods carriages at any time during the previous year and furnishes a declaration along with his Permanent Account Number, to the person paying or crediting such sum.

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:-

   

Case

Particulars

TDS

Remark

1)

Single contract of 25,000

No TDS

Single contract up to 30,000

2)

Two contracts of 30,000 each

No TDS

Both contracts having each contract up to 30,000

3)

Four contracts of 30,000 each

TDS on 120,000 (30,000*4)

TDS will be deducted on 120,000, as and when the total sum exceeds 1,00,000

4)

Single Contract of 40,000

TDS on 40,000

Single contract exceeding 30,000

5)

- 1st Payment : 25,000

- 2nd Payment : 40,000

- 3rd Payment : 20,000

- 4th Payment : 20,000

- No TDS

- TDS on 40,000

- No TDS

- TDS on 65000

- Single contract upto 30,000

- Contract exceeding 30,000

- Single contract upto 30,000

- Total sum exceed 100,000

6)

- 1st Payment : 1,05,000

- 2nd Payment : 20,000

- TDS on 1,05,000

- TDS on 20,000

- Total sum exceed 100,000

- Total sum exceed 100,000

7)

- 1st Payment : 30,000

- 2nd Payment : 25,000

- 3rd Payment : 25,000

- 4th Payment : 30,000

- No TDS

- No TDS

- No TDS

- TDS on 110,000

- Single contract upto 30,000

- Single contract upto 30,000

- Single contract upto 30,000

- Total sum exceed 100,000

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 –

   

Particulars

Due date

TDS payment from the month of April to February

Within 7 days from the end of the month in which the TDS is deducted

TDS for the month of March

On or before 30th April

Payment by the Government deductor (with the production of challan)

Within 7 days from the end of the month in which the TDS is deducted

Payment by the Government deductor (without production of challan)

Same day of

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 –

   

Quarter for the Financial Year

Due date

April to June

31st July

July to September

31st October

October to December

31st January

January to March

31st May

(Note: Due date of filing of return for the quarter ending 31st March 2020 has been extended to 30th June 2020)

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):

   

Nature of default

Interest subject to TDS amount

Period for which interest is paid

Non-deduction of TDS either full or in part

1% per month or part of the month

From the date on which TDS is deductible to the date on which TDSis actually, deducted

Non-payment of TDS after deduction, either whole or in part

1.5% per month or part of the month

(Note: 0.75% for delay in remittance beyond the due date in case the due date is falling between 20th March 2020 to 30th June 2020. After 30th June 2020, normal 1.5% is chargeable)

From the date of deduction of TDS to the date of payment.

 

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


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Category Income Tax, Other Articles by - CA Rakesh Negi 



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