Taxation

TDS on Contractor Payment – Section 194C

According to Section 194C of Income Tax Act, 1961, any person who is responsible for the payment of any sum to the resident contractor to carry out any work (including the supply of labour) in pursuance of an existing contract between the contractor and the following:

• Central government or any State Government
• Any local authority
• Any company
• Any corporation established under a Central, State or any provisional Act
• Any cooperative society
• Any society registered under the Societies Registration Act, 1980 or any such law corresponding law existing in any part of India
• Any firm
• Any university or any deemed university
• Any trust

What is meant by term ‘work’ under section 194C? 

According to Section 194C, the scope of the term ‘work’ includes:

• Advertising
• Carriage of passengers or goods by any mode of transportation except railways
•  Telecasting and broadcasting including production of programmes for such telecasting and broadcasting
• Supplying or manufacturing of products as per the needs and requirements of customers by using the materials from such customer or his associates according to section 40A(2). This does not include supplying or manufacturing of products as per the needs and requirements of the customers by using materials purchased not from the customer or his associated but from a person other than such customer
• Catering 

When is the TDS applicable to contractors? 

If the payment made to a contractor does not exceed a sum of Rupees 30,000, then TDS is not applicable to be deducted on such payment made to a contractor. However, if the total number of payments cumulatively exceeds a sum of Rupees 1 lakh rupees during a financial year, then TDS shall be deducted under section 194C.

Rate of TDS on contractor payment 

The rate of TDS on contractor payment shall be 1% which is required to be deducted by the payer in case the payment has been made to an HUF or an individual and at the rate of 2% in case the payment is made to any other person.

At what time TDS on contractor payment is deducted? 

According to section 194C, TDS shall be deducted within earlier of the following dates:

• At the time when payment is made via cheque/ cash/ draft or any other mode or
• At the time of extending credit of the sum to the contractor

In case where any sum has been credited to any account, whether called as a ‘suspense account’ or known by any other name, of a person who is liable to pay such amount then such crediting shall be deemed to be a credit of such income to the account of the payee and the provisions of this section shall be applicable accordingly. Therefore, the TDS has to be deducted even if the amount payable to the resident contractor/ sub-contractor has been transferred to the suspense account by the payer in his books.

Who is a Sub-contractor according to section 194C? 

A sub-contractor is a person who enters into a contract with a contractor for carrying out a work or for supplying of labour for the purpose of carrying out the whole or part of the work which has been undertaken by the contractor as part of a contract with any of the authorities or for supplying of labour whether wholly or partly which the contractor has undertaken to supply under a contract with any of the authorities mentioned under section. 

What is the rate of TDS applicable to Sub-Contractors? 

The rate of TDS applicable to sub-contractors is 1% on the gross amount of receipt at the time when payment is made in cash or by issue of cheque or DD or by any other mode (whichever is earlier).

What conditions must be satisfied at the time of making payment to the sub-contractors? 

• The payment is made to a sub-contractor who is a resident according to section 6 of the Income Tax Act.
• A resident contractor who is not a Hindu Undivided Family (HUF) or individual makes the payment.
• The payment is made for the purpose of doing any work or consisting of supply of labour.
• The consideration amount of the contract for which payment is made should not be below the amount of Rupees 30,000.
• This sum should be paid or credited by the contractor in respect of a contract undertaken by the contractor with the specified bodies

Exceptions to the TDS on contractor payment 

Deduction of TDS in cases of a composite contract

In cases where the materials are supplied by the government, the question is whether the deduction will be made taking into account gross payment made to the contractor or net payment made to him i.e. gross payment minus deductions if any. In such cases of materials being supplied to the government, deduction will be decided in light of the terms of a particular contract and conduct of the parties will also be taken into account.

In cases where the contractor has undertaken to construct a dam or a building for the government and the government or other specified persons has undertaken to supply all or any of the materials required for the work at the stipulated prices, the deductions will be made only on the gross payment without excluding any adjustments on account of the cost of the materials.

