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TDS Under Section 194C : TDS on Contractor

Summary

Section 194C of the Income Tax Act mandates that any person responsible for making payment to a resident contractor, sub-contractor must deduct tax at source (TDS) before crediting or paying the amount. The obligation arises when a single payment exceeds ₹30,000 or aggregate payments in a financial year exceed ₹1,00,000. The rate of TDS is 1% (if the recipient is an individual or HUF) and 2% (for others) on the gross payment. Section 194C covers contracts for execution of work, including supply of labour and specified services such as advertising, broadcasting, carriage of goods, and catering. Employers and businesses must register the TDS deducted, issue TDS certificates, and file quarterly TDS returns (Form 24Q or Form 26Q, as applicable). Failure to deduct or deposit TDS leads to penalties, interest, and disallowance of expenses.

What Is Section 194C?

Section 194C of the Income Tax Act, 1961, is titled “Payment to Contractors” and governs the deduction of TDS on payments made for executing any work, including supply of labour under a contract. The section aims to ensure tax compliance by capturing taxable income at the source when contractors and sub-contractors receive payments for services rendered.

Who Must Deduct TDS Under Section 194C?

1. Deductor (Payer)

• Any Person (including individuals/HUFs): If engaged in business or professional activities and making payments to a resident contractor.
• Businesses & Companies: Corporate entities must deduct TDS when paying contractors or sub-contractors.
• Registered Persons: GST-registered persons paying for works contracts must also deduct TDS.

2. Deductee (Recipient)

• Resident Contractors/Sub-contractors: Individuals, HUFs, firms, companies, or other entities that execute work contracts or supply labour.

Applicability and Scope

Section 194C applies to the following types of contracts:

1. Execution of any work: Construction, installation, repair, renovation, or similar activities.
2. Supply of labour: When labour is provided through contractors or sub-contractors for carrying out work.
3. Advertising & Broadcasting: Contracts for advertisement, including radio or television.
4. Carriage of Goods/Passengers: Transport contracts for goods or passengers via any mode except railways.
5. Catering Services: Contracts for catering including food delivery.

The obligation to deduct TDS arises if:

• Single Payment: Exceeds ₹30,000 in a single transaction.
• Aggregate Payments: Exceeds ₹1,00,000 in a financial year.

194C Threshold Limits

Contract Payments (General)

• Single Payment: If payment or credit in one transaction to a contractor exceeds ₹30,000, TDS must be deducted.
• Aggregate Payments: If total payments in a financial year to the same contractor exceed ₹1,00,000, TDS applies.

Rates of TDS Under Section 194C

1. 1% Rate: Applicable when the recipient is a resident individual or a Hindu Undivided Family (HUF).
2. 2% Rate: Applicable when the recipient is any other resident person (e.g., company, firm, association of persons).

Exemptions and Special Cases

1. Professional Fees vs. Contract Payments

• Section 194J: TDS on professional fees (consultancy, legal, technical) is governed by Section 194J, not 194C. Hence, professional contracts should not be subjected to Section 194C TDS.

2. Contracts with Non-Residents

• Section 195: TDS on payments to non-residents is governed by Section 195; Section 194C applies only to resident contractors.

3. Government & Local Authorities

• Government Payers: Similar threshold and rates apply, but certain state or central government departments may have specific TDS procedures.

4. Composite Contracts

• If a contract involves supply of goods and execution of work, the nature of predominant activity determines the applicability of Section 194C.

Computation and Deduction Procedure

1. Identify Payment Type: Confirm that the payment is for a contract falling under Section 194C.
2. Verify Recipient’s Status: Check if the recipient is a resident and obtain PAN/Aadhaar.
3. Check Thresholds:
   • If a single payment > ₹30,000 (general) or ₹75,000 (transport) OR aggregate > ₹1,00,000, deduct TDS.
4. Apply TDS Rate:
   • 1% for individuals/HUFs.
   • 2% for others.
   • Use 20% in the absence of PAN.
5. Deduct TDS at Time of Payment: Deduct before crediting or paying the contractor’s account.

Compliance Requirements

1. TAN Registration

• Tax Deduction and Collection Account Number (TAN) must be obtained by the deductor before July 1 of the financial year or before making the first deduction (whichever is earlier).

2. TDS Deduction Certificate (Form 16B or Form 16C)

• Form 16C: Issued to contractors/sub-contractors for TDS deducted under Section 194C.
• Due Date: Must be provided within 15 days from the due date of filing the quarterly TDS return.

3. TDS Deposit

• Due Date: 7th day of the following month.

4. TDS Return Filing

• Form 24Q: Applicable for salaries.
• Form 26Q: Applicable for non-salary payments, including Section 194C.
• Due Dates:
  • Quarter 1 (Apr–Jun): 31 July
  • Quarter 2 (Jul–Sep): 31 October
  • Quarter 3 (Oct–Dec): 31 January
  • Quarter 4 (Jan–Mar): 31 May of the following year.

Illustrative Example

Scenario:
XYZ Ltd. hires contractor ABC Construction for renovating its office. The contract value is ₹50,000, and ABC Construction is a registered firm with PAN.

1. Threshold Check:
   • Single Payment: ₹50,000 > ₹30,000 → TDS applies.
2. Rate Determination:
   • Recipient is a firm (non-individual) → 2% TDS.
3. TDS Calculation:
   • TDS Amount: 2% of ₹50,000 = ₹1,000.
   • Net Payment: ₹50,000 – ₹1,000 = ₹49,000 (paid to ABC).
4. Compliance Steps:
   • Deduct ₹1,000 at the time of payment.
   • Deposit ₹1,000 with government by 7th of next month.
   • Issue Form 16C to ABC Construction.
   • File Form 26Q for the quarter.

Consequences of Non-Compliance

1. Interest and Penalty on Late Deduction/Deposit:
   • Interest at 1% per month or part thereof from due date until actual deduction.
   • Interest at 1.5% per month or part thereof from deduction date until deposit with government.

Frequently Asked Questions (FAQ)

What is Section 194C of the Income Tax Act?

Section 194C mandates TDS on payments made to resident contractors or sub-contractors for execution of work, supply of labour, and specified services when payments exceed prescribed thresholds.

Who is liable to deduct TDS under Section 194C?

Any person (individual, HUF, firm, company) making contract payments to residents must deduct TDS if thresholds are exceeded.

What are the TDS rates under Section 194C?

• 1% if contractor is an individual or HUF.
• 2% for any other resident person (firm, company, etc.)

What is the threshold limit for TDS under Section 194C?

• General Contracts: Single payment > ₹30,000 or aggregate > ₹1,00,000 in a financial year.

Is TDS required if a contractor does not have a PAN?

Yes. If no PAN is provided, TDS must be deducted at 20% irrespective of the usual 1%/2% rates.

Are payments for professional services covered under Section 194C?

No. Payments for professional services (consultants, lawyers, doctors) fall under Section 194J, not 194C.

How and when should a deductor file TDS returns for Section 194C?

Use Form 26Q (non-salary TDS) and file quarterly by:

Q1: 31 July; Q2: 31 October; Q3: 31 January; Q4: 31 May.

What happens if TDS is not deducted or deposited?

• Interest at 1% per month for late deduction; 1.5% per month for late deposit.

Is TDS required on advances paid to contractors?

Yes. If advance to contractor exceeds thresholds, TDS applies at that time. Amount can be adjusted when final bills are settled.

Do government departments also deduct TDS under Section 194C?

Yes. Government and local authorities must follow the same rules and rates unless specific exemptions are notified.