Application Of Section 194C

The provisions outlined under Section 194C of the Income Tax Act are only applicable to either

  • Works Contracts
  • Labour Contracts

However, it is not applicable to any contract that deals with the sale of any goods or solely the supply of any goods or products.

TDA deducted as per Section 194C is applicable only under the conditions mentioned below:

  • The contractor should be an Indian resident, as per the guidelines stated in Section 6 of the Income Tax Act
  • Any payment that has been made to the contractor must be carried out by any person as mentioned under Section 194C
  • The payment made must be done for the purpose of conducting any form of work, which may also include the supply of manpower for the purpose of conducting any kind of work.
  • The payment in question must be carried out in accordance with the stipulations mentioned in the contract, to which both the payer as well as the contractor are privy to. The contract in question may be in either oral form or written form.
  • The amount of payment made between the two parties should not be in excess of Rs 30,000 at any given point in time.
  • If the total of all payment or credit amounts given to the contractor by the payer is found to be in excess of Rs 75,000 over the course of the financial year, then the payer will be required to ensure that deduction of TDS takes place from the total payment amount.
  • If the total of all advance payments made to the contractor is found to be in excess of Rs 30,000, then the payer will be required to ensure that deduction of TDS takes place from the total payment amount.
  • If the total of all payments made to the contractor was initially found to not be in excess of Rs 30,000, but was later found to surpass this amount, then the payer will be required to ensure that deduction of TDS takes place from the total payment amount in accordance with previous payments made as well.

Non-Applicability Of Section 194C

The provisions outlined under Section 194C will not be applicable under the following conditions:

  • If, through the carrying on of any type of business, the payer in question has accumulated a total turnover that does not exceed the stipulated limit of Rs 1 crore over the course of the financial year that was completed prior to the the financial year during which the payment was made to the contractor.
  • If, through the carrying on of any type of profession, the payer in question has accumulated a total turnover that does not exceed the stipulated limit of Rs 25 lakhs over the course of the financial year that was completed prior to the the financial year during which the payment was made to the contractor.
  • If the payment made by an individual or Hindu Undivided Family (HUF) was diverted towards any expenses of a personal nature that have been incurred by the individual or HUF.

What is the Meaning of Work for the Purpose of Section 194C?

The expression, “work” in this section comprises:

  • Broadcasting and telecasting including the production of programs foe such telecasting or broadcasting
  • Advertising
  • Catering
  • Carriage of goods and passengers by any transportation, other than railways
  • Manufacturing or supplying a product in accordance with a customer’s requirements or specifications while utilising materials obtained from that customer or a business partner as defined in section 40A(2) is allowed, but this does not include manufacturing or supplying a product in accordance with a customer’s requirements or specifications while utilising materials obtained from a third party.

Constitution Of ‘Work’ As Per Section 194C

Under Section 194C of the Income Tax Act, the term ‘work’ constitutes any of the following:

Definition Of Contractor And Subcontractor As Per Section 194C

Under Section 194C of the Income Tax Act, a contractor and a subcontractor may be defined as follows:

  • A contractor is referred to as any person who agrees to be party to a contract involving any of the following entities for the purpose of conducting any form of work, which also includes supplying manpower to conduct such work:
    • The Central or State Government
    • A Corporation
    • A Company
    • A Localised Authority
    • A Co-operative Society
  • A Subcontractor is referred to as any person who agrees to be party to a contract involving a contractor mentioned above, for the purpose of the following:
    • Conducting either all or part of the work, which the contractor has agreed to undertake
    • Supplying manpower for all or part of the work undertaken by the contractor

Deduction Of TDS As Per Section 194C

As per the provisions of Section 194C of the Income Tax Act, deduction of TDS will be made by the payer at any of the following times:

  • When the payment is made to the contractor or the subcontractor when the amount has been credited to either of their bank accounts.
  • When the payment made to the contractor or the subcontractor is in the form of cash.
  • When the payment made to the contractor or the subcontractor is in the form of a cheque.
  • When the payment made to the contractor or the subcontractor takes place through any other payment method.
  • When the payer transfers or credits any amount meant for a contractor or subcontractor to a ‘Suspense Account’ or any other account.

Rate Of TDS As Per Section 194C

As per the provisions of Section 194C of the Income Tax Act, the rate of TDS that is applicable depends on certain conditions mentioned below:

If the payee or contractor possesses PAN:

  • TDS of 1% of the amount will be deducted from any payments or credits made to resident individuals or Hindu Undivided Families (HUFs).
  • TDS of 2% of the amount will be deducted from any payments or credits made to any party other than resident individuals or Hindu Undivided Families (HUFs).
  • No TDS will be deducted from any payments or credits made to any transporters.

If the payee or contractor does not possess PAN:

  • TDS of 20% of the amount will be deducted from any payments or credits made to resident individuals or Hindu Undivided Families (HUFs)
  • TDS of 20% of the amount will be deducted from any payments or credits made to any party other than resident individuals or Hindu Undivided Families (HUFs)
  • TDS of 20% will be deducted from any payments or credits made to any transporters.

What is the Rate of TDS?

