As per Section 194C, deduction of TDS is required to be made from payments of any amount to resident contractors or sub-contractors.
1. DEDUCTION OF TDS FROM PAYMENT TO RESIDENT CONTRACTORS :- Sec 194C(1) provides that any person responsible for paying any sum to resident contractor for carrying out any work (including supply of labor) in pursuance of a contract between the contractor and the following:
a) The Central Government or any State Government;
b) Any local authority;
c) Any corporation established by or under a Central, State or Provisional Act;
d) Any company;
e) Any co-operative society;
f) 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;
g) Any society registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India;
h) Any trust;
i) Any university or deemed university;
j) Any firm;
1. The expression “work” in this section would include— (a) advertising; (b) broadcasting and telecasting including production of programs for such broadcasting or telecasting; (c) carriage of goods and passengers by any mode of transportation, other than railways; (d) catering; (e) Manufacturing or supplying of a product according to the requirement or specification of a customer by using the materials purchased from such customer,
But does not include manufacturing or supplying of a product according to the requirements or specifications of a customer by using the materials purchased from a person, other than such a customer.
2. A “Contractor” for the purpose of the provisions of this section would be any person who enters into a contract with the Central Government or any State Government, any local authority, any corporation established by or under a Central, State or Provincial Act, any company or any co-operative society for carrying out any work including the supply of labor for carrying out any work.
3. A “sub-contractor” would mean any person who enters into a contract with the contractor for carrying out, or for the supply of labor for carrying out the whole or part of the work undertaken by the contractor under a contract with any of the authorities or for supply of, whether wholly or partly, any labor which the contractor has undertaken to supply in terms of his contract with any of the authorities mentioned under this section.
APPLICABILITY OF THIS SECTION:-
Provisions of Section 194C are applicable only in relation to “works contracts” and “labor contracts” but do not cover “contract for sale or mere supply of goods”.
Neither Income Tax Act nor Income Tax Rules specifies the difference between the contract for sale and works contract; so there is no standard criteria to determine whether a contract is of contract for sale or a contract for work and labor.
One of the criteria to differentiate between “contract for sale” and “works contract” is to determine the ownership regarding goods in question. In case of works contract, even though a part or whole of the materials used belongs to the contractor, yet the property in the thing produced will be the performance whereas in the case of contract for sale the things produced generally are the sole property of the party who has performed the work before its delivery and such person and the property therein passes only under the contract relating thereto to other party for price. Mere transfer of property in goods used in the performance of a contract is not sufficient. To constitute a sale there must be an agreement expressed or implied relating to sale of goods and completion of the agreement by passing of title in the very goods constructed to be sold.
The following conditions must be satisfied for applicability of this Section:
1.) The payee, i.e., contractor must be resident in India within meaning of Sec. 6 of the Income Tax Act.
2.) Payment should be made by any person specified above.
3.) Payment should be made for carrying out any work including supply of labor for carrying out any work.
4.) The payment should be made pursuant to a contract whether oral or written between payer and payee.
5.) The consideration of a contract in respect of which payment is made should exceed Rs. 30,000 at a time.
6.) If aggregate of the amount of such sums credited or paid or likely to be credited or paid in the financial year exceeds Rs.75,000/- TDS is required to be deducted.
7.) Where advance payments are made, tax will have to be deducted if the total payment is likely to exceed Rs. 30,000.
8.) Where it was expected that the total consideration would not exceed Rs. 30,000 but later on, it was found that consideration would exceed Rs. 30,000, tax will have to be deducted in respect of earlier payments also.
2. DEDUCTION OF TAX AT SOURCE FROM PAYMENT TO SUB-CONTRACTORS : Any person (being a contractor and not being an individual or a Hindu Undivided Family) responsible for paying any sum to any resident in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labor for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labor which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the sub-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, deduct amount equal to 1 % of sum as income-tax on income comprised therein.
Where the payment is made to sub-contractors, the following conditions must be satisfied :-
1.) Payment is made to a sub-contractor who is resident within the meaning of Section 6 of the Income Tax Act, 1961.
2.) Payment is made by a resident contractor, not being an individual or an HUF.
3.) Payment is made to carry out any work, including supply of labor.
4.) The amount of consideration of the contract in respect to which payment is made should not be less than Rs. 30,000.
5.) The amount is paid or credited after 31-5-1972.
6.) The sum should be credited or paid by the contractor in respect of a contract undertaken by him with the specified bodies.
NOTE: A contractor who is an individual or HUF is exempt from the obligation of TDS while making payment to subcontractors.
EXEMPTION FROM DEDUCTION OF TAX AT SOURCE IN CERTAIN CASES: No tax is required to be deducted in the following cases:
1.) Where the sum is credited or paid in pursuance of any contract, the consideration for which does not exceed Rs. 30,000, or where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year does not exceeds Rs. 75,000, the person responsible for paying such sums will not deduct TDS under this section.
2.) Where the sum is credited or paid before the 1st June 1972;
3.) Where the sum is credited or paid before 1st June 1973 in pursuance of a contract between the contractor and the co-operative society or in pursuance of a contract between such contractor and the sub-contractor in relation to any work (including supply of labor) undertaken by the contractor for the co-operative society.
4.) Individual or HUF not to deduct tax if the payment or amount credited to contractor is for personal use. No individual or HUF shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purpose of such individual or any member of HUF.
