Persons responsible for making payment of income, covered by the scheme of Tax Deduction at Source (TDS), are responsible to deduct tax at source and deposit the same to the Government Treasury within the time stipulated.
The recipient of the income (though s/he gets only the net amount after TDS) is liable to tax on the gross amount. The amount deducted is adjusted against her/his final tax liability.
TDS scheme covers payment of salary and payment other than salary (viz. contract, interest, dividend, rent, commission/brokerage, lottery winnings, winnings from races, technical/professional fees, royalty, compensation etc) to residents as well non-residents.
Here I particularly discuss some of the provisions relating to payments/credits to residents concerning the section 194C – TDS on payments to contractors or sub-contractors:
|Particulars||194C – TDS on Contracts|
|Who is responsible for tax deduction (payer)?||Any specified person (listed below)|
|Who is the recipient?||Resident contractor or sub-contractor (defined below)|
|What is the nature of payment covered?||Consideration for any work contract (defined below)|
|When is tax to be deducted?||At the time of credit or payment, whichever is earlier|
|What is the rate of tax deduction?||1% (Individual/HUF)2% (Others)|
|When is tax not deductible (threshold limit)?||Amount credited/paid is ≤ Rs.30,000 in a single payment/credit OR Amount credited/paid in aggregate during the FY is ≤ Rs.1,00,000 OR In case the recipient is transport operator, no TDS if certain conditions are satisfied and PAN is provided (explained below)|
|Is tax deductible at lower rate?||Yes (explained below)|
The following persons are responsible to deduct tax at source u/s 194C:
a) Central/State Government
b) Any Local Authority
c) Any corporation established by/under a Central/State/Provincial Act
d) Any company
e) Any co-operative society
f) Any authority constituted in India by/under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or both
g) Any society registered under the Societies Registration Act, 1860 or under any law corresponding to that Act in force in any part of India
h) Any trust
i) Any university established/incorporated by/under a Central/State/Provincial Act and an institution declared to be a university u/s 3 of University Grants Commission Act, 1956
j) Any foreign government or a foreign enterprise or any association or body established outside India
k) Any firm
l) any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person,-
1) Individual/HUF/AOP/BOI whose books are NOT required to be audited u/s 44AB during the immediately preceding FY
2) Individual/HUF if sum paid is towards PERSONAL expenses of such individual or any member of HUF
A contractor is one who makes an agreement with another to do a piece of work, retaining in himself/herself control of the means, methods and the manner of producing the result to be accomplished, neither party having the right to terminate the contract at will.
The definition also includes a contractor who is carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government of a foreign state, or a foreign enterprise, or any association or body established outside India.
A sub-contractor is the one who takes portion of contract from principal contractor or another sub-contractor.
Provisions of 194C are applicable only where contract is either a work contract or a contract for supply of labour for works contract (194C is not applicable for payments made under contract for sale of goods). Work shall also include the following:
2) Broadcasting and telecasting including production of programmes for such broadcasting/telecasting
3) Carriage of goods/passengers by any mode of transport other than by railways
5) Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, being a person placed similarly in relation to such customer as is the person placed in relation to the assessee under the provisions contained in clause (b) of sub-section (2) of section 40A,
but does not include 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.
a) As per provisions of section 197, the recipient can apply in form no.13 to the Assessing Officer to get a certificate authorizing the payer to deduct tax at lower rate (or deduct no tax, if certain conditions are satisfied). There is no time limit for application and it can be filed at any time before actual deduction of tax.
b) If the recipient does not have PAN, he cannot apply for the certificate.
c) The certificate shall be issued, directly to the person responsible for paying income, on a plain paper, under an advice to the applicant.
d) The certificate cannot be issued with retrospective effect.
e) The recipient may furnish copy of such certificate to the person responsible for paying the income for lower/no deduction of tax at source.
a) If the recipient is a transport operator (in the business of plying, hiring or leasing goods carriages) and he/she furnishes his/her PAN to the payer, TDS rate is nil, at present.
b) However, non-deduction of tax shall be applicable only if the following conditions are satisfied:
i) Payment/credit in the nature of transport charges is made to a contractor or sub-contractor
ii) Such contractor/sub-contractor is engaged in the business of transport (i.e. plying, hiring or leasing goods carriage)
iii) Such contractor/sub-contractor is eligible to compute income as per the provisions of section 44AE of the Income Tax Act (i.e. a person who is not owning more than 10 goods carriage at any time during the previous year)
iv) Such contractor/sub-contractor has also furnished a declaration to this effect (ii & iii above) along with her/his PAN
c) If the above conditions are not satisfied, tax has to be deducted at source @1% (for individual/HUF) or @2% (for others) after considering the threshold limit.
a) If the recipient does not furnish PAN to the deductor, tax will be deducted @20%.
b) If the recipient is a transport operator (in the business of plying, hiring or leasing goods carriages) and he/she furnishes his/her PAN to the payer, TDS rate is nil w.e.f. 1st October 2009. If PAN is not furnished, TDS shall be deducted @20% from 1st April 2010 onwards.
No, additional surcharge, education cess or secondary and higher education cess u/s 194C are not applicable, when the recipient is a resident.
