Section 194C of income tax act – TDS rate on Contractor
Introduction – Section 194C of Income Tax Act Provision
A. Overview of Section 194C of the Income Tax Act, 1961
TDS shall be deducted under section 194C of Income Tax Act, 1961 at 1% or 2% (as the case may be) or payments by any person (i.e., Resident or Non-Resident) to a resident (i.e., contractor) for carrying out any work, in pursuance of the contract between the contractor and contractee.
B. Importance of Understanding Section 194C of the Income Tax Act, 1961
It is pertinent to understand the concept of Section 194C of the Income Tax Act, 1961 since it deals with a wide range of services that fall under it and are required to deduct taxes at source. When a payment is made to a contractor, it is essential to ascertain if TDS is to be deducted on the said amount.
- Reduction of Tax Burden: By deducting tax at source, the recipient of the payment receives the net amount after deducting the tax, thereby reducing the tax and administrative burden.
- Record-keeping: The tax deducted at source serves as a proof of income received by the recipient, which can be used for record-keeping purposes.
- Avoid Conflict with other provisions: At times, there is conflict between different provisions for deduction of TDS under the Income Tax Act, 1961.
For example: whether Section 194C or Section 194J will apply for the routine and clerical work of documentation. The question arises whether TDS will be deducted for ‘technical work’ or ‘job work’.
For such a purpose, it is important to understand the intricacies of both the provisions to determine the taxability of the service under the correct provision.
- Revenue generation: By ensuring that the tax is deducted at source, Section 194C acts as a source of revenue for the government.
- Convenience: Section 194C provides a convenient and hassle-free method of tax collection, as the person making the payment is responsible for deducting and depositing the tax with the government.
C. Purpose of Section 194C of the Income Tax Act, 1961
- To Deduct Tax at Source: The purpose of Section 194C is to deduct tax at source from payments made to a resident contractor for undertaking the work of a specified person (like Government, Local Authority, etc.). The one who makes such a payment has to deduct TDS on such payment at a rate specified in the provisions of Section 194C.
- Recipient Receives Net Amount: This section aims to ensure that the recipient of the payment receives the net amount of the payment after deducting the tax, thereby reducing the burden of paying taxes at a later stage.
- Tax Compliance: Additionally, this helps in improving the tax compliance and prevents tax evasion, as the tax deducted at source serves as a proof of income received by the recipient.
| Who is the Payor ? | Resident/Non Resident |
| Who is the Payee or recipient ? | Resident |
| What is the TDS Rate | 1% or 2% |
| What is the timing of deduction of TDS | Date of credit or Date of payment whichever is earlier |
| What is the exemption limit | Not exceeding Rs.30,000 individual transaction / Rs.100,000 on aggregate basis (Enroll for our TDS Course) |
| Whether Issue of Form 16A is compulsory? | Compulsory |
| What is the due date for issue of Form 16A | With in 15 days of filing of TDS return |
| AO’s Certificate under section 197 | Can be obtained |
| Applicability of Section 206AA | Yes |
| Applicability of Section 285BB (Annual Information system) | Applicable |
| Applicability on person not covered under section 44AB | Not applicable |
| Which TDS Return is applicable under Section 194C | 26Q |
| Applicability on payments made in the nature of personal use | Not applicable |
| Applicability in case of Courier charges | Applicable (Enroll for our TDS Course) |
| Applicability in case of Advertising model | Not applicable |
| Applicability on Oral Contracts | Applicable |
| Applicability on piece rated contract | Applicable |
| Applicability on courier services | Applicable (Enroll for our TDS Course) |
| Applicability on warehousing contracts | Applicable |
| Applicability on cold storage charges | Applicable |
| Applicability on AMC Charges | Applicable |
| Applicability on Bank Charges | Not applicable |
| Applicability on payments made to Advertising agency | Applicable |
| Applicability on sponsorship | Applicable |
| Applicability on clearing and forwarding agents | Applicable |
| Applicability on contract for purchase of materials | Not applicable |
| Applicability in case of hoarding | Applicable |
| Applicability of ancillary services provided by Hotel | Not applicable |
| Applicability on landing and parking charges paid by Airlines | Applicable |
Background of Section 194C of the Income Tax Act,1961
Eligibility Criteria under Section 194C of the Income Tax Act, 1961
A. Who is required to deduct TDS under Section 194C?
When there is a contract between a contractor and ‘specified persons’ and a payment is made to the contractor for undertaking any ‘work’, a TDS is to be deducted as per the specified rate under Section 194C of the Income Tax Act, 1961.
Who are considered as “specified persons” for the purpose of deduction of TDS under Section 194C of the Income Tax Act, 1961?
A specified person, as per Section 194C can be any of the following:
- The Central Government;
- Any of the State Governments;
- Any Local Authority;
- A company;
- A co-operative society;
- A firm;
- A trust, etc.;
- Any State authority responsible for providing housing accommodation or planning or development of cities, towns, etc.
