Section 194C of Income Tax Act, 1961: An In-Depth Guide to Tax Deduction on Payments to Contractors
The concept of Tax Deducted at Source (TDS) has been introduced with the aim of collecting tax at the source of income. It is an indirect method of tax collection that combines the principles of “pay as you earn” and “collect as it is being earned.” The responsibility for tax deduction lies with the payer when making payments of specific nature to a specified recipient. One such specific payment is payment for a work contract.
In this write-up, I have attempted to analyze the provisions of Section 194C of the Income-tax Act, 1961, in a question-and-answer format.
When are the provisions of section 194C applicable?
The provisions of this section are applicable when the following conditions are met:
1. Payment to Contractors: When any payment is made to a resident contractor or subcontractor;
2. Nature of Payment: The payment should be in the nature of a “work contract”; and
3. Threshold Limit: When the total payment or aggregate payments made to a contractor or subcontractor in a financial year exceed a specified threshold.
What is the meaning of Work for section 194C?
Work, for deduction tax at the source, has been defined inclusively. When a definition is inclusive, it means that the term being defined includes not only what is explicitly mentioned but also other similar or related elements that may fall within the general understanding of the term.
As per explanation (iv) of section 194C Work shall “include”
(b) broadcasting and telecasting including the production of programs for such broadcasting or telecasting;
(c) carriage of goods or passengers by any mode of transport other than by railways;
(e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such a customer or its associate, being a person related to the customer in such a manner as defined u/s 40A(2)(b).
However, work 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.
According to section 194C(3), where any sum is paid or credited for carrying out any work as mentioned in clause (e), tax shall be deducted at source
♦ on invoice value excluding the value material, if such value is separately mentioned in the invoice; or
♦ on the whole of the invoice value, if the value of the material is not separately mentioned in the invoice.
What is the meaning of contractor and sub-contractor?
Contractor means any person who enters into a contract with the central/state government; a local authority; a statutory corporation; a company; a co-operative society; a statutory authority dealing with housing accommodation; a society registered under the Societies Registration Act, 1860; a trust; a university established under a Central, State, or Provincial Act and an institution declared to be a university under the UGC Act, 1956; a firm; any Government of a foreign State or foreign enterprise or any association or body established outside India; or any person, being an individual, HUF, AOP or BOI to conduct any form of work (including the supply of labor).
Sub-contractor means a person who enters into a contract with a contractor for:
> Conducting either all or part of the work, which the contractor has agreed to complete
> Supplying manpower for all or part of the work taken by the contractor.
According to explanation (iii) of section 194C, the Work Contract shall include sub-contract.
Who is responsible for deducting tax at source under Section 194C?
Any “specified person” responsible for paying any sum to any resident contractor for carrying out any work (including supply of labor for carrying out any work) in pursuance of a contract shall be liable to deduct tax at source under section 194C. The contract shall include any sub-contract.
As per explanation (i) of section 194C, Specified persons shall mean:
(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 a profession during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor.
However, as per section 194C(4) an individual or HUF will not be liable to deduct tax on the sum credited or paid to the account of the resident contractor where such sum is credited or paid exclusively for personal purposes of such an individual or any member of HUF.
Whether tax is required to be deducted at source when any sum is paid or credited to the account of the resident contractor for carrying out any work by an individual or HIUF exclusively for personal purposes?
Section 194M provides for the levy of TDS at the rate of 5% by an individual or a HUF for paying any sum during the financial year to any resident contractor for carrying out any work (including supply of labor for carrying out any work) in pursuance of a contract where such sum or, as the case may be, the aggregate amount of such sums paid or credited to the account of a resident contractor during the financial year exceed ₹50 Lakhs.
Provisions of this section are applicable when work is being carried on exclusively for the personal purpose of the individual/HUF or when such individual/HUF is not subjected to tax audit and where such sum or, as the case may be, the aggregate amount of such sums paid or credited to the account of a resident contractor for the work during the financial year exceed ₹50 Lakhs.
When tax is not required to be deducted u/s 194C?
In the following cases, tax is not required to be deducted at source:
(1) When any sum paid or credited or likely to be paid or credited to the account of the resident contractor during the financial year does not exceed
(2) Resident Transporter: If the following conditions are satisfied
(a) Amount is paid/credited to the account of any Resident Transporter who is engaged in the business of plying, hiring, or leasing of Goods Carriage vehicle;
(b) Resident Transporter furnishes his Permanent Account Number (PAN) to the payer; and
(c) He owns 10 or less than 10 Goods Carriage vehicles at any time during the financial year and furnishes a declaration to this effect to the payer (Declaration annexed below in this article).
Tax will not be required to be deducted when any sum is paid or credited to the account of a Resident Transporter engaged in the business of Goods Carriage, even if it exceeds the specified threshold limit.
However, tax shall be deducted by the payer if any sum paid or credited to the account of a resident transporter engaged in the business of Passenger Carriage exceeds the specified threshold limit and the sum is being paid or credited for chartered hiring of Passenger Carriage.
Illustration: Mr. Reyansh, the proprietor of Reyansh & Co., gave an annual maintenance contract for the maintenance of office air-conditioners to Mr. Sharthak. As per the agreed terms, the payments to be made to Mr. Sharthak are as follows:
Whether Mr. Reyansh is required to deduct tax from the contract payments to be made to Mr. Sharthak in the financial year 2023-24?
