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Section 194C of Income-tax deals with any TDS on payment of contractor & Sub-Contractors. This guide by H&R Block deals with mainly what is TDS on contract, conditions, rates and also the consequences.

Section 194C – TDS on Work Contract

Last Update Date : May 02, 2018

section 194c

TDS under Section 194C is deducted from the payment that is made to people in relation to contractors or sub-contractors. In this comprehensive guide, we are going to understand TDS on the payment to contractors levied under Section 194C.

What is Section 194C?

Section 194C of the Income Tax Act deals with Tax Deducted at Source (TDS) which is to be compulsorily deducted from the payments made to any person who is a resident contractor or a subcontractor in pursuance of work in accordance to the contract.

It means if payment is made to the persons mentioned above, then TDS is required to be deducted by the person who has made the payment.

Meaning and Scope of Works Contract

Section 194C is applicable when any payment is made to a contractor or sub-contractor for any ‘work’ which includes

  • Advertising contract.
  • Telecasting and broadcasting including the production of such programs
  • Carriage of passengers and goods by any mode of transport (exception: Railways)
  • Catering services
  • Supplying or manufacturing a product as per the requirement or the specification of a customer by using the materials that are supplied by such customer.
  • Supply of labour for works contract

Applicability of Section 194C

The provisions are applicable only to following contracts

  • Works Contracts
  • Labour Contracts

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

Conditions before Deducting TDS

There are certain conditions that should be kept into consideration before deducting the TDS.

  • The contractor should be a Resident of India.
  • 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 to conduct any form of work.
  • The payment in question must be carried out by the conditions mentioned in the contract (Oral or written)
  • Tax to be deducted if any single payment or credit exceeds Rs 30,000 in any instance.
  • If the total payment or credit amount given to the contractor by the payer is found to be more than Rs 1,00,000 in the financial year (tough the individual payment is less than Rs 30,000), then the payer will have 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 more than Rs 30,000, then the payer will have to ensure that deduction of TDS takes place from the total payment amount

TDS to Sub-Contractor

As per the I-T Act provisions, any person (who is a contractor other than Individual or HUF), who is responsible for payment to any resident and who undertakes following
A contract along with a sub-contractor for carrying out or for supplying labour for carrying out (whether whole or any part is taken by the contractor) the contractor shall

  • Deduct an amount that is equal to 1 % of the amount as income-tax on income comprised therein
  1. At the time of credit of the amount in the account of sub-contractor; or
  2. At the time of payment in cash
  3. By issuing a cheque or a draft or by any mode, whichever is earlier.

Subcontractor means any person who enters into a contract with the contractor for carrying out, or for the supply of labour for carrying out the whole or part of the work undertaken by the contractor under a contract with any of the authorities.

Conditions for Payment to Sub-Contractor

  • Payment made to a sub-contractor who is Resident of India
  • Payment made to carry out any work
  • Payment made by the contractor
  • The amount of the contract for which payment is made should be more than Rs 30,000 or total for the year should be more than Rs 1,00,000.

What is the Rate of TDS?

The rate of TDS (No surcharge, cess etc. required to be deducted) that is applicable depends on certain conditions as mentioned below

Nature of the Payment Rate of TDS if PAN is available Rate of TDS if PAN is unavailable
Payment or credit to a Resident Individual or HUF 1% 20%
Payment or credit to a resident other than an Individual or HUF 2% 20%
Payment or credit to Transporters NIL 20%

When is TDS to be Deducted

Tax is not to be deducted in the following cases

  • When the amount that is paid or credited for any contract is less than Rs 30,000
  • When the amount of money credited or paid or likely to be credited or paid is not more than Rs 1,00,000 during the financial year
  1. If the payment or the amount to be credited to the contractor is for personal use, an individual or HUF need not deduct
  2. No individual or HUF shall be liable to deduct tax on the amount that is credited or paid in to the account of the contractor where such amount is credited or paid only for the personal purpose
  3. No deduction will be made from any amount that is credited or paid or likely to be credited or paid for the business of plying, hiring or leasing goods carriages, on furnishing of his PAN, to the person paying or crediting such amount.

Time Limit to Deposit the Tax

  • If the Payments are made on behalf of the Government – On the same day.
  • If the Payments are made in any other case than that of government.
  1. If the amount is credited in March – On or before 30th April
  2. For other months – Within 7 days from the end of the month in which the deduction is made.

For example, if payment is made to the Contractor XYZ Ltd on 20th Jan then, in this case, the last date to deposit the tax with the Government will be 7th Feb.

Issue of TDS Certificate

TDS certificates are to be issued on a quarterly basis in Form No.16A in case of payments other than salary. Every person that is responsible for deducting tax from payments which are other than salary is required to issue a quarterly TDS certificate in Form No. 16A, as per Rule 31.

As per the CBDT Circular No. 1/2012, dated 9th April 2012, generating the TDS certificate through the TIN central system and then downloading the certificate with a unique certificate number from TIN website has been made compulsory for all the deductors. These provisions were made applicable from 1st April 2012. The TDS certificate that has been issued can be further authenticated by using either a digital signature or manual signature.

Consequences of Non-Compliance

Case 1: Failure to deduct TDS

Interest: In a situation where a person makes the payment to a resident and fails to deduct TDS where he is liable to deduct tax at source, then he will have to pay interest at the rate of 1% per month from the date on which it was deductible till the time it is deducted.

Case 2: Failure to pay TDS

Interest: In case of a situation where the tax has been deducted from the payment, but it has not been deposited with the government. Then, in this case, Interest will be chargeable at the rate of 1.5% per month from the date of deduction till the date of payment.

Case 3: Default in the filing of returns

Interest: There is no interest liability.

Late Filing Fees u/s 234E (Penalty): If the return is not filed then as per the provisions of Act, late filing fees u/s 234E (Penalty) of Rs 200 per day will be levied till the time failure continues subject to a maximum of total amount of TDS.

Apart from the ones mentioned above, there are more consequences for Non-Compliances as follows

Disallowance of Expenditure

In this case, if a person is deducting TDS while making the payment to the said person, then, in this case, the deductor is allowed to claim a deduction for the said expenditure.
But if there is vice versa scenario where the person fails to deduct the amount of TDS to be deducted or has deducted the TDS but fails to deposit the same, then such amount will be disallowed u/s 40(a)(ia) for computing income under the head “PGBP”

Penalty (Sec 271H)

If a person responsible to deduct the TDS fails to file the statement of TDS within due date then the assessing officer may direct him to pay penalty minimum of Rs 10,000 which may be extended to Rs.1,00,000.

Prosecution (Sec 276B)

As per the Income Tax Act, if any person who has deducted the tax at source but fails to pay the tax to the government within the time limit, then he may be punishable with imprisonment for a term of minimum 3 months to maximum 7 years including the fine.

If you have any issues relating to TDS compliance or return filing or if you have more queries to be resolved you can post your queries on our Tax Forum.

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