TDS on Labour Charges – Section 194C of Income Tax Act

Introduction – TDS on Labour Charges – Section 194C of Income Tax Act

TDS on labour charges paid is required to be deducted under Section 194C of the Income Tax Act, 1961 (hereinafter referred to as the “Act”). When a person makes a payment to a labour contractor on a contract, such person has to deduct TDS on labour charges. Let’s dive into this concept.

What are ‘labour charges’ for the purposes of Section 194C of the Income Tax Act, 1961?

Where labourers work through a labour contractor i.e., a contractor supplies labour to a person, and payment is made to such contractor by the deductor, the amount so paid to the contractor will be covered through labour charges.

But if the labourers are directly employed by the person, there will be employer-employee relationship between them and it will not be covered under Section 194C of the Income Tax Act, 1961. (Tapas Pal v. ACIT [2017])

Applicability of TDS provisions on Labour Charges under Section 194C of the Income Tax Act, 1961

When there is a contract between a contractor and ‘specified persons’ and a payment is made to the contractor for undertaking any work in the nature of labour , TDS is to be deducted on such paymentas per the specified rate in Section 194C of the Act.

Note: A contract between a sub-contractor and specified persons will also be liable to TDS under Section 194C, Income Tax Act, 1961.

Who are considered as “specified persons” for the purpose of deduction of TDS on labour charges?

A specified person, as per Section 194C includes:

1. The Central Government;
2. Any of the State Governments;
3. Any Local Authority;
4. A company;
5. A co-operative society;
6. A firm;
7. A trust;
8. Any State authority responsible for providing housing accommodation or planning or development of cities, towns, etc.
9. A society registered under the Societies Registration Act, 1860;
10. A university established or incorporated under the respective Central, State or Provincial legislation;
11. A Government of a foreign country or a non-resident corporate entity or any other association or body of such foreign State;
12. An individual, BOI, AOP or HUF has total sales, turnover or gross receipts of more than Rs. 1 crore (in case of business) or Rs. 50 Lakh (in case of profession).

Rate of deduction of TDS on Labour Charges under Section 194C of the Income Tax Act, 1961

The rate of TDS to be deducted is as under: –

• TDS shall be deducted at the following rates under Section 194C of the Act depending on whether  payment is made to an Individual/ HUF or other than Individual/ HUF:
• • Credit is given/ Payment is made to an Individual/ HUF – 1%
  • Credit is given/Payment is made to a person other than an Individual/ HUF – 2%

• No Surcharge and Higher Education Cess (“HEC”) shall be added to the above-mentioned rates.

As per Section 206AB  of the Act, TDS at the rate of 20% shall be deducted where the payee does not provide the PAN number to the deductor.

Time of deducting TDS on Labour Charges under Section 194C of the Income Tax Act, 1961

TDS is required to be deducted in case of payment made to the contractor when –

• Such sum is credited of such sum to the account of payee; or
• Payment is made to the payee in cash or by way of issue of cheque/ draft/ any other mode

whichever event takes place earlier.

Deemed application of provisions of TDS on Labour Charges

Where the amount is credited to the Suspense Account or any other account in the books of the person who is liable to make payment to the payee, it will be deemed to have been credited to the account of the payee and the provisions for deduction of TDS on payment made on labour charges will apply.

Threshold Limit for deduction of TDS on Labour Charges under Section 194C of the Income Tax Act, 1961

• The threshold limit for TDS on Labour Charges on payment made towards Car Hire Charges is as follows:
  • Payment should not exceed Rs. 30,000 in case of a single transaction, and
  • Aggregate payments made during the relevant FY should not exceed Rs. 1,00,000
• If it exceeds the threshold limit, then the rate of deduction of TDS as provided under Section 194C of the Act will be applicable, i.e., 1% or 2%.

Exemption from  deduction of TDS under Section 194C of Income Tax Act, 1961 limit

• Sum doesn’t exceed Rs. 30,000: Where the amount credited/ paid does not exceed Rs. 30,000 in a single transaction, no TDS shall be deducted.
• Sum doesn’t exceed aggregate of Rs. 1,00,000: Further, no TDS shall be deducted, where the amount or aggregate of amounts credited/ paid to the deductee during the FY does not exceed Rs. 1,00,000.
• Personal Purpose: Where consideration paid by an individual or HUF is on account of personal purpose, no TDS is to be deducted on such consideration.
• Non-Resident Contractor: Payment made to a Non-Resident contractor shall not attract TDS under Section 194C of the Income Tax Act,1961. However, it shall be governed by provisions of Section 195.

Clarification by CBDT

Circulars

• TDS on labour charges shall be deducted on invoice value, excluding the value of GST (if such value is mentioned separately in the invoice) – Circular No. 23/ 2017.
• However, TDS shall be deducted on the entire invoice value (if the value of GST is not mentioned separately in the invoice) – Circular No. 23/ 2017
• If the payments are for supply of labour for carrying out the contract, it will be covered under Section 194C. – Circular No.: 715/ 1995.
• If the payments are made to recruitment agency for labour supply, TDS will nodeducted under Section 194C but shall be deducted under Section 194J. – Circular No.: 715/ 1995.

Landmark Judgements for Section 194C (TDS on Labour Charges) of the Income Tax Act, 1961

• In the case of Commissioner of Income-tax v. Executive Engineer [2013], the High Court held that where the labour was hired by the assessee for the repairing of transformers, TDS was to be deducted only on the labour charge and not on the value of the materials under Section 194C.
• In the case of NDT Systems v. Income-tax officer [2015], the Court observed that the performance of services like ducting of pipes, laying of pipelines, and other labour jobs are not part of professional services and are covered under Section 194C .

Illustrations: – 

Mr. Y employed the services of Mr. X, Mr. A and Mr. Z, labourers, working under Mr. Ruzman, a labour contractor, for the work of converting rough diamonds into polished ones, for the aggregate amount of Rs. 5,00,000 in the FY 2022-2023. At what rate, the TDS will be deducted?

Solution: The TDS rate and amount on labour charges will be deducted at 1% and Rs. 500 respectively because the payment made to Mr. Ruzman exceeds the aggregate threshold of Rs. 1,00,000.

Illustration:

Mr. A was paid amount of Rs. 5,000 for performing the job of construction of the bridge to Mr. Z, a labour contractor. At what rate, the TDS will be deducted?

Solution: Though, these transactions fall under the TDS on labour charges but it also is covered under the threshold or exemption limit of Rs. 30,000 as per Section 194C of the Act.

Thus, the TDS will be Nil, i.e., no TDS will be deducted on such payment.

For the Full text of Section 194C of Income Tax Act, please refer this link

TDS on labour charges is required to be deducted under Section 194C of the Income Tax Act, 1961 at the rate of 1% or 2% (as the case may be) for payments to residents.

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