Section 194C : Applicability & TDS on Payment to Contractors

Section 194C of the Income Tax Act outlines the provisions for tax deduction at source (TDS) on payments made to resident contractors and sub-contractors. The applicability, time of deduction, rates, threshold limits, and various other aspects related to TDS under this section are clarified below.

1. Applicability of TDS under Section 194C:

TDS under Section 194C applies to payments made to resident contractors and sub-contractors for work carried out under various categories, including contracts with the

• The Central Government or any State Government; or
• Any local authority; or
• Any statutory corporation; or
• Any company; or
• Any co-operative society; or
• Any statutory authority dealing with housing accommodation; or
• Any society registered under the Societies Registration Act, 1860; or
• Any trust; or
• Any university established under a Central, State or Provincial Act and an institution declared to be a university under the UGC Act, 1956; or
• Any firm; or
• Any Government of a foreign State or foreign enterprise or any association or body established outside India; or any person, being an individual, HUF, AOP or BOI, who has total sales, gross receipts or turnover from the business or profession carried on by him exceeding Rs. 1 crore in case of business and Rs. 50 lakhs in case of profession during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor.

2. Time of Deduction:

Tax must be deducted at the time of payment or when the sum is credited to the contractor's account, whichever is earlier. If the sum is credited to an account in the books of the payer, it is considered as credited to the payee, and TDS should be applied.

3. Rate of TDS:

The TDS rates under Section 194C are as follows:

• 1% for individual and HUF contractors/sub-contractors
• 2% for other payees
• Nil for contractors or sub-contractors in the transport business who furnish their PAN

4. Threshold Limit for TDS:

No TDS is required for contract considerations that do not exceed ₹30,000. However, TDS is applicable if the aggregate sum paid to a contractor or sub-contractor exceeds ₹1,00,000 during the financial year, even if a single payment is below ₹30,000.

5. Definition of Work:

Work includes various activities, such as advertising, broadcasting, carriage of goods or passengers, catering, and manufacturing or supplying products based on customer requirements. However, contracts for manufacturing or supplying products using raw materials from a source other than the customer are considered sales contracts and not covered under Section 194C.

6. Non-Applicability of TDS:

TDS is not required for payments made in the nature of transport charges during the business of plying, hiring, or leasing goods carriages if the contractor furnishes their PAN. Specific conditions, including owning ten or fewer goods carriages, engagement in the transport business, and PAN submission, must be met for this exemption.

• • Owns ten or less goods carriages at any time during the previous year
  • Engaged in the business of plying hiring, or leasing goods carriages
  • Furnished Declaration With Pan

Meaning of Goods carriage:
Goods carriage means -

• Any motor vehicle constructed or adapted for use solely for the carriage of goods; or
• Any motor vehicle not so constructed or adapted, when used for the carriage of goods.

The term “motor vehicle” does not include vehicles having less than four wheels and with engine capacity not exceeding 25cc as well as vehicles running on rails or vehicles adapted for use in a factory or in enclosed premises.

7. Important Points:

• Section 194C applies to work contracts and labor contracts, not sales contracts.
• Contracts for professional services are not covered under Section 194C; separate provisions exist under Section 194J.
• TDS must be deducted at the time of crediting the sum to the contractor's account or at the time of payment, whichever is earlier.

8. Deduction of Tax on Gas Transportation Charges:[Circular No. 9/2012 dated 17.10.2012]:[ [Circular No. 9/2012 dated 17.10.2012]

Gas transportation charges paid by the purchaser to the owner/seller of natural gas are not covered under Section 194C if the contract remains essentially a sale and not a works contract.

9. Applicability of TDS on Payments by Broadcasters/Television Channels: [Circular No. 04/2016, dated 29-2-2016]

The distinction between payments for content production as per broadcaster specifications and payments for acquiring broadcasting/telecasting rights is essential. The former falls under Section 194C, while the latter may be subject to TDS under other sections of Chapter XVII-B.
In conclusion, understanding the applicability of TDS under Section 194C is crucial for businesses and individuals to comply with tax regulations when making payments to contractors and sub-contractors for various types of work.

10- The time limit to deposit TDS (Tax Deducted at Source)

If the amount is paid or credited in a month other than March: The TDS must be deposited within 7 days from the end of the month in which the deduction is made.
If the amount is paid or credited in the month of March: The TDS must be deposited on or before 30th April of the same financial year.

11- The time limit to file the TDS return under Section 194C,

Due dates for filing TDS returns for different quarters are as follows:

• April to June: The due date for filing the return is 31st July.
• July to September: The due date for filing the return is 31st October.
• October to December: The due date for filing the return is 31st January.
• January to March: The due date for filing the return is 31st May.

Exceptions to TDS Under Section 194C

The following are the exceptions to TDS under Section 194C:

• Payments made to individuals and HUFs for personal use. [Keep in mind Section 194M]
• Payments made to the government or local authority.
• Payments made for the purchase of goods.
• Payments to a contractor who has furnished a valid declaration under Form 15G/15H.
• Payments made to non-resident contractors who do not have a permanent establishment in India.

Various consequences of non-complianc u/s 194C

TDS regulations can lead to various consequences, including financial penalties and disallowances. Here are the consequences of non-compliance:
A. Non-Deduction or Non-Payment of TDS:

• TDS Default for Non-Deduction or Non-Payment:
  • If tax is deductible but not deducted, 30% of the expenditure is disallowed in the current year.
  • If tax is deducted in a subsequent year, the disallowed expense will be allowed in the year in which TDS is deducted and deposited.

• Tax Deducted but Not Deposited on Time:
  • If tax is deducted but not deposited on or before the due date of filing the income tax return, 30% of the expenditure is disallowed in the current year
  • If tax is deposited after the due date of filing the income tax return, the expense will be allowed in the year of depo

B. Interest on Default:
The deductor will be deemed to be in default, and interest will be levied in the following cases:

• If a person fails to deduct tax, interest is levied at the rate of 1% per month or part of the month from the date on which the tax was deductible to the date on which the tax is deducted.
• If a person has deducted tax but failed to deposit it, interest is levied at the rate of 1.5% per month or part of the month from the date on which the tax was deducted to the date on which the tax is actually paid.

C. Late Fee for TDS Return Filing:
The deductor is liable to pay a fee under Section 234E for default in furnishing quarterly TDS return in Form 26Q. The fee is Rs. 200 for every day during which the failure to file the return continues. However, the fees shall not exceed the maximum amount of TDS deducted. It is mandatory to pay the late fee before filing the return.

General Point

1. Payment made by an individual or a HUF for contract work or by way of commission or brokerage or fees for professional services [Section 194M]
2. Sponsorship of debates, seminars and other functions in schools/colleges/associations – It is in the nature of advertising – provisions of Section 194C would apply
3. Payment made by a cable operator to get licence of TV channels is covered u/s 194C
4. Payment made to travel agency or an airline for purchase of a ticket for travel is not liable for TDS u/s 194C.
5. Payments made to courier agency including clearing or forwarding agent – Provisions of section 194C is applicable.
6. TDS not applicable on serving food in a restaurant because the restaurant services are not covered under catering.
7. Payments made to an electrician is liable for TDS u/s 194C
8. Rendering any services for procurement of orders is covered under section 194J and not under section 194C
9. Recruitment agency- ection 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
10. This section does not require a written contract , even if agreement is verbal, TDS should be deducted.

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