TDS is a way of collecting income tax from taxpayers in India. The payer deducts some tax from the payment and gives it to the government. The payee gets credit for the tax paid and pays less tax later. Section 194C is a TDS rule for payments to contractors or sub-contractors for any work. It applies to both individuals and businesses.
In this blog post, we will discuss the meaning, scope, applicability, rates, and exceptions of Section 194C. We will also explain the procedure and compliance requirements for deducting and depositing the tax under this section.
Meaning and Scope of Section 194C
Section 194C of the Income Tax Act, 1961 mandates tax deduction at source from payments to contractors or sub-contractors for work. Here's a concise breakdown:
Meaning and Scope:
- Contractors undertake work for others, while sub-contractors delegate part or all of the work.
- Work includes labor or material-supply activities like construction, manufacturing, repair, etc.
- Exceptions: Personal services like teaching, consulting, and auditing are not covered.
Conditions and Exceptions:
- Payments must be by a business or professional entity, not individuals or HUFs for personal use.
- Payments must be to resident contractors/sub-contractors, not non-residents or foreign companies.
- Payments should be for work under a contract, excluding salary payments.
- Thresholds: Single payments over Rs. 30,000 or aggregate payments exceeding Rs. 1,00,000 in a financial year require tax deduction.
- Tax deduction at the time of payment or credit, whichever is earlier, even if made by a third party.
- Exemption: Contractors/sub-contractors with income below taxable limits can provide Form 15G/15H, except for payments by companies or firms.
Applicability and Rates of Section 194C
The applicability and rates of tax deduction under Section 194C depend on the amount and nature of the payment made to the contractor or sub-contractor. The applicability and rates of Section 194C are explained below:
Threshold and Limits:
The tax deduction according to Section 194C only applies when the payment amount or the total payments expected throughout the fiscal year surpass the specified threshold. This threshold stands at Rs. 30,000 for individual payments and Rs. 1,00,000 for the total payments within a fiscal year.
If payments fall below this threshold, no tax deduction is necessary. However, if the payer suspects payment splitting to evade tax, they reserve the right to deduct tax even if the payment amount or total payments remain under the threshold limit.
Also Read: TDS Rate Chart for Financial Year 2023-24/ Assessment Year 2024-25 Including Budget 2023 Amendments
Rates of Tax Deduction
The rates of tax deduction under Section 194C vary depending on the status and the nature of the payee.
The rates of tax deduction under Section 194C are as follows:
| Status of the Payee | Nature of the Payee | Rate of Tax Deduction |
|---|---|---|
| Individual or HUF | Contractor | 1% |
| Individual or HUF | Sub-contractor | 1% |
| Others | Contractor | 2% |
| Others | Contractor | 2% |
The rate of tax deduction is also subject to surcharge, cess, and health and education cess, as applicable. The rate of tax deduction is also subject to the lower or nil deduction certificate issued by the Assessing Officer under Section 197 of the Income Tax Act, if any.
Multiple Contracts and Payments
If the payer engages in multiple contracts or makes multiple payments to the same payee within the fiscal year, they must calculate the total payments to determine tax deduction under Section 194C.
For instance, if A contracts B twice for Rs. 20,000 and Rs. 25,000 respectively, and makes payments of Rs. 10,000 and Rs. 15,000 respectively, the tax deduction is required from the second payment of Rs. 15,000 since the total payments exceed the Rs. 30,000 threshold.
Special Cases
There are some special cases where the applicability and rates of Section 194C are different from the general cases. Some of these special cases are:
- Transport Operators: If a transport operator, owning or leasing less than 10 goods carriages, provides Form No. 15-I and PAN, no tax is deducted. Otherwise, tax is deducted at 2% or 1%.
- Advertising Agencies: Tax is deducted at 2% or 1% for advertising services. If payments are made to others for advertising services, tax is deducted at 1%.
- Insurance Commission: Payments to insurance agents for business services are taxed at 5% under Section 194D, not 194C. Payments to others for similar services are taxed at 1% under 194C.
Procedure and Compliance of Section 194C
The procedure and compliance requirements for deducting and depositing the tax under Section 194C are as follows:
Obtaining and Verifying the PAN
Before paying or crediting the contractor/sub-contractor, the payer must acquire and authenticate their PAN. The PAN should be stated in TDS returns and certificates. Failure to provide or providing an inaccurate PAN results in tax deduction at 20% or the applicable rate, whichever is greater, under Section 206AA of the Income Tax Act.
Depositing the Tax Deducted
Upon deducting tax, the payer is obligated to remit the deducted amount to the Central Government within the stipulated time frame. The deposit timelines differ based on the payer's classification:
1. Government Offices:
- If payment is made in cash, cheque, or draft, the tax must be deposited on the same day as the deduction.
- If payment is via book adjustment, the tax should be remitted on or before seven days from the end of the month in which the deduction occurred.
2. Non-Government Payers:
- Tax deducted must be deposited on or before seven days from the end of the month in which the deduction was made, except for March.
- For deductions in March, the tax must be deposited on or before the 30th of April in the subsequent financial year.
The tax deposit process is facilitated through challan no. ITNS 281. This challan can be used for both online and offline transactions and requires comprehensive details such as payer and payee information, deduction date, deduction amount, tax rate, and other relevant particulars.
Filing the TDS Returns
Payers must submit quarterly TDS returns in Form No. 26Q, online or offline, by specific deadlines:
- Quarter ending on 30th June: Due by 31st July of the same financial year.
- Quarter ending on 30th September: Due by 31st October of the same financial year.
- Quarter ending on 31st December: Due by 31st January of the same financial year.
- Quarter ending on 31st March: Due by 31st May of the next financial year.
- These returns should include comprehensive details like payer/payee information, payment and deduction dates, tax rates, and challan particulars.
Issuing the TDS Certificates
Payers are required to provide TDS certificates in Form No. 16A to contractors or sub-contractors within specified time frames:
- Quarter ending on 30th June: By 15th August of the same financial year.
- Quarter ending on 30th September: By 15th November of the same financial year.
- Quarter ending on 31st December: By 15th February of the same financial year.
- Quarter ending on 31st March: By 15th June of the next financial year.
- These certificates should contain detailed information such as payer/payee details, payment and deduction dates, tax rates, and challan information.
Rectifying the Errors or Defaults
Payers must address any TDS process errors like non-deduction, short-deduction, non-deposit, late-filing, etc., promptly and correctly. This involves paying applicable interest, penalties, or fees, and submitting revised or corrected TDS returns/certificates as necessary. Payers must also respond to any queries or notices from the Income Tax Department regarding TDS processes.
Also Read: TDS on Purchase of Goods
Penalties and Consequences
Non-compliance with Section 194C results in penalties, including:
- Interest of 1% per month for non/short deduction and 1.5% for non/short deposit under Section 201.
- Penalty equal to the undeducted/deposited tax under Section 271C.
- Late filing penalty of Rs. 200 per day, capped at the deducted tax amount, under Section 234E.
Balancing Tax Compliance and Operational Challenges under Section 194C
Section 194C of the Income Tax Act, 1961 is a crucial provision mandating tax deduction at source from payments to contractors or sub-contractors. Its application spans various types of labor or material-based work, impacting both individuals and businesses engaged in contractual services. Tax deduction rates range from 1% to 2%, contingent on payee status and nature.
Compliance entails obtaining and verifying PAN, timely tax deposit, filing quarterly TDS returns, issuing TDS certificates, rectifying errors, and facing penalties for non-compliance. While compliance ensures steady government revenue and reduces tax evasion, it presents paperwork and coordination challenges for both payer and payee.