PROVISIONS FOR PAYMENTS AND TDS TO TRANSPORTERS :-No deduction shall be made from any sum credited or paid or likely to be credited or paid during previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, on furnishing of his PAN, to the person paying or crediting such amount.
PERSON RESPONSIBLE FOR DEDUCTION OF TDS:- The payer is the person responsible for TDS.
WHEN TAX TO BE DEDUCTED:- The person responsible for making payment to resident contractor/sub-contractor should deduct TDS either at the time of crediting such sum to the account to the payee or at the time of payment thereof in cash or by issue of a cheque or by any other mode, whichever is earlier.
AMOUNT CREDITED TO SUSPENSE ACCOUNT :- Where any sum is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such amount, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Thus, tax has to be deducted even if amount payable to resident contractor/subcontractor is transferred to suspense account by the payer in his books.
NO DEDUCTION OF TAX OR DEDUCTION AT LOWER RATE :- According to Section 194C where the AO is satisfied that the total income of contractor or sub-contractor justifies the deduction of income-tax at any lower rate or non deduction of income-tax, as the case may be, the AO shall, on application made by the contractor or sub-contractor in this behalf give to him such certificate as may be appropriate.
RATES OF TAX DEDUCTION: Rates of TDS from payment to contractors and sub-contractors are as under:
|S. No.||Nature of Payment||TDS Rate if PAN available||TDS Rate if PAN not available|
|1.||Payment / Credit to resident individual or HUF||1 %||20 %|
|2.||Payment/Credit to any resident person other than individual / HUF||2 %||20 %|
|3.||Payment/ credit to Transporters||NIL||20 %|
Note:- No Surcharge, Education Cess and SHEC shall be added. Hence, TDS shall be deductible at basic rates.
DEDUCTION OF TAX AT SOURCE IN CASE OF COMPOSITE CONTRACT
1. WHERE MATERIALS ARE SUPPLIED BY THE GOVERNMENT: The question is whether deduction will be made with reference to gross payment to the contractor or the net payment, i.e., gross payment minus deductions, if any, on account of materials supplied by the government, will have to be decided in the light of the terms of the particular contract and the conduct of parties thereto. Where the contractor has undertaken to construct a building or a dam, and the government or other specified person has undertaken to supply all or any of the materials necessary for the work at the stipulated prices, the deduction will be related to the gross payment without excluding any adjustments on account of cost of materials. Where, however, the contractor has undertaken only to provide the labor for the work, the ownership of the materials supplied remaining at all times with the government or other specified person, the sum payable to the contractor in respect of the contract will only be the amount paid for such labor or services and will, thus, not include the price of the materials supplied by the government or other specified persons.
Thus, the rate of TDS from payments made by the government or other specified persons to any contractor will be 2% or 1% of the gross payment or, as the case may be, the net payment, depending on the terms of the contract.
2. DEDUCTION WHEN PARTY SUPPLIES MATERIALS TO THE CONTRACTOR:- When materials are supplied no deduction is possible. Consequently, no TDS is required to be made. However, when payment is made either in cash or in kind to contractor/sub-contractor tax is required to be deducted.
DEPOSIT OF TAX TO CREDIT OF CENTRAL GOVERNMENT:- The tax deducted is required to be deposited with the Central Government through a challan within the prescribed time by the person making the deduction.
TDS is to be deposited by remitting the same to any of the following banks:
TIME LIMIT WITHIN WHICH TAX IS TO BE DEPOSITED :-
|S. No.||Particulars||Due date for payment|
|1.)||Where the payment is made by or on behalf of the Government||On the same day (Without using any Challan form)|
|2.)||Where the payment is made in any other case than the government|
|a) If the amount is credited in the month of March||On or before April 30th.|
|b) In Other months.||Within 7 days from the end of the month in which the deduction is made.|
Issue of TDS certificate
In case of payments other than salary, TDS certificates are to be issued on quarterly basis in Form No.16A. As per rule 31, every person responsible for deduction of tax from payments other than salary has to issue a quarterly TDS certificate in Form No. 16A. The certificate is to be issued by following dates :
|Quarter||Due date for Non-
|Due date for
|April to June||30th July||15th August|
|July to September||30th October||1 5th November|
|October to December||30th January||1 5th February|
|January to March||30th May||30th May|
As per CBDT Circular No. 1/2012, dated 9-4-2012, it is mandatory for all the deductors to issue TDS certificate in Form No. 16A by generating the certificate through TIN central system by downloading the certificate from the TIN website with a unique TDS certificate number. These provisions are applicable in respect of all sums deducted on or after 1-4-2012. The certificate so issued can be authenticated either by using digital signature or manual signature.
Contract U/Sec. 194C Vs. professional and Technical Fees U/Sec. 194J
Sec. 194C of the Act deals with tax deduction at source on payments to contractors and sub-contractors, whereas Sec. 194J of the Act deals with TDS on fees for professional or technical services. Sec. 194C is on statute book since 1972 while as Sec. 194J was introduced with effect from a July, 1995. Sec. 194J is in a sense an off-shoot of Sec. 194C. Hence, there are a few common points between the two, although there are quite a few points of distinction.
Sec. 194C deals with payment in respect of ‗contract of work‘, however, earlier the CBDT vide Circular no. 681, dated 8th March, 1994 sough to invoke these provisions even for contracts of professional work like audits. There was a great resistance and litigation by the professional community, which compelled the CBDT to withdraw the circular. However, the same was achieved through the introduction of new Sec. 194J to specifically cover professional fees and the rate of deduction was made as 5% as against 2% under section 194C.