- A society registered under the Societies Registration Act, 1860;
- A university established or incorporated under the respective Central, State or Provincial legislation;
- A Government of a foreign country or a non-resident corporate entity or any other association or body of such foreign State;
- 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).
B. What will be considered as “work” under Section 194C of the Income Tax Act, 1961?
The term “work” under Section 194C will include these: –
- Carriage of goods by any transport except by rail;
- Carriage of passenger by any transport except by rail;
- Advertising;
- Broadcasting and telecasting;
- Catering Services;
- Supplying or manufacturing a product for which material is supplied by the customer.
Note: It will not apply in the case where the material is purchased from the person who is not the customer, i.e., the material has been purchased from a third party.
C. Threshold Limit for deduction of TDS under Section 194C of the Income Tax Act, 1961
- The threshold limit for deduction of TDS for payments made to contractors is currently set at Rs. 30,000 in a single transaction and the aggregate amount of payments made during a financial year, does not exceed Rs. 1,00,000.
- If it exceeds the threshold limit, then the rate of deduction as provided under Section 194C of the Act will be applicable, i.e., 1% or 2%.
D. On which value, TDS shall be deducted under Section 194C of the Income Tax Act, 1961?
- TDS shall be deducted on the invoice value excluding the value of the material (if such value is mentioned separately in the invoice).
- TDS shall be deducted on the entire invoice value (if the value of the material is not mentioned separately in the invoice).
E. Rates of TDS under Section 194C of the Income Tax Act, 1961
- TDS shall be deducted at the following rates under Section 194C depending on whether the 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 HEC on TDS
- No Surcharge and HEC (Higher Education Cess) shall be added to the above-mentioned rates.
Higher rate of TDS under Section 194C of Income Tax Act, 1961
As per Section 206AB of the Income Tax Act, 1961, TDS shall be deducted at the rate of 20% where no PAN has been furnished by the contractor to whom payment is being made.
F. Timing of Deduction of TDS under Section 194C of the Income Tax Act, 1961
- TDS u/s 194C is required to be deducted on a payment which is made to a contractor when:
- Such sum is credited to the account of payee, i.e., at the time when the invoice is received; or
- Payment is made to the payee in cash or by way of issue of cheque/ draft/ any other mode
whichever is earlier.
- For example, if the payment is made on the basis of advance invoice, TDS has to be deducted at the time of the advance payment, even though the invoice is received later.
- Deemed Application: Where such sum is credited to Suspense Account or any account by whatever name called, in the books of the account of the person liable to make payment to the payee, it shall be deemed to have been credited to the account of the payee.
G. Exemption from deduction of TDS under section 194C of Income tax Act
- Sum doesn’t exceed Rs. 30,000: Where the amount credited/ paid does not exceed Rs. 30,000 in single transaction, no TDS will 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 during the FY does not exceed Rs. 1,00,000.
- Personal Purpose: Where consideration paid by an individual or an HUF is on account of work done for 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 of Income Tax Act, 1961.
- Business of Hiring, leasing or plying goods carriage: Where the contractor owned 10 or less carriages in the previous year and a declaration is provided with PAN to the person paying or crediting the amount to the Deductor, no TDS will be deducted.
Key Points to Remember
A. Documents Required under Section 194C of the Income Tax Act, 1961
Under Section 194C of the Income Tax Act, 1961, the person making the payment to contractors and sub-contractors is required to maintain the following documents:
- PAN of the recipient: Under Section 206AA, PAN (Permanent Account Number) of the recipient (i.e., the contractor or sub-contractor) is required to be furnished. If PAN is not provided, then the rate of TDS to be deducted will be 20%.
- Invoices or Bills: Invoices or bills raised by the recipient for the work done or services provided should be kept on record.
- Payment Receipts: Receipts of payment made to the recipient should be kept on record.
- Tax Deduction Account Number (TAN): The person making the payment is required to obtain a TAN (Tax Deduction Account Number) and quote it in all TDS returns and challans as per Section 203A of the Income Tax Act, 1961.
- TDS Returns: Under Section 206 of the Income Tax Act, 1961, TDS Returns should be filed with the prescribed income tax authority and should include details of the tax deducted at source as may be prescribed and within the required timeline.
- TDS Certificates: Under Section 203 of the Income Tax Act, 1961, TDS certificates (Form 16A) shall be issued giving effect to the fact that TDS has been deducted which will specify:
- Amount of TDS deducted;
- Rate of TDS;
- Any other prescribed particular.
B. Duties of the Deductor and recipient of TDS under Section 194C of the Income Tax Act, 1961
Deductor: Under Section 200 of the Income Tax Act, 1961, the sum deducted by the deductor is to be credited to the Central Government or as the Board may direct.
Additionally, the deductor has to furnish TDS Certificate under Section 203 to the deductor, file TDS Return, deduct the amount of tax as per the rate of deduction of TDS, etc.
Recipient: The recipient has to provide the PAN details to the deductor, failure to provide which would result in TDS to be deducted at the rate of 20%. Under Section 203 of the Income Tax Act, 2013, the TDS Certificate is to be furnished to the recipient by the deductor providing to the effect the amount, rate, etc. of the deduction of TDS.
