Budget 2024 proposes an amendment to section 194C of the Income Tax Act to explicitly exclude sums covered under section 194J from being considered as “work” for the purposes of Tax Deducted at Source (TDS) on payments to contractors. Section 194C mandates a 1% TDS for individual or HUF payments and 2% for others, whereas section 194J pertains to TDS on professional or technical services with rates of 2% or 10%, depending on the payment type. Due to the lack of clear exclusion, some deductors have been incorrectly applying section 194C when they should apply section 194J. The amendment, effective from October 1, 2024, aims to rectify this by explicitly stating that sums under section 194J do not constitute “work” under section 194C, ensuring proper tax deduction practices. This change is detailed in Clause 53 of the Finance Bill 2024.
Budget 2024: Excluding sums paid under section 194J from section 194C (Payments to Contractors)
Section 194C of the Act provides for TDS on payments to contractors at the rate of 1% when the payment is being made or credit is being given to an individual or HUF and 2% in other cases. Section 194J of the Act relates to TDS on fees for professional or technical services wherein the applicable TDS rates are 2% or 10% depending on the nature of payment being made.
2. Clause (iv) of the Explanation of section 194C defines “work” to specify which all activities would attract TDS under section 194C. However, there is no explicit exclusion of assessees who are required to deduct tax under section 194J from requirement or ability to deduct tax under section 194C of the Act. Therefore some deductors are deducting tax under section 194C of the Act when in fact they should be deducting tax under section 194J of the Act.
3. In view of the above, it is proposed to explicitly state that any sum referred to in sub-section (1) of section 194J does not constitute “work” for the purposes of TDS under section 194C.
4. The amendment will take effect from 1st day of October 2024.
[Clause 53]
Extract of Clause 53 of Finance Bill 2024
Clause 53 of the Bill seeks to amend section 194C of the Income-tax Act relating to payments to contractors.
Clause (iv) of the Explanation to the said section provides the meaning for the term “work”.
It is proposed to amend the said Clause (iv) to exclude any sum referred to in sub-section (1) of section 194J from the definition of “work”.
This amendment will take effect from 1st October, 2024.
Proposed Amendment of section 194C
In section 194C of the Income-tax Act, in the Explanation, in clause (iv), for the long line, the following long line shall be substituted with effect from 1st day of October, 2024, namely:—
“but does not include—
(A) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer or associate of such customer; or
(B) any sum referred to in sub-section (1) of section 194J.”.
