Know about TDS on Payments to Contractors and sub-contractors [Section 194C]

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Provisions related to Tax Deduction at Source (TDS) that are applicable on payments to contractors and sub-contractors are in Section 194C of the Income Tax Act, 1961. This section applies only to payments made to resident contractors and sub-contractors. For payments to non-residents, section 195 shall be applicable.

TDS on Contracts

Who should deduct such TDS?

This section requires all individuals, HUFs and other forms of entities that are subject to tax audit under section 44AB to deduct TDS under this section.

However, following individuals will not collect TDS –

  • Individual, HUF, AOP or BOI whose total sales, gross receipts or turnover from business is below ₹ 1 crore. This limit is reduced to 25 lakhs in case of the profession. Figures of immediately preceding the current financial year are used for determining the applicability of this section.
  • Individual or HUF also do not need to deduct TDS if the payments are in nature of personal expenses.

When to deduct TDS?

TDS should be deducted at the time of payment or when it credited in the books of accounts. This section applies to payments of works contract only.

Work includes –

  • Advertising;
  • Broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
  • Carriage of goods or passengers by any mode of transport other than by railways;
  • Catering;
  • Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. (however, a contract of sale shall be distinct from contact of works under this section. No TDS is applicable on the contract of sale. If the Manufacturer purchases the raw materials from a person other than the customer and sales the final product, it is generally a contract of sale.)

Limits

TDS should be deducted only if such payments to contractor or sub-contractor exceeds –

  • The total sum credited or paid during the financial year is more than ₹ 75,000.
  • Any single amount of ₹ 30,000 or more is credited or paid.

Rates of TDS

The applicable rates of TDS under section 194C are as follows –

Payee

TDS Rate

Individual/ HUF Contractor/ Sub-contractor

1%

Other than Individual/ HUF Contractor/ Sub-contractor

2%

Contractor in Transport Business (if PAN is furnished)

Nil

Sub-Contractor in Transport Business (if PAN is furnished)

Nil

In the case of the Contractor/Sub-contractor in Transport Business, no TDS will be collected for charges related to transportation only. Further, restrictions have been imposed by section 194C(6) and such transporter should comply following conditions –

  • Own ten or fewer goods carriage at any time during the previous year.
  • is engaged in the business of plying, hiring or leasing goods carriages
  • has furnished a declaration to this effect along with his PAN.

In case the contractor doesn’t furnish his PAN, the TDS should be deducted at the flat rate of 20%. This high rate of TDS is on account of Section 206AA. This section requires paying TDS if PAN is not furnished at a higher rate of –

  • the rate specified in the Act; or
  • the rate in force; or
  • the rate of 20%.

Important Circulars

  • Deduction of tax at source on payment of gas transportation charges by the purchaser of natural gas to the Seller of gas has been exempted under this section as it is defined as a contract or sale. [Circular No. 9/2012 dated 17.10.2012]

Some Important Points

  • Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants etc., cannot be regarded as contracts for carrying out any “work” and therefore no TDS under this section is applicable. They are covered by Section 194J and TDS on Professional services is applicable to such contracts with them.

Identify Confusions on Application of this Section

Often, people confuse with the applicability of TDS on Contracts. One has to note that whenever there is a service charge unless exempted under any notification, it consists of a contract. Now that Contract can be of three types –

  • Contracts with non-resident (covered by Section 195 for the purpose of TDS from non-residents);
  • Contracts under this section i.e. 194C; or
  • Contracts for Professional Services (covered by Section 194J)

So this method of identifying contract from the sale shall help you in finding the section applicable for deducting TDS on such contract.

Filing of TDS Return

Person deducting such TDS has to file a return in Form 26Q. It should consist of following details –

  • Payment made to such contractors/ sub-contractors,
  • PAN furnished by such contractors/ sub-contractors,
  • The amount of TDS deducted and paid.

Hope, this article helps you in dealing with TDS for payments to Contactors/ Sub-contractors. In case you have any query, do post them in the comment section of this post.

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