Section 194C of the Income Tax Act, 1961 deals with the provisions related to deduction of TDS at the time of payment to contractors/sub-contractors. According to this section any person making payment to the resident contractor (or subcontractor) for carrying out any contract (including the supply of labor) is required to deduct tax on such payment.
Meaning of Contractor:
- A contractor is a resident person, who is engaged in carrying out any ‘work’, including the supply of labor, on account of a contract entered by him with ‘Specified Person’.
- The specified person is required to deduct TDS at the time of making payment to the contractor.
Meaning of Sub-Contractor:
- A sub-contractor is a resident person who has entered into a contract with the contractor for carrying out such ‘work’, which the contractor has agreed to complete as a part of his contract with the specified person.
- The sub-contractor might have entered into a contract with the contractor for following:
- Conducting either all or part of work, which the contractor has agreed to complete.
- Supplying manpower for all or part of work taken by the contractor.
Specified Person:
Specified Person for the purpose of this Section include following persons:
- The Central or State Government;
- The local authority;
- The Corporation established by the Central, State or Provincial Act;
- The Company;
- The Trust;
- The Co-operative Society;
- The Registered Society;
- The authority engaged either for the purpose of dealing with and satisfying the need for the housing accommodation or for planning, improvement or development of cities, town and village;
- The university established / incorporated by Central, State or Provincial Act;
- The firm;
- The Government of a foreign state / a foreign enterprise or any association / body established outside India;
- The individual or HUF liable to audit under section 44AB [Clause (a) or Clause (b)] during the financial year immediately preceding the financial year in which the sum is credited or paid to the account of the contractor.
Meaning of the term ‘Work’:
For the purpose of this Section, the term ‘Work’ includes following activities:
- Advertising;
- Carriage of goods / passengers by any mode of transport except railway;
- Broadcasting and telecasting (which also includes the production of programmes for such broadcasting or telecasting);
- Catering;
- Manufacturing / supplying a product based on the requirement and specification of customers by using material purchased from the customer. However, it doesn’t include when the material is purchased from any person other than the customer.
Rate of TDS Deduction u/s 194C:
TDS u/s 194C shall be deducted at following rates:
| Contractor/Sub-Contractor | Rate of TDS (if PAN available) | Rate of TDS (if PAN not available) |
| Payment to Resident Individual/HUF | 1% | 20% |
Payment to:
|
2% | 20% |
Threshold Limit for TDS Deduction:
1. Threshold limit is the maximum amount of payment till which TDS is not applicable. If the amount of payment in a financial year exceeds such maximum limit, there shall be a deduction of TDS.
| Particulars | Threshold Limit |
| Single Payment to a Contractor | Rs. 30,000 |
| Aggregate Payment to a contractor during a Financial Year | Rs. 1,00,000 |
TDS Deduction in case of Customized Products:
2. Many a times, a product is manufactured by the contractor as per the specifications provided by the customer. Similarly, the material used for such manufacture is also purchased from the customer himself. In such a case the amount of TDS u/s 194C to be deducted shall be computed on following value:
| Scenario | TDS to be computed on Value |
| Where price of material and service charges are indicated separately in the Invoice by the contractor. | Invoice value excluding the value of material |
| Where price of material and service charges are not indicated separately but a lump sum amount is charged by the contractor in the Invoice. | Total Invoice Value |
Applicability of Section 194C to Transport Business:
3. There are two types of transport businesses namely:
- Passenger Transport
- Goods Carriage Transport
4. Under Section 194C(6), TDS deduction is not required in case payment is made to a goods transport agency (in the business of plying, hiring or leasing goods) which owns 10 or fewer carriages at any time during the previous year. However, the contractor has to submit a declaration of above along with PAN.