Lastly, the invoices and bills are to be provided to the deductor for the work done.
C. Penalty for Not Deducting TDS under Section 194C of the Income Tax Act, 1961
Non-compliance with Section 194C of the Income Tax Act, 1961 can result in several consequences, including the following:
- Penalty: As per Section 201 and 271C of the Income Tax Act, 1961, the person who fails to deduct tax at source and deposit may be liable to pay a penalty. Such person will be considered as “assessee in default”. The amount of penalty will be an amount equal to the tax that he has failed to deduct at source. This penalty will be imposed by the Joint Commissioner.
- Interest: As per Section 201 of the Income Tax Act, 1961, in addition to the penalty, the deductor may also be liable to pay interest on the tax not deducted at source at:
- 1% – from the month the tax was deductible till the date it is deducted; (In case of non-deduction)
- 5% – from the month the tax was deducted to the date it was paid (credited) (in case of non-payment).
- Imprisonment: As per Section 276B and 276BB of the Income Tax Act, 1961, if the person fails to pay the tax at source, then he may be subjected to prosecution and may face imprisonment for a term ranging from 3 months to 7 years, along with fine.
Conclusion
Section 194C of the Income Tax Act, 1961 deals with the deduction of income tax on payments made to contractors and sub-contractors for carrying out any work. The following are the key provisions of Section 194C:
- Tax Deductibility: The person making the payment (i.e., the contractor or sub-contractor) is responsible for deducting tax at source from the amount paid to the recipient.
- Threshold Limit: The threshold limit for tax deduction at source under Section 194C is Rs. 30,000 or aggregate amount of Rs. 1,00,000. If the amount paid to the recipient is less than Rs. 30,000 or aggregate amount of Rs. 1,00,000, no tax is required to be deducted at source.
- Rate of TDS: The tax deduction rate under Section 194C is 2% for payments made to individuals and Hindu Undivided Families (HUFs) and 1% for payments made to other entities.
- Exemptions: Certain types of payments, such as payments made for personal purposes, are exempt from tax deduction at source under Section 194C.
Multiple Choice Questions – TDS rate on Contractors – Section 194C of Income Tax Act
1. Section 194C provides for deduction of tax at source on the payments made to ____________ contractors/ sub-contractors.
a. Resident
b. Non-resident
c. Both resident and non-resident
d. None of the above
Answer
Answer: a. Resident
2. Who would be liable to deduct tax at source on payments made to resident contractor u/s 194C ?
a. Individual
b. HUF
c. Individual or HUF liable to tax audit in immediately preceding FY
d. None of the above
Answer
Answer: c. Individual or HUF liable to tax audit in immediately preceding FY
3. Chanchal Pvt. Ltd. has to make payment of Rs. 40,000 per month to Mr. Munna for operation and maintenance of factory premises. At what rate, TDS would be deducted under section 194C of Income tax act?
a. 1%
b. 2%
c. 10%
d. Nil
Answer
Answer: a. 1%
4. Neetu Pvt. Ltd. has to make payment of Rs. 70,000 per month to Geeta India Ltd. for operation and maintenance of factory premises. At what rate, TDS would be deducted under section 194C of Income tax act?
a. 1%
b. 2%
c. 10%
d. Nil
Answer
Answer: b. 2%
5. Contract ________ sub-contract for the purpose of deduction of TDS under section 194C of Income tax act.
a. Includes
b. Excludes
Answer
Answer: a. Includes
MCQs – How to deduct TDS rate on Contractor with Example
6. Hemant Limited, manufactured certain toy cars for Abhishek Private Limited, for which the necessary material was provided by Abhishek Private Limited. The service charges for such work were Rs. 1,00,000, which was included in the gross amount of material supplied, worth Rs. 6,00,000. In such a case, the TDS deducted would be _________
a. 1,000
b. 7,000
c. 2,000
d. 14,000
Answer
Answer: d. 14,000
7. Hoshiyar Limited, manufactured certain toy cars for Bipasha Private Limited, for which the necessary material was provided by Bipasha Private Limited. The service charges for such work were Rs. 50,000, which was separately mentioned alongwith the gross amount of material supplied, worth Rs. 4,50,000. In such a case, the TDS deducted would be ___________
a. 1,000
b. 10,000
c. 500
d. 5,000
Answer
Answer: a. 1,000
TDS Sections
- Section 192 of Income tax act
- Section 193 of Income tax act
- Section 194 of Income tax act
- Section 194B of Income tax act
- Section 194C of Income tax act
- Section194EE of Income tax act
- Section 194H of Income tax act
- Section 194I of Income tax act
- Section 194IA of Income tax act
- Section 194 J of Income tax act
- Section 194K of Income tax act
- Section 194LD of Income tax act
- Section 194LBB of Income tax act
- Section 194M of Income tax act
- Section 194N of Income tax act
- Section 194O of Income tax act
- Section 194Q of Income tax act
- Section 194R of Income tax act