Nature of PaymentTDS Rate (If PAN Available)TDS Rates from 15.5.2020 to 31.3.2021TDS Rate if PAN no available
Payment/ Credit to resident individual or HUF1%0.75%20%
Payment/ Credit to any resident person other than individual/ HUF2%1.5%20%
Payment/ Credit to TransportersNILNIL20%

Where is the Payment made to Sub-contractors, what Conditions should be Satisfied?

  • A subcontractor is paid who is deemed to be a resident under Section 6 of the Income Tax Act, 1961.
  • Payment is done by a resident contractor, not being a Hindu Undivided Family (HUF) or an individual.
  • To complete any task, including the provision of labour, payment is provided.
  • The contractor must either credit or pay the amount in relation to a contract he agreed into with the designated bodies.
  • The contract’s consideration must not be less than Rs.30,000 in order for payment to be made.

Exemptions Under Section 194C

Certain circumstances exist under which the deduction of TDS under Section 194C of the Income Tax Act will not be applicable. These are as follows:

  • If the amount paid to the contractor or subcontractor in accordance to the stipulations of the contract is less than Rs 30,000 at any given time, then the payer will not be liable to deduct TDS
  • If the total amount paid to the contractor or subcontractor in accordance to the stipulations of the contract is less than Rs 75,000 over the course of the financial year, then the payer will not be liable to deduct TDS
  • If the amount paid to the contractor or subcontractor was made prior to the 1st of June 1972
  • If the amount was paid prior to the 1st of June 1973 in accordance to the stipulations of the contract entered into by either
    • A contractor and a co-operative society
    • A contractor and a subcontractor with regards to work conducted by the contractor for the co-operative society.

What are the Exceptions to TDS on Payment to Contractors?

Deduction of TDS in case of composite contract: 

  • When the government provides materials, it is unclear whether the contractor will be paid in full or in net payment, which is the sum of the gross payment and any deductions.
  • Due to information provided by the government, a decision will need to be made in light of the terms of the specific contract and the actions of the parties thereto.
  • When the government or another designated party has agreed to supply all or a portion of the materials required for the work at the agreed-upon prices, and the contractor has agreed to build a building or a dam, the deduction will be applied to the gross payment without excluding any adjustments on account of the cost of materials. 
  • The sum payable to the contractor in relation to the contract will only be the amount paid for such labour or services and will, therefore, not include the price of the materials supplied by the government or other specified persons when the contractor has only agreed to provide labour for the work and the ownership of the materials supplied remains at all times with the government or another specified person.

Under What Circumstances TDS u/s 194C is not deductible?

In the following cases, no tax needed to be deducted:

  • When the total amount paid or credited in accordance with any contract is less than or equal to Rs. 30,000, or 
  • The person responsible for paying such sums will not deduct TDS in accordance with this section when the total amount of such sums credited or paid or projected to be credited or paid during the financial year does not exceed Rs.1,00,000.
  • If the money is credited or sent to the contractor’s account only for the benefit of the individual or any member of the HUF, neither they nor the HUF shall be permitted to deduct income taxes from the amount.
  • On providing their PAN to the contractor paying or crediting the amount, no deduction shall be made from any sum credited or paid, or anticipated to be credited or paid, during the previous year to the account of a contractor during the course of business of operating, hiring, or leasing goods carriages.

Substitution of new section for section 194C

61. For section 194C of the Income-tax Act, the following section shall be substituted with effect from the 1st day of October, 2009, namely:—

“194C. Payments to contractors.—(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 labour 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 an amount equal to—

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

         (ii )  two per cent 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.

(2) Where any sum referred to in sub-section (1) is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(3) Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, tax shall be deducted at source—

          (i )  on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or

         (ii )  on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.

(4) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.

(5) No deduction shall be made from the amount of any sum credit­ed or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed twenty thousand rupees :

Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds fifty thousand rupees, the person respon­sible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section.

(6) No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, on furnishing of his Permanent Account Number, to the person paying or crediting such sum.

(7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the pre­scribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be pre­scribed.

Explanation.—For the purposes of this section,—

          (i )  “specified person” shall mean,—

     (a)  the Central Government or any State Government; or

     (b)  any local authority; or

      (c)  any corporation established by or under a Central, State or Provincial Act; or

     (d)  any company; or

      (e)  any co-operative society; or

      (f)  any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfy­ing the need for housing accommodation or for the purpose of planning, deve-lopment or improvement of cities, towns and vil­lages, or for both; or

     (g)  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

     (h)  any trust; or

      (i)  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

      (j)  any Government of a foreign State or a foreign enter­prise or any association or body established outside India; or

      (k)  any firm; or

      (l)  any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person,—

            (A) does not fall under any of the preceding sub-clauses; and

            (B) is liable to audit of accounts under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor;

         (ii )  “goods carriage” shall have the meaning assigned to it in the Explanation to sub-section (7) of section 44AE;

        (iii )  “contract” shall include sub-contract;

         (iv )  “work” shall include—

     (a)  advertising;

     (b)  broadcasting and telecasting including 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,

                but does not include manufacturing or supplying a product accord­ing to the requirement or specification of a customer by using material purchased from a person, other than such customer.’.

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