In instances where the contractor has undertaken to supply only the labour for the work where the ownership of the materials remains with the government at all times or some another specified person, the amount that will be paid to the contractor in respect of the contract will only be for such labour services provided by him will not include the price of the materials which are supplied by the government or some other specified person.

The rate of TDS on contractor payment made by the government or other specified persons shall be 2% or 1% of the gross payment depending on the terms of the contract. However, the rate is 1.5% or 0.75% for transactions from 14 May 2020 until 31^St of March, 2021.

TDS on Contractor Payment where the party itself supplies materials to the contractor

In cases where the material is supplied by the party itself, then no deduction is possible and consequently no TDS can be made. However, in cases where the payment is made to the contractor/ sub-contractor, tax is required to be deducted.     

What are the instances where TDS on contractor payment is not deductible?  

In the following instances, TDS on contractor payment is not deductible under section 194C:

• In cases where the sum credited or sum paid in pursuance of a contract does not exceed the amount of Rupees 30000 or
• In cases where the cumulative amount of the sums credited or the sums paid or likely to be credited or paid during a given financial year doesn’t exceed the amount of Rupees 1 lakh, then the person responsible for the payment of such sums is not liable to deduct TDS under this section

HUF or Individuals are not supposed to deduct TDS if the amount credited or payment made is for the personal use of the contractor

• No HUF or individual is liable to deduct income tax on the amount paid or credited in the account of the contractor where the credit or payment of such sum is done exclusively for the personal use of such individual or any other member of HUF.
• Further, no deduction of TDS shall be made from any sum paid or credited or likely to be paid or credited during the previous year to the account of a contractor during the course of business of hiring or leasing of goods carriages, plying only after PAN card has been furnished to the person paying or crediting such amount.

What is the time limit within which TDS on contractor payment needs to be deposited?  

In cases where payment is made by or on behalf of the government, then TDS needs to be deposited on the same day itself.

In cases where the payment has been made other than the government-

• If the payment has been made in the month of March then TDS needs to be deposited on or before April 30.
• If the payment is made in other months, then TDS needs to be deposited within a period of 7 days from the end of the month in which the deduction is supposed to be made.

Issue of certificates for TDS on contractor payment  

Apart from payment other than salary, TDS certificates are issued on a quarterly basis in Form no. 16A. Rule 31 provides that every person who is responsible for the deduction of tax on payments other than salary has to issue a TDS certificate on a quarterly basis in Form no. 16A. According to a circular released by CBDT Circular No. 1/2012 dated 09-04-2012, it is mandatory for all the eligible TDS deductors to issue TDS certificates in Form No. 16A by generating the same through Tax Information Network (TIN) central system by downloading the certificate from the TIN website with the certificate carrying a unique certificate number. The provisions of this circular shall be applicable to all the sums deducted on or after the 01-04-2012. The certificate issued can also be authenticated by either using a manual signature or a digital signature. 

Certain clarifications have also been provided by CBDT-

• Payment made to a contractor for extending electrician services or payment made to an electrician is covered under section 194C
• Brokerage or Fixed Deposit (FD) Commission are not covered under section 194C
• Payment made to an airline or a travel agent for the purchase of a ticket is not subjected to TDS under section 194C. However, in case a plane, bus or any other mode is chartered, then TDS is liable to be deducted under section 194C
• Payments made to a courier service is covered under section 194C
• Payments which are made to the forwarding and clearing agents for the carriage of goods is liable to TDS under section 194C.

Return filing requirements for TDS on contractor payment  

Every deductor who deducts the TDS as per section 194C is mandated to file a quarterly return in Form 26Q within the following dates:

Months	Due Date
April – June	31st July
July – September	31st October
October – December	31st January
January – March	31st May

Lower rate of TDS on contractor payment  

Where the Assessing Officer (AO) is of the opinion that as per section 194C of the Income Tax Act^[1], the net income of the contractor or sub-contractor justifies deduction at any lower or non-deduction of income-tax, the AO shall on an application made by the contactor or sub-contractor in this behalf grant him such certificate as may be appropriate. Then the contractor or sub-contractor shall furnish a lower TDS or even nil TDs to the deductor.  

Read our Article:Section 194R of the Income Tax Act- Brief Analysis