Solution: As per section 194C(5), no TDS will apply if a single payment does not exceed ₹30,000 and the aggregate payment made during the financial year does not exceed ₹1,00,000.
|Date||Amount paid||Aggregate amount paid||TDS|
|05-05-2023||₹25,200||₹25,200||Tax is not required to be deducted since a single & aggregate sum paid in the financial year 2023-24 does not exceed the threshold of ₹30,000 and ₹1,00,000 respectively.|
In this case, all the payments are below ₹30,000 and the aggregate payment to be made during the financial year is below ₹1,00,000. Hence, there is no requirement to deduct tax from the contract payments to be made to Mr. Sharthak.
Illustration: Whether the provisions of section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc.?
Solution: The carriage of documents, letters, etc., is in the nature of the carriage of goods and, hence, provisions of Sec. 194C would be attracted in respect of payments made to the couriers.
What is tax the rate for deduction of tax under section 194C?
The rate at which tax shall be deducted depends upon the status of contractors. As per section 194C(1), tax shall be deducted at the following rate
|Where any sum paid or credited to the account of a contractor being||TDS rate shall be|
|(1) an individual or a Hindu Undivided Family (HU)||1%|
|(2) a person other than an individual or a Hindu undivided family (HUF)||2%|
However, if the resident contractor fails to provide a valid PAN to the specified person, the tax shall be deducted at 20% according to section 206AA of the Income Tax Act, 1961.
When shall be tax deducted u/s 194C?
The tax shall be deducted at the time of credit of payment to the contractor or subcontractor’s account or at the time of actual payment, whichever is earlier. This means that TDS should be deducted when either of the following events occurs first:
(a) The payment is credited to the account of the contractor or subcontractor, or
(b) The payment is actually made to the contractor or subcontractor.
It’s important to note that if any advance payment is made to the contractor or subcontractor, TDS should also be deducted at the time of such advance payment.
Illustration: PQR Ltd. has made the following payments on various dates in the financial year 2023-24 to RDX Ltd. towards work done under different contracts:
|Contract Number||Date of payment||Amount (₹)|
PQR Ltd. claims that it is not liable for deduction of tax at source under section 194C. Examine the correctness of the claim made by the company.
Solution: As per section 194C(5), tax has to be deducted at source when 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 aggregate during the financial year.
Therefore, in the given case, even though the value of each individual contract does not exceed ₹30,000, the aggregate amount exceeds ₹1,00,000. Hence, PQR Ltd.’s contention is not correct and tax is required to be deducted at source on the whole amount of ₹1,04,000 from the last payment of ₹18,000 towards Contract No.5 on account of which the aggregate amount exceeded ₹1,00,000.
Illustration: XYZ Ltd. gave an annual maintenance contract (AMC) for the maintenance of office furniture to ABC Ltd. on a charge of ₹2,52,000. As per the agreed terms, XYZ Ltd. has to make a payment of ₹2,00,000 in advance and the balance is to be paid at the time of completion of the AMC.
Solution: As per section 194C(5), tax is to be deducted 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 the issuance of a cheque or draft or by any other mode, whichever is earlier. Considering the above provisions, advance of ₹2,00,000 will be liable to TDS.
Will Tax be Deductible at Source on the GST amount charged in the bill?
If any amount representing GST in an invoice is indicated separately then TDS will be levied on value excluding such GST. GST for this purpose will include IGST, CGST, SGST, and UTGST.
What is the meaning of the goods carriage?
Goods carriage means
(i) any motor vehicle constructed or adapted for use solely for the carriage of goods, or
(ii) any motor vehicle not so constructed or adapted when used for the carriage of goods.
The term “motor vehicle” does not include vehicles having less than four wheels and with engine capacity not exceeding 25CC as well as vehicles running on rails or vehicles adapted for use in a factory or in enclosed premises.
Declaration Under Section 194C (6)
Patna, Ashiana Nagar, 800001 (Bihar)
I, XYZ, Proprietor of M/s XYZ Logistics (hereinafter “The Contractor”) do hereby make the following declaration as required by sub-section (6) of section 194C of the Income Tax, 1961 for receiving payments from the payer without deduction of tax deduction at source (TDS).
1. That name of party authorized to make this declaration in the capacity as proprietor/ partner/ Director.
2. That the contractor is engaged by the payer for hiring or leasing of goods carriage for its business.
3. That I have not own more than ten goods carriage vehicles as on date.
4. That if the number of goods carriages owned by the contractor exceeds ten at any time during the previous year 2017-18 (01-04-2017 to 31-03-2018), the contractor shall forthwith, in writing intimate the prater of this fact.
5. That the Income Tax Permanent Account Number(PAN) of the contractor is …………………… A photocopy of the same is furnished to the payer along with this declaration.
I the above-named declarant do hereby verify that the contents of paragraphs one to five above are true to my own knowledge and belief that no part of it is false and nothing material has been concealed in it.
Name of the Declarant
Rishikant Mehta, Practicing Chartered Accountant can be contacted For any query/information /suggestion at firstname.lastname@example.org