TDS stands for Tax Deducted at Source. In order to minimize tax evasion, government has introduced it to collect tax at the source of income rather than at a later date.
TDS is applicable on payment to contractors and sub-contractors for carrying out any work including supply of labour. Provisions related to TDS on payment to contractors and sub-contractors are provided in Section 194C.
As per section 194C, any person responsible for paying any sum to any resident contractor for carrying out any work under a contract or in pursuance of a contract between contractor and person specified below, shall deduct income tax at the time of such payment or its credit to contractor’s account or any other account, by whatever name called, whichever happens earlier.
As specified above, work contract also includes supply of labour for carrying out any work.
Rate Of TDS Applicable On Payment To Contractors And Sub-Contractors
If payment for a contract is being made or credit is given to an individual or HUF, then tax has to be deducted at the rate of 1%.
In any other case, rate of TDS is 2%. This means if payment for a contract is being made or credit is given to a company, partnership firm or any other person who is not an individual for HUF, then rate of TDS under section 194C will be 2%.
Rate of TDS in above cases should be considered as 20% if Permanent Account Number of the deductee is not quoted.
No surcharge, education cess and SHEC shall be added to above rates as it’s fixed.
When TDS On Payments To Contractor Is Not Applicable – Section 194C
There are certain cases where the person is either not required to deduct tax at source or TDS provisions of section 194C will not be applicable.
Tax is not be required to be deducted at source where the amount paid or credited to a contractor does not exceed Rs. 30,000 in a single payment.
However, in aggregate if the amount credited or paid to a contractor during a financial year exceeds Rs. 1, 00,000, then TDS on Contractor is applicable.
This means, if the amount paid or credited does not exceed Rs. 30,000 at one time and Rs. 1, 00,000 in aggregate during the financial year, then no deduction shall be made under section 194C.
Individual or HUF not to deduct tax on the sum credited or paid to the account of the contractor, where such sum is credited or paid exclusively for personal use of such individual or any member of HUF.
TDS under section 194C will not be applicable where any sum credited or paid or likely to be credited or paid during the previous year to a person who is engaged in business of plying, hiring or leasing of goods carriage, where such contractor owns not more than 10 goods carriage at anytime during the previous year. Such exemption will be provided only when the contractor furnished a declaration along with his Permanent Account Number or PAN.
Here are certain other cases where provisions of section 194C are not attracted;
- Contract for sale of goods
- Contract for supply of any article or things as per buyer’s prescribed specification only if it’s a contract for sale.
- Payments to travel agent or airlines for booking tickets of individual. However, provisions will be applicable when payments are made for chartering an aircraft for carriage of passengers of goods (Circular : No. 713, dated 2-8-1995).
- Works executed under national rural employment programme and rural landless employment guarantee program (Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.)
- As per section 194C, TDS provisions not applicable to an individual or a Hindu undivided family or AOP or BOI whose total sales, gross receipts or turnover from the business or profession carried on by him does not exceed the monetary limits specified 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. This means, it’s not applicable when such individual or HUFs or AOP or BOI are not subject to tax audit under section 44AB during the last financial year.
In above cases, TDS under section 194C is not required to be deducted at source while making payments to contractors or sub contractors.
Special Cases To Which TDS Provisions Attracted Under Section 194C
Payments made by broadcasters or telecasters to production houses for production of content or programme for broadcasting or telecasting will attract TDS under section 194C only when following two conditions are satisfied;
- Content is produced as per the specifications provided by the broadcaster or telecaster; and
- Copyright of the content or programme also gets transferred to the telecaster or broadcaster.
Here are certain other cases where tax has to be deducted under section 194C; as clarified in Circular : No. 715, dated 8-8-1995;
- sponsorship of debates, seminars and other functions held in colleges, schools and associations with a view to earn publicity through display of banners, etc., put up by the organizers as the agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement.
- payments for cost of advertisement issued in the souvenirs brought out by various organisations
- supply of printed material as per prescribed specifications.
Person Responsible To Deduct Tax Under Section 194C
Following persons are specified to deduct TDS under section 194C;
- The Central Government or any State Government;
- Any local authority;
- Any corporation established by or under a Central, State or Provisional Act;
- Any company;
- Any co-operative society;
- Any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the needs for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both;
- Any society registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India;
- Any trust;
- Any university or deemed university;
- Any government of foreign state or foreign enterprise or any association or body established outside India;
- Any firm
- Any person being an individual or a Hindu undivided family or an association of persons or a body of individual, whether incorporated or not other than those falling under any of the preceding clauses, whose total sales, gross receipts or turnover from the business or profession carried on by him exceeds the monetary limits specified 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.
Meaning Of Work
Work shall include;
- Broadcasting and telecasting including production of programmes for such broadcasting or telecasting
- Carriage of goods and passengers by any mode other than railways
- Manufacturing or supplying a product in accordance with requirement or specification of a customer using material purchased from such customer. However, it will not include material purchased from person other than customer.
- Supply of labour for works contract.