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.
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.
Section 194C is applicable when any payment is made to a contractor or sub-contractor for any ‘work’ which includes
The provisions are applicable only to following contracts
Exception: However, it is not applicable to any contract that deals with the sale or supply of any goods or products.
There are certain conditions that should be kept into consideration before deducting the TDS.
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
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.
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%|
Tax is not to be deducted in the following cases
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.
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.
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.