The provisions for TDS on contractors or subcontractors are covered by Section 194C. According to this section, any person paying a resident contractor (or subcontractor) money to complete any work, including providing supply of labour, is required to deduct tax from that payment. A contract between the contractor and the contractee is also necessary for the aforementioned requirement to be met. Let’s understand the TDS on payment to contractor and subcontractor under section 194C of Income Tax Act, 1961.
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What is TDS on payment to Contractor and Subcontractor?
When it comes to paying a contractor or subcontractor, it is essential to keep in mind the TDS on payment if there is a contract in place between the parties. In this payment process, there are two key players involved – the contractor who performs the work and the deductor who is responsible for withholding TDS and ensuring that the contractor receives their income. This system guarantees that the TDS on payment to contractors and subcontractors is managed according to regulations, maintaining compliance at all times.
Who is required to deduct TDS u/s 194C?
TDS must be deducted from any payment made by a specified person to a resident contractor for services rendered. “Specified person” refers to:
- University
- Registered Society
- Company
- Firm
- Central or State Government
- Local Authority
- Corporation
- Co-operative Society
- Trust
any person, HUF, association of person, or body of individuals, with the exception of those who have total sales, gross receipts, or turnover from their business or profession exceeding Rs.1 crore for businesses, or Rs.50 lakh for professions during the financial year immediately prior to the financial year in which the sum is credited or paid to the contractor’s account.
Definition of Work Under Section 194C
It includes:
- Catering
- Advertising
- Telecasting and Broadcasting (including the production of programs)
- Transportation of both goods and passengers via any mode of transport (excluding railways).
- Supply or manufacturing of a product as per specification of customer by using the material purchased from customer, however it does not include supplying or manufacturing a product as per specification of customer by using material purchased from other than such customer.
Definition of Contractor and Subcontractor
Contractor
Any person who signs a contract to perform any kind of work (including the supply of labor) with the central/state government, local authority, corporation, company, or cooperative society.
Sub-contractor
Any person entering into a contract with a contractor for:
- Conducting the work that the contractor has committed to complete, in full or in part
- Supplying labour for the work taken by the contractor, in full or in part.
TDS Rate u/s 194C
| Nature of Payment | TDS Rate |
| Payment / Credit to resident individual or HUF | 1% |
| Payment/Credit to any resident person other than individual / HUF | 2% |
| Payment/ credit to Transporters | Nil |
Note 1: If PAN is not available in any of the above case, TDS will be deducted at the rate of 20%.
Note 2: Payment is made to a goods transport agency (in the business of plying, hiring, or leasing goods) that owns 10 or fewer carriages at any time during the previous year. Also, the contractor has to submit a declaration of the above along with PAN.
Threshold Limit for 194C
TDS will be deducted u/s 194C in the below cases:
- If Single payment of a contract exceeds Rs.30000 at any time during the previous year. Or
- If Aggregate payment of a contract exceeds Rs.100000 at any during the previous year.
How to deduct TDS on Contractor with Example?
| Example | Amount | Payment Date | TDS will be deducted? |
| 1 | Rs.1,10,000/- Rs.10,000/- | 25-07-2022 16-09-2022 | Yes Yes |
| 2 | Rs.20,000/- Rs.35,000/- Rs.22,000/- Rs.27,000/- | 14-04-2022 29-05-2022 22-19-2022 28-11-2022 | No Yes (single limit Rs.30,000 crossed) Yes (as TDS deduction already started) Yes (aggregate limit Rs.1 lakh crossed) TDS will be deducted on Rs.20000 also on which not deducted at first |
| 3 | Rs.25,000 /- Rs.20,000 /- Rs.20,000 /- Rs.25,000 /- | 20-05-2022 19-06-2022 05-08-2022 16-12-2022 | No No No No (aggregate payment does not exceed Rs. 1 lakh) |
When TDS is required to be deducted u/s 194C
TDS will be deduction at the time of:
- Credit of income to the payee’s account (receiver) or
- Actual payment (in cash or other modes)
Time Limit for TDS Payment
| Conditions | Time limit to deposit TDS |
| If amount is paid/credited in March | On or before 30th April |
| If amount is paid/credited in other months | Within 7 days from the end of the month is which TDS was deducted. |
TDS for Composite Work u/s 194C
Composite work means when work includes supply or manufacturing of a product as per specification of customer by using the material purchased from the same customer, then TDS will be deducted on:
- Total invoice value (if material value is not indicated separately in the invoice).
- Invoice amount excluding the material’s value (if it is indicated separately in the invoice).
Exemptions from TDS u/s 194C
TDS is not required to be deducted in the below cases:
- The payment made to the contractor in a single contract does not exceed Rs.30000. If the total amount of such contracts exceeds Rs.100000 in a financial year, TDS will be applicable.
- When an individual or HUF pays any amount to the contractor for carrying out work in the nature of personal use.
- When any amount is paid to a goods transport agency that owns 10 or fewer carriages at any point during the previous year and is engaged in the plying, hiring, or leasing of goods, provide the contractor also submit a declaration of the above along with PAN.
- If payment is made to a non-resident Sub-Contractor or contractor.
194C Applicability on Some Special Cases
The following special announcements have been made by CBDT about the implications of section 194C:
- TDS Deduction on GST Amount: If invoice indicates the GST amount separately, then TDS will be deducted on value excluding GST amount
- Payment for Travel Agents: Passengers’ payments made to airlines or travel agencies when buying tickets are not subject to TDS under Section 194C. There will not be any TDS if the agent make the payment to airlines. However, when such payment is made for the chartered hiring of a bus, an airplane, or any other kind of transportation, TDS will be deducted.
- Payment for serving food in restaurants: No TDS is required when the payment is made for serving food in a restaurant in the normal course of business.
- Payment for Couriers: any amount paid to couriers for the transportation of goods will be subject to TDS liability.
Read also: Latest TDS Rate Chart for FY 2023-24 (AY 2024-25)
Consequences of Non-Compliance with Section 194C
If you fails to comply with section 194C, you may face the below consequences:
- Interest: If TDS is not deducted or late deducted or is not deposited or late deposited to Government after deduction by specified person, then interest will be required to be paid on such amount.
- Expenses disallowance: In the above case, such person will not be eligible to claim the deduction of such expenses from PGBP income. The amount of disallowed expenses shall be 30% of the payment. However the expenses will be allowed, if TDS is deposited in subsequent years.
TDS at a Lower Rate
When considering the TDS on payments to Contractors and Subcontractors under Section 194C, the Assessing Officer (AO) has the authority to determine a reduced rate of income tax deduction or even no deduction at all, if the total income of the contractor or subcontractor justifies it. This allows them to issue a certificate upon request, which can then be presented to the deductor for a lower or zero TDS amount. This process ensures that the appropriate amount of tax is deducted in accordance with the contractor or subcontractor’s income.
Conclusion
To sum up, acquiring a Section 194C certificate from the Assessing Officer can greatly facilitate the process of deducting TDS on payments to Contractors and Subcontractors. This ensures that the appropriate amount is deducted, and in some cases, no deduction is necessary, resulting in smoother transactions for all parties involved.
Frequently Asked Questions (FAQ)
According to the rules, when a resident contractor receives payment from a specified individual for completing a task, the latter is responsible for deducting TDS. In this case, a specified individual refers to either the Central or State Government or a Local Authority.
The scope of Section 194C includes a wide range of contracts that require the deduction of TDS. These include contracts for services, advertising, broadcasting and telecasting, transportation of goods and passengers, as well as the provision of labor.