5. Such exemption is not allowed to a goods transport agency which owns more than 10 trucks at any time during the year.
6. Similarly, this benefit is only for Goods Carriage Transport. Passenger transport businesses do not enjoy any such exemption.
| Nature of Transport Business | Rate of TDS (if PAN available) | Rate of TDS (if PAN not available) | ||
| Individual/HUF | Others | |||
| Passenger Transport
(irrespective of number of vehicles owned) |
1% | 2% | 20% | |
| Goods Transport | Owning up to 10 carriages at any time during the FY. | Nil* | Nil* | 20%** |
| Owning more than 10 carriages at any time during the FY. | 1% | 2% | 20% | |
| Goods Transport Contractor not owning any carriages (all carriages are hired/sub-contracted.)1 | 1% | 2% | 20% | |
* Declaration must be furnished along with copy of PAN Card.
**No Declaration can be furnished in absence of PAN.
Note:
1. When a person undertakes any transportation contract who does not own any truck or goods carriage and arranges trucks from other truck owners he cannot be said to be a person engaged in the business of transport i.e. plying, hiring or leasing goods carriage and he is also not eligible to compute income as per the provisions of section 44AE. In this case even if such a person gives a declaration of owning less than 10 trucks (zero number of trucks), he will not be given the benefit of non-deduction of TDS under section 194C(6).
Other Important Points:
- FD Commission and brokerage are not covered under section 194C.
- Payment made to an electrician or payment made to a contractor for providing electrician service is covered under section 194C.
- Payment made to courier covered under section 194C.
- Payment made to travel agent or an airline for purchase of a ticket is not subjected to TDS under section 194C. However, if the plane, bus or any other mode is chartered, then TDS is liable to be deducted under section 194C.
- Payment made to clearing and forwarding agents for the carriage of goods is liable to TDS under section 194C.
Time Limit to deposit TDS:
• TDS deducted is required to be deposited to the credit of the Government within given below timeline to avoid interest:
| Month of Deduction | Due date of deposit of TDS |
| During any month from April to February | 7th of Subsequent Month |
| During the month of March | 30th April |
TDS Return Filing Due Date:
| Quarter | TDS Return Filing Due Date |
| Q1: April to June | 31st July |
| Q2: July to September | 31st October |
| Q3: October to December | 31st January |
| Q4: January to March | 31st May |
TDS Certificate (For 16A):
| Quarter | TDS Return Filing Due Date |
| Q1: April to June | 15th August |
| Q2: July to September | 15th November |
| Q3: October to December | 15th February |
| Q4: January to March | 15th June |
Interest on Late Filing:
| Section | Nature of Default | Interest Payable | Period for which interest is to be paid |
| 201A | Non deduction of tax at source, either in whole or in part | 1% per month or part thereof | From the date on which tax deductible to the date on which tax is actually deducted. |
| After deduction of tax, Non-payment of tax either in whole or in part | 1.5% per month or part thereof | From the date of deduction to the date of payment. |
Notes:
- The above interest should be paid before filing of TDS return. The deductor can make the payment of interest on such late payment of TDS before filing TDS returns or demand raised by TRACES.
- The interest paid u/s 201A is not allowed as an expense under the Income Tax provisions.
- Interest to be calculated on a monthly basis and not on the number of days i.e. part of a month is considered as a full month.
- Penalty for late filing of TDS Returns:
Section 234E:
- The deductor will be liable to pay by way of fees Rs.200 per day till the failure to pay TDS continues.
- However, the penalty should not exceed the amount of TDS for which the statement was required to be filed.
Section 271H:
- Also, a penalty from Rs.10,000 to Rs.1 lakh is leviable under Section 271H if a company provides incorrect information or fails to submit the returns within the specified due date.
- This penalty will be charged in addition to the penalty under Section 234E.
- No penalty under Section 271H will be charged in case of delay in filing the TDS/TCS return if the following conditions are satisfied:
i. The tax deducted/collected at source is paid to the credit of the government.
ii. Late filing fees and interest (if any) is paid to the credit of the government.
iii. The TDS/TCS return is filed before the expiry of a period of one year from the due date specified in this behalf.
