TDS on income of Hired / Rented Vehicle used for goods and staff in same vehicle.

Dear Sir,

We are a Local Authority and one of our vendor Provides us transportation service of our staff and transportation of goods in the same vehicle on contract basis . We often take service of such type of vendors for this activity. At Present we are deducting TDS at the rate 10 % on taxable amount from the payment of these vendors under Income Tax Act 1961 and section 194(IA) along with this, We deduct TDS GST (CGST @ 1% and SGST @ 1%) for GST Registered Vendors. This Vendors CA contacted us and gave information that the TDS Duduction rate is to be at the rate 1% (for Proprietor) & 2% (for Firm or Company)as per Income Tax Section 194(C) he also suggest to raise all the future Bill to the Best respective Depot in RCM form . In this context We request you to Clarify the above matter and guide us about TDS Deduction percentage and Income Tax Section Under which this TDS should be deducted. Also guide us about raising bills in RCM form Please.

Thanking you.

Anand V Mhetre

Hi Anand — you’ve raised an important and practical compliance issue. Let’s clarify everything step-by-step about:

✅ Correct TDS Section
✅ Correct TDS Rate
✅ GST-TDS (if applicable)
✅ RCM billing clarity

✅ 1. Correct TDS Section: It should be Section 194C, not 194-IA

You mentioned deducting TDS under Section 194-IA, but that's incorrect in this context.

📘 Section 194-IA:

Applies to purchase of immovable property
Not applicable for vehicle hire or transportation services

✅ In your case, the correct section is:

🔹 Section 194C – TDS on Contractual Payments

Applicable to payment to contractors/sub-contractors for carrying out any work, including:

Transportation of goods and/or personnel
Hired vehicles for transporting staff or materials

So yes, Section 194C is applicable to your scenario.

✅ 2. Correct TDS Rates under Section 194C

Type of Payee	TDS Rate under 194C
Individual / HUF (Proprietor)	1%
Firm / Company / LLP / Others	2%

🔸 TDS should be on the amount excluding GST, only if GST is separately mentioned on the invoice (as per CBDT Circular 23/2017).

✅ 3. Is GST TDS (2% under Section 51 of CGST Act) Also Required?

Yes — since you're a Local Authority, you're a notified deductor under GST.

So, for GST-registered vendors, you must also:

Deduct 2% GST-TDS (1% CGST + 1% SGST) under Section 51 of CGST Act
Applicable only if contract value > ₹2.5 lakh (excluding GST)

❓ 4. What is the Vendor Referring to in “RCM Form”?

Your vendor's CA is suggesting:

Instead of charging GST, the vendor raises invoice without charging GST
You (the Local Authority) pay GST under Reverse Charge Mechanism (RCM)

But here’s the catch:

🚫 Reverse Charge (RCM) for Transport Services applies only when:

The service is a GTA (Goods Transport Agency)
And a consignment note is issued

In your case — combined staff + goods transport in hired vehicles — the vendor is not necessarily a GTA, and RCM may not be applicable.

So:

✅ RCM billing is NOT mandatory unless the service qualifies under RCM notifications (GTA services, legal services, etc.)

✅ Summary Table

Topic	Correct Position
Applicable TDS Section	194C
TDS Rate for Proprietor	1%
TDS Rate for Firm/Company	2%
TDS on GST portion?	❌ No (if GST is separately shown)
GST TDS under CGST Act	✅ Yes, 2% (if contract > ₹2.5 lakh & supplier registered)
RCM Billing Required?	❌ No (unless vendor is GTA or service falls under RCM)
194-IA applicable?	❌ No — that’s for immovable property, not transport

✅ What You Should Do:

Switch to Section 194C for TDS — apply 1% or 2% based on vendor type.
Stop using Section 194-IA — it is not applicable here.
Continue GST-TDS deduction for GST-registered vendors where applicable.
Do not accept RCM invoices unless clearly justified under GST rules (like GTA).
Ask vendors to mention GST separately on invoices — so TDS is calculated only on taxable value.