As section 194C is a very important section, which is largely involved in business scenarios. If a person is working in the accounting section of any company then he must have deep knowledge of the provisions of Section 194C for TDS on payment to contractors.
Important provisions of Section 194C are given below-
1. Section 194C Applicability TDS on Payment to Contractors
Firstly, it is very important to identify the transactions which are applicable to Section 194C. Given below are the situations in which any payment made to the contractor is liable for TDS:
- For carrying out any work, payment is made;
- Supplying of labour for carrying out any work
- Other items are listed in the definition of work.
The definition of work is explained below:
“Work” Must Include
- Advertising;
- Telecasting and broadcasting including the production of programs for such telecasting and broadcasting;
- Other than railway, carrying of passengers or goods by any mode of transport;
- Catering;
- Supplying or manufacturing a product as per the specification or requirement of a customer by using material bought from such customers
But will not include supplying or manufacturing a product as per the specification or requirement of a customer by using material bought from a person, other than such customer.
The definition of work is self-explanatory. But, a discussion is needed on point no. (e)-
| Part (i) of point no. (e) | |
| Supplying or manufacturing a product as per the specification or requirement of a customer by using material purchased from such customer, | Assume that for stitching, a shirt manufacturer supplies clothes to a tailor as per the specifications provided by the shirt manufacturer. In this situation, the shirt manufacturer is the principal manufacturer and the tailor is Job Worker. The shirt manufacturer is liable to deduct TDS u/s 194C on payments to be made to the tailor for stitching clothes. |
| Part (ii) of point no. (e) | |
| but does not include supplying or manufacturing a product as per the specification or requirement of a customer by using material purchased from a person, other than such customer. | This is a simple contract for sale. If the tailor buys clothes from the open market and then stitches shirts as per the specifications of the shirt manufacturer, then this is a sale contract between the shirt manufacturer and the tailor. Here, the shirt manufacturer does not supply clothes to the tailor. Tailor is free to buy clothes from any person. In this situation, TDS is not applicable. |
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Some Important Points:
A. In part (i) of point no. (e) if the tailor supplies an invoice which states material charges and stitching charges individually then TDS will be deducted on stitching charges only. Or else, TDS will be deducted on the entire invoice value.
B. Sub-contract is also included in Contract.
C. Persons who can deduct TDS are:
- Any State Government or the Central Government; or
- Any local authority; or
- Any corporation established under or by the State, Central or Provincial Act; or
- Any company; or
- Any co-operative society; or
- any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of development, planning or improvement of towns, cities and villages, or for both; or
- any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; or
- Any trust; or
- any university incorporated or established by or under a State, Central or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or
- any Government of a foreign State or a foreign enterprise or any association or body established outside India; or
- any firm; or
- any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person,-
- Does not fall under any of the previous sub-clauses; and
- is liable to an audit of accounts under clause (a) or clause (b) of section 44AB during the fiscal year immediately preceding the fiscal year in which such sum is paid or credited to the account of the contractor;
D. Deducted must be the resident person only.
2. Non-applicability of Section 194C for TDS on Payment to Contractors
Given below are the situations in which Section 194C is not applicable:
- Where the party liable to pay any amount to the contractor is an individual or HUF and the particular amount is required to be paid especially for the personal purpose of such individual or any member of HUF.
- If the single payment does not exceed Rs 30,000 or the total sum paid during the financial year does not exceed Rs 1,00,000 then a deduction of TDS is not required.
- If payment is made to a contractor who is engaged in the business of hiring, plying or leasing goods carriages no TDS is required to be deducted, where such contractor owns ten or fewer goods carriages at any time during the last year and furnishes a declaration to that effect along with his Permanent Account Number, to the person crediting or paying such sum.
- TDS is not required to be deducted if it is a contract for sale and not a works contract.
Recommended: Easy Guide to Upload TDS Returns On NSDL Official Portal
3. Rate of TDS:
The deduction must be made for an amount which is equal to :
- 1% in which the payment is given to or credited to an individual or a Hindu undivided family;
- 2% in which the payment is given to or credited to a person other than an individual or a Hindu undivided family.
- (If PAN details are not given, then the TDS must be deducted @20%.)
4. Time of Deduction
While paying credit in the books to the account of the contractor the TDS must be deducted.
