A simple explanation of section 194C- TDS on payment to contractors

A simple explanation of section 194C- TDS on payment to contractors

Who is required to deduct TDS under sec 194C?

Sec 194C requires the following persons to deduct TDS under this section if the payment is made to any “resident contractor or sub-contractor” for carrying out any “work” in pursuance of a contract:

  1. The central government or any State Government
  2. Any local authority
  3. Any corporation established by or under a Central, State or Provisional Act;
  4. Any company
  5. Any co-operative society
  6. Any authority constituted in India by or under any law, engaged either for dealing with and satisfying the needs for housing accommodation or for planning, development or improvement of cities, towns and villages or for both [e.g., CIDCO, HUDCO, etc.]
  7. Any society registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India.
  8. Any trust
  9. Any university or deemed university
  10. Any firm

What comprises “work” under this section?

“Work” shall include-

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 as per the requirement or specification of a customer by using material purchased from such customer

“Work” shall not include:

Manufacturing or supplying a product as per the requirement or specification of a customer by using material purchased from a person, other than such customer.

What does a “resident contractor or sub-contractor” mean?

A “contractor” would be any person who enters a contract with above persons (from a to j) for carrying out any work including the supply of labour for carrying out any work.

A “sub-contractor” would mean any person who enters 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.

A contractor or a sub-contractor must be a resident in India for applicability of this section.

What does this section imply?

This section implies that if the above persons (from a to j) makes payment to a contractor or a sub-contractor, they must deduct TDS before making such payment.

One must note that individuals and HUFs are not prescribed in the list of persons who are required to deduct TDS, thus an individual and a HUF is not required to deduct TDS under 194C. However an individual or HUF who is liable for tax audit under section 44AB, then they should also deduct TDS under this section

What is the rate at which TDS should be deducted?

This depends upon the status person to whom payment is being made.

  1. If payment is made to Individual or HUF, TDS should be deducted at 1 %.
  2. If payment is made to any other persons, TDS should be deducted at 2%.
  3. TDS should be deducted at 20%, if payee’s PAN is not available.

Is there any threshold limit for deduction under 194C?

Yes.

TDS under 194C should be deducted when consideration of a contract in respect of which payment is made exceeds Rs. 30,000.

Also, if aggregate of the amount of such sums credited or paid or likely to be credited or paid in the financial year exceeds Rs. 100,000, TDS is required to be deducted.

At what point of time one requires to deduct TDS under this section?

TDS under section 194C should be deducted at the time of:

  1. crediting such sum to the account of the payee (or any other account such as suspense account) or
  2. payment thereof in cash or by issue of a cheque or by any other mode,

whichever of the above occurs earlier

Important considerations- an analysis

Are there any exceptions to sec 194C?

Yes.

  1. Payment to transporters

When any payment is made or a credit is made to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, no TDS is required to be deducted, provided the contractor furnishes his PAN.

Also no TDS should be deducted on payments made to travel agents or airlines for purchase of tickets for air travel.

  1. 194C not applicable on ‘contract of mere supply of goods’

Provisions of Sec. 194C are applicable only in relation to “works contracts” and “labour contracts” but do not cover “contract for sale or mere supply of goods.”

How to differentiate between a “work contract” & a “contract for sale”?

The most important criteria to differentiate between the two is to determine the ownership regarding goods in question.

In case of a work contract, even though a part or whole of the materials used belongs to the contractor, yet the property in the thing produced will be the performance.

While in case of a contract of sale, the things produced generally are the sole property of the party who has performed the work before its delivery.

  1. Payments for personal use

In case a payment is made by an individual or HUF for personal use os such individual or a member of HUF, no TDS should be deducted in such case.

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