Introduction:

Section 194C of the Income Tax Act addresses the TDS deducted from specified payments made to contractors and subcontractors. As a result, a thorough comprehension of the area is necessary to avoid future unanticipated problems in your firm. In this post, we will look at a detailed review of TDS on payments made to contractors and subcontractors.

Legal provisions:

194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labor 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 to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct TDS on Payment equal to—

(i) one percent where the payment is being made or credit is being given to an individual or a Hindu undivided family;

(ii) two percent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein.

Analysis:

This section talks about the TDS on payment made to the resident Contractor/sub-contractor by the Contractee for carrying out any work. It includes the supply of labor, advertising, broadcasting, telecasting, and catering. However, TDS on payment made to the recruitment agency would attract the TDS under section 194J not under 194C. 

Who is required to deduct the TDS

• Central Government or any State Government; or
• local authority; or
• Any corporation established by or under a Central, State, or Provincial Act; or
• Any company; or
• Any cooperative society; or
• Any authority constituted in India by or under any law engaged either to deal with and satisfy the need for housing accommodation or planning, development, or improvement of cities, towns, and villages, or both; or
• Any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; or
• Any trust; or
• 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 (3 of 1956); or
• Any Government of a foreign State a foreign enterprise any association or body established outside India; or
• Any firm; or
• Any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals if such person,—
• does not fall under any of the preceding sub-clauses; and
• has total sales, gross receipts, or turnover from business or profession carried on by him exceeding one crore rupees in case of business or 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;

Rate of TDS:

Threshold for deduction of TDS

TDS on Payment will be deducted by the contractee if the amount paid or payable exceeds INR 30,000 in one transaction or INR 1,00,000 in aggregate during the financial year.

Time for deduction of TDS:

At the time of TDS on Payment or credit whichever is earlier

Work on which TDS on Payment will be deducted under Section 194C

work” shall include—

(a) advertising;

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

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

(d) catering;

(e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, being a person placed similarly about such customer.

Frequently Asked Questions for TDS under Section 194C

Question 1: Is it mandatory to have an agreement for deducting the TDS under section 194C?

Clarification: No, but it is advisable to have the contract between the contractor and contractee deduct the TDS under section 194C.

 Question 2: While deducting the TDS whether GST or any other taxes will be included or excluded?

Clarification: TDS will be deducted on the basic amount exclusive of GST or any other taxes.

 Question 3: TDS is applicable in advance?

Clarification: Yes, TDS is applicable on the advance also i.e. payment or credit whichever is earlier.

Question 4: TDS is applicable on the payment made for personal purposes by Individual/HUF?

Clarification: No, TDS would not be applicable on the payment made for personal purposes by Individual/HUF.  

 Question 5: Whether TDS is required to be deducted u/s 194C if payment is made to a non-resident contractor?

Clarification: Section 194C only covers payments to resident contractors or sub-contractors. TDS on payment to a non-resident contractor will be governed by u/s 195.

 Question 6: What are the consequences for non-deduction/payment of TDS or non-filing of TDS return by Contractee?

Clarification: 

• Disallowance of expenditure under section 40(a)(a) of the Act. 
• Interest u/s 201(1A) 1% per month for non-deduction and 1.5% for non-payment.
• Late fees u/s 234E for non-filing of TDS statement 200 per day during which default continues.
• Penalty for non-payment of TDS or non-filing of TDS return.
• Prosecution in some specified cases.