Section-194C TDS on Payment to Contractors

Sub clause (e) of clause (iv) of the Explanation which describe the definition of the “work” has been amended by finance bill 2020. The new definition inserts the word “its associates” after the word “such customer” as under:

Sub clause (e) of clause (iv) of the Explanation “work” shall include: (Amend w. e. f. 01-04-2020)

(a) advertising;
(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) carriage of goods or passengers by any mode of transport other than by railways;
(d) catering;
(e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, being a person placed similarly in relation to such customer as is the person placed in relation to the assessee under the provisions contained in clause (b) of sub-section (2) of section 40A.
but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer and associate of such customer.

Provision Extract from Section 194C of the Income Tax Act

1. 1. Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—
      • one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;
      • two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family,
        of such sum as income-tax on income comprised therein.

Summary of Section 194C

• Deductor/ Payer: Specified person (Including Individual/HUF if they are liable to audit u/s 44AB)
• Deductee/ Payee: Resident person or Contractor
• Contract/Agreement: There should be contract between contractor and specified person
• Contract include sub-contract
• Threshold Limit:
  • If contractor in a business other than plying, hiring or leasing goods carriage then:
    • Single Invoice: Exceed Rs. 30,000/-
    • Aggregate invoice during the financial year: – Exceed Rs. 1,00,000/-
  • If contractor in a business of plying, hiring or leasing goods carriage i.e. Transporter then:
    • Single Invoice: Exceed Rs. 30,000/-
    • Aggregate invoice during the financial year: – Exceed Rs. 75,000/-
• Rate of TDS:
  • Payment made to Individual or HUF: 1%
  • Payment made to other than Individual or HUF: 2%
    However, in case the PAN is not furnished, then Deductor would be liable to deduct TDS @ 20% i.e. at the maximum marginal rate.
• Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, tax shall be deducted at source—
  • on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or
  • on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.
• Time of deduction:
  Deductor is required to deduct TDS within earlier of the following dates:
  • At the time of credit of such income to the account of the payee or
  • At the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode
• No Liability to deduct TDS:
  • No TDS is required to be deducted if sum paid or credited or likely to be paid or credited to the contractor then if:
    • Single Invoice value: Rs. 30,000/- or less.
    • Aggregate invoice amounts paid during the financial year Rs. 1,00,000/- or less (For Contractor other than transporter) & Rs. 75,000 or less (For Transporter) .
  • No TDS is required to be deducted if sum paid or credited or likely to be paid or credited if:
    • Contractor in the business of plying, hiring or leasing goods carriages i.e. Transporter and
    • Contractor/Transporter does own ten or less goods carriage at any time during the previous year and
    • Contractor furnish a declaration along with PAN to the deductor.
  • No TDS is required to be deducted if sum paid or credited to the contractor by an Individual or HUF for carrying out work in the nature of personal use.
  • If payer or deductor is Individual/HUF and they are not labile to audit u/s 44AB.

• The person responsible for paying or crediting any sum to the person (i.e. Contractor in the business of plying, hiring or leasing goods carriages i.e. Transporter and having less than 10 goods carriage and having PAN) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.

• “Specified person” shall mean, —
  • the Central Government or any State Government; or
  • any local authority; or
  • any corporation established by or under a Central, State or Provincial Act; or
  • any company; or
  • any co-operative society; or
  • any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; or
  • any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; or
  • any trust; or
  • any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or
  • any Government of a foreign State or a foreign enterprise or any association or body established outside India; or
  • any firm; or
  • any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person, —
    • does not fall under any of the preceding sub-clauses; and
    • 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;