Yes, in case of manufacturing/supplying a product according to the requirement/specification of a customer by using materials purchased from such customer, tax shall be deducted on the invoice value excluding the value of material supplied by such customer, if such value is mentioned separately in the invoice. If it is not separately mentioned, tax shall be deducted on the whole of the invoice value.
No, Tax deduction at source shall not be applicable (on/after January 1, 2013) on payments of following nature, if made by a person to a bank listed in II schedule to RBI Act (other than a foreign bank):
1) Bank guarantee commission
2) Cash management service charges
3) Depository charges on maintenance of DEMAT accounts
4) Charges for warehousing services for commodities
5) Underwriting service charges
6) Clearing charges (MICR charges)
7) Credit/debit card commission for transaction between the merchant establishment and acquirer bank – Notification No.56/2012 dated December 31, 2012
|Advertising Contracts||1)When a client makes payment to an advertising agency, TDS is applicable @1% – Circular No.715 dated August 8, 19952) If an advertising agency gives a consolidated bill (including charges for art work & other related jobs as well as payment to media), tax to be deducted at source @1% – Circular No.7153)If payments are made for production of programmes for the purpose of broadcasting/telecasting, TDS applicable @2% – Circular No.7154)Payments in the nature of advertising made directly to Doordarshan may not be subjected to TDS, as DD being a Govt agency, not liable to income tax – Circular No.7155) The agreement of sponsorship of debates, seminars and other functions in schools/colleges/associations is in the nature of advertising and 194C would apply – Circular No.715
6) TDS is applicable on payments towards cost of advertisements in the souvenirs brought out by various organizations – Circular No.715
7) The contract for putting up a hoarding is in the nature of advertisement and 194C would be applicable. However, a person has taken a particular space on rent and thereafter sub-lets the same fully or in part for putting up a hoarding, the person would be liable for TDS u/s 194I – Circular No.715
8) Payment by an advertising agency to print/electronic media is not subject to TDS – Circular No.717 dated August 14, 1995
|Broadcasting/telecasting contract||Payment made by a cable operator to get licence of TV channels is covered u/s 194C – Kurukshetra Darpans (P) Ltd Vs CIT  169 Taxman 344 (Punj & Har)|
|Payments to travel agent or an airline||Payment made to travel agency or an airline for purchase of a ticket for travel is not liable for TDS u/s 194C. However, if any plane/bus/any other mode of transport is chartered, TDS is applicable – Circular No.713 dated August 2, 1995|
|Payment to courier, clearing/forwarding agents||Provisions of 194C would be applicable – Circular No.715|
|Freight||Payment on freight would be subject to tax deduction even when goods are received on freight to pay basis – Circular No.715|
|Serving food in restaurant||Catering does not include serving food in restaurant in the normal course of running of restaurant/cafe, hence TDS is not applicable on serving food in restaurant – Circular No.715|
|Payment to an electrician||Payment made to an electrician or a contractor for electrical services is liable for TDS u/s 194C – Circular No.715|
|Maintenance contracts||Routine/normal maintenance contracts which include supply of spares are covered u/s 194C [if technical services are rendered 194J is applicable] – Circular No.715|
|Fixed deposit commission/brokerage||Not covered u/s 194C – Circular No.715|
|Procurement of orders||Rendering services for procurement of orders is not covered by 194C (but covered by 194J) – Circular No. 715|
|Cooling charges||194C is applicable in respect of cooling charges paid by customers of the cold storage – Circular No.1/2008 dated January 10, 2008|
|Transportation of passengers||Covered by 194C (not 194J) – CIT Vs Delhi Public School  144 ITD 670/24 ITR 531 (Delhi)|
|Repair of transformers||Tax is deductible u/s 194C only on labour charges by excluding the value of material used by contractor for repair – CIT Vs Executive Engineer (Electricity Stores)  217 Taxman 199 (Mag) (All)|
|Reimbursement||Reimbursements cannot be deducted out of the bill amount for the purpose of TDS u/s 194C – Circular No. 715|
|Bidi manufacturing||1) Payments made to munshis (who give the work to workers who work at home) are subject to tax deduction at source – Circular No. 433 dated September 25, 1985) However, no tax is deductible if workers (employed through the medium of agency such as munshis) bring bidi to factory for quality check & for getting payments – Circular No. 487 dated June 8, 1987|
|Hiring of rooms in hotels & availing catering services||Tax is required to be deducted at source u/s 194I for hiring of rooms and banquet in hotels, and also u/s 194C for availing catering services – Hero Moto Corp Ltd Vs CIT  60 SOT 25 (Delhi)|
|Hire charges||194C is not applicable in case of payments made for hiring/renting of equipments etc. – Circular No. 781 dated March 8, 1994|
|No TDS on service tax||If service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source on the amount paid/credited without including such service tax component – Circular No.1/2014 dated January 13, 2014|
|No TDS on GST||CBDT has clarified vide Circular No. 23/2017 dated 19th July, 2017 that if GST on Services component has been indicated separately in the invoice, then no tax would be deducted at source under Chapter XV Il-B of the Income Tax Act, 1961 on such GST component.|
(Republished with Amendments by Team Taxguru)