Applicability of TDS under Section 194C
Section 194C provides for deduction of tax at source from the payment made to resident contractors and sub-contractors.
Tax has to be deducted at source under section 194C by any person responsible for paying any sum to a resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the –
(i) the Central Government or any State Government; or
(ii) any local authority; or
(iii) any statutory corporation; or
(iv) any company; or
(v) any co-operative society; or
(vi) any statutory authority dealing with housing accommodation; or
(vii) any society registered under the Societies Registration Act, 1860; or
(viii) any trust; or
(ix) any university established under a Central, State or Provincial Act and an institution declared to be a university under the UGC Act, 1956; or
(x) any firm; or
(xi) any Government of a foreign State or foreign enterprise or any association or body established outside India; or
(xii) 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 ‘1 crore’ in case of business and ’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.
Time of deduction
Tax has to be deducted at the time of payment of such sum or at the time of credit of such sum to the account of the contractor, whichever is earlier.
Where any such sum is credited to any account in the books of account of the person liable to pay such income, such crediting is deemed to be credit of such income to the account of the payee and the tax has to be deducted at source. The account to which such sum is credited may be called “Suspense account” or by any other name.
However, no tax has to be deducted at source in respect of payments made by individuals/HUF to a contractor exclusively for personal purposes.
Rate of TDS
The rate of TDS under section 194C on payments to contractors would be 1%, where the payee is an individual or HUF and 2% in respect of other payees. The same rates of TDS would apply for both contractors and sub-contractors.
|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|
Threshold limit for deduction of tax at source under section 194C
No deduction will be required to be made if the consideration for the contract does not exceed ` 30,000. However, to prevent the practice of composite contracts being split up into contracts valued at less than ` 30,000 to avoid tax deduction, it has been provided that tax will be required to be deducted at source where the amount credited or paid or likely to be credited or paid to a contractor or sub-contractor exceeds ` 30,000 in a single payment or ` 1,00,000 in the aggregate during a financial year.
Therefore, even if a single payment to a contractor does not exceed ` 30,000, TDS provisions under section 194C would be attracted where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid to the contractor during the financial year exceeds ` 1,00,000.
Non-applicability of TDS under section 194C
No deduction is required to be made from the sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor, during the course of the business of plying, hiring or leasing goods carriages, if he furnishes his PAN to the deductor.
Points to Remember
- The deduction of income-tax will be made from sums paid for carrying out any work or for supplying labour for carrying out any work. In other words, the section will apply only in relation to ‘works contracts’ and ‘labour contracts’ and will not cover contracts for sale of goods.
- 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, accordingly, no deduction of income-tax is to be made from payments relating to such contracts under this section. Separate provisions for fees for professional services have been made under section 194J.
- The deduction of income-tax must be made at the time of credit of the 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.
Latest Case Laws on Section 194C