Section 194C – TDS on Contract. How it is different from 194M

TDS under Section 194C: Tax deduction at source is a means to avoid the increase in unaccounted incomes. On few transactions specified by the Government of India the payee deduct TDS from the amount payable and deposits that amount to the government as TDS in name of the receiver. The receiver is allowed to adjust such TDS against total tax liability.

Section 194C – TDS on Contract

As per the Income Tax provisions of section 194C, payment made by a person to a resident person for carrying WORK under a contract between the ‘specified person’ and the resident contractor, attracts tax deduction at source (TDS).

What is Work?

An inclusive definition is given in the Income-tax Act, 1961. It includes the following activities-

Construction
Repair
Renovation
Cleaning
Advertising
Broadcasting and telecasting
Catering
Manufacturing of a product according to specifications.
Painting and many more.

Clarification regarding WORK-

If Mr B asks Mr A to deliver 500 handmade shirts.

Case 1- if Mr A buys raw material from a third person then this transaction will not qualify as WORK, it will be SALE OF GOODS

Case 2- if Mr B provides raw material to Mr A for the manufacturing shirts for Mr B then this transaction will qualify as WORK and attracts TDS u/s 194C.

Who are specified Persons?

The ‘specified person’ means the following –

Central or State Government;
local authority;
Corporation established by Central, State or Provincial Act;
Company;
Trust;
Co-operative Society;
registered Society;
authority engaged eir for purpose of dealing with and satisfying need for housing accommodation or for planning, improvement or development of cities, town and village;
university established / incorporated by Central, State or Provincial Act;
firm;
Government of a foreign state / a foreign enterprise or any association / body established outside India;
Individual or HUF liable to audit under section 44AB [Clause (a) or Clause (b)] during financial year immediately preceding financial year in which sum is credited or paid to account of contractor.

Further, it is mention here that term ‘contract’ includes ‘sub-contract’.

Payment made to any resident contractor.

A contractor is a person who performs work for the person. The contractor must be resident if he is a non-resident no TDS u/s 194C.

Threshold Limit of section 194C

No tax is required to be deducted at source if the amount paid/payable during a financial year does not exceed:

Rs 30,000 in case of a single contract, or
Rs 1,00,000 in case of multiple contracts/ aggregate of contracts

Example:

ABC Ltd. made the following different contract payments to Mr Z, a contractor during FY 2019-20-

Rs 28,000 on 24^th September
Rs 27,000 on 5^th November
40,000 on 31^st December
Rs 15,000 on 5^th February

On the first two payment, NO TDS is deducted as both the transaction is under Rs 30,000. But the third transaction will attract TDS on Rs. 40,000 only as it exceed Rs 30,000. On the fourth transaction, since whole total of all transaction exceeds 1,00,000, therefore TDS is to be deducted on whole 1,10,000 minus TDS on 40,000 already deducted.

Exemption from TDS under section 194C

1. No tax to be deducted at source if payment is made by individuals or HUFs for carrying out work in the nature of personal use

Example: Mr Babatax makes a payment for the repairing work done at his place of residence. In this case, no TDS is required.

2. No TDS if all the following conditions fulfilled;

The Transporter is engaged in the business of plying, hiring or leasing goods carriages.
The Transporter owns 10 or fewer goods carriages during the previous year
The transporter has furnished a declaration to this effect along with PAN.

Time of Deduction of TDS

The Deductor is required to deduct TDS under Section 194C at the time earlier of the following dates –

Credit of sum to the account of the Contractor; or
Payment in cash or cheque or draft or any other mode.

TDS rate on Contract under Section 194C

Payment Made to	Rate
Individuals or HUF	1%
Any other Person	2%

Note: TDS rate have been reduced by 25% due to Covid-19 from 14th May 2020 to 31 March 2021. Therefore, 0.75% shall be charged in place of 1% and 1.5% shall be charged in place of 2%.

Section 194M

Section 194M was introduced to provide for levy of TDS at the rate of 5% on the sum paid or credited in a year on account of contractual work or professional service of above Rs 50 lakh in a financial year. Such individuals and HUF not required to get their books of accounts audited.

Difference Between section 194M and 194C

The main difference between both sections is that individuals and HUFs who don’t have tax audit in the previous year are not liable to deduct TDS u/s 194C but they will be liable to deduct TDS u/s 194M if total payment during the FY exceeds Rs 50,00,000 irrespective of fact he made payment for personal purpose. Read More at Summary of Section 194M- TDS on payment to resident contractors and professionals

Example:

1. Mr BabaTax, a proprietor who not required to do income Tax Audit in the previous year, made a payment of Rs. 80,00,000 to a builder for making their house.

Mr Arvind is not liable to deduct TDS u/s 194C as he has No TAX AUDIT in the previous year.
But he is liable to deduct TDS u/s 194M as payment exceeds Rs 50,00,000.

2. M/s Arvind and sons LLP made a payment of Rs. 80,00,000 to a builder for repairing of their office.

LLP is liable to deduct TDS u/s 194C as payment is made for business purpose and exceeds both limits.
They are not liable to deduct TDS u/s 194M as TDS is already deducted u/s 194C

Important Points to Note

1. In all the above cases, when self-declaration under Form 15G/ 15H is filed, no TDS is deducted.

2. If in any case, PAN is missing, TDS rate will be 20%.

3. No Surcharge, Education Cess, and SHEC shall be added. Hence, TDS shall be deductible at basic rates.

The author of the above article is Aditya Kishore.

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Section 194C – TDS on Contract. How it is different from 194M