Section 194C of the Income Tax Act outlines the provisions for Tax Deducted at Source (TDS) on payments made to contractors and sub-contractors in India. This section applies to a wide range of entities, including government bodies, corporations, universities, trusts, and firms. Here’s a comprehensive guide to understanding the key aspects of Section 194C.
What does section 194C stand for?
Section 194C states that any person responsible for paying any sum to the resident contractor for carrying out any work (including the supply of labor), in pursuance of a contract between the contractor and the following:
- The Central Government or any State Government
- Any local authority
- Any corporation established by or under a Central, State or Provisional Act
- Any company
- Any co-operative society
- Any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the needs for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both
- Any society registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India
- Any trust
- Any university or deemed university
- Any Government of a foreign State or a foreign enterprise or any association or body established outside India
- Any firm
- 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;
What is the meaning of work for the purpose of Section 194C?
The expression, “work” in this section would include-
- Advertising
- Broadcasting and telecasting including production of programs for such broadcasting or telecasting
- Carriage of goods and passengers by any mode of transportation, other than railways
- Catering
- Manufacturing or supplying of a product according to the requirement or specification of a customer by using the materials purchased from such customer or its associate as defined in section 40A(2), But does not include manufacturing or supplying of a product according to the requirements or specifications of a customer by using the materials purchased from a person, other than such a customer.
TDS Rate under Section 194C
| Sl. No | Nature of Payment | TDS Rate if PAN available | TDS Rate if PAN not available |
|---|---|---|---|
| 1 | Payment / Credit to resident individual or HUF | 1% | 20% |
| 2 | Payment/Credit to any resident person other than individual / HUF | 2% | 20% |
| 3 | Payment/ credit to Transporters | NIL | 20% |
*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.
Read more: Section 194C – TDS on Contract. How it is different from 194M
According to Section 194C, what is a Contractor?
Contractor means any person who enters into a contract with the central/state government; corporation; company; local authority, or a cooperative society to conduct any form of work (including the supply of manpower).
According to Section 194C, what is a Sub-Contractor?
A “sub-contractor” would mean any person:
- Who enters into a contract with the contractor for carrying out, or
- For the supply of labor for carrying out the whole or part of the work undertaken by the contractor under a contract with any of the authorities or
- For the supply of, whether wholly or partly, any labor which the contractor has undertaken to supply in terms of his contract with any of the authorities mentioned under this section.
Where is the Payment made to Sub-contractors, what Conditions must be Satisfied?
- Payment is made to a sub-contractor who is resident within the meaning of Section 6 of the Income Tax Act, 1961
- Payment is made by a resident contractor, not being an individual or a HUF
- Payment is made to carry out any work, including the supply of labor
- The amount of consideration of the contract in respect to which payment is made should not be less than Rs. 30,000
- The sum should be credited or paid by the contractor in respect of a contract undertaken by him with the specified bodies
Read more: TDS Rate Chart for FY 2022-23/AY 2023-24 – Income Tax
When must TDS be subtracted in accordance with Section 194C?
The person responsible for making payment to resident contractor/sub-contractor should deduct TDS,
- either at the time of crediting such sum to the account to the payee or
- at the time of payment thereof in cash or
- by an issue of a cheque or by any other mode, whichever is earlier.
Where any sum 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 amount, 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. Thus, the tax has to be deducted even if the amount payable to the resident contractor/subcontractor is transferred to the suspense account by the payer in his books.
In what situations is TDS up to 194C non-deductible?
No tax is required to be deducted in the following cases:
- Where the sum paid or credited in pursuance of any contract does not exceed Rs. 30,000, or
- Where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year does not exceed Rs. 1,00,000 the person responsible for paying such sums will not deduct TDS under this section
- Individual or HUF not to deduct tax if the payment or amount credited to the contractor is for personal use
- No individual or HUF 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 the personal purpose of such individual or any member of HUF
- 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 PAN, to the person paying or crediting such amount
Time Limit within which TDS is to be Deposited
- Where the payment is made by or on behalf of the Government – On the same day.
- Where the payment is made in any other case than the government
- If the amount is credited in the month of March – On or before April 30th
- In other months – Within 7 days from the end of the month in which the deduction is made.
Read Also: Summary of Section 194M- TDS on payment to resident contractors and professionals
Issue of TDS certificate
In case of payments other than salary, TDS certificates are to be issued on a quarterly basis in Form No.16A. As per rule 31, every person responsible for deduction of tax from payments other than salary has to issue a quarterly TDS certificate in Form No. 16A. The certificate is to be issued by the following dates:
As per CBDT Circular No. 1/2012, dated 9-4-2012, it is mandatory for all the deductors to issue TDS certificate in Form No. 16A by generating the certificate through TIN central system by downloading the certificate from the TIN website with a unique TDS certificate number. These provisions are applicable in respect of all sums deducted on or after 1-4-2012. The certificate so issued can be authenticated either by using the digital signature or manual signature.
TDS at a Lower Rate
According to Section 194C where the AO is satisfied that the total income of contractor or sub-contractor justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the AO shall, on application made by the contractor or sub-contractor in this behalf give to him such certificate as may be appropriate. The contractor or sub-contractor can then furnish the lower rate or nil TDS certificate to the deductor.
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