TDS on Contractor: Key Insights into Section 94C of IT Act

TDS on Contractor is a tax mechanism where the payer deducts a certain percentage as tax when making payments to contractors and remits it to the government on behalf of the contractor.

Under Section 194C of the Income Tax Act 1961, the various rules and regulations regarding tax deduction at source on payments made to contractors or subcontractors are laid down.

Section 194C

Let us understand the following elements of Section 194C:

Persons that are responsible for deducting tax under Section 194C

• The Central Government or any State Government.
• Any Local Authority.
• Any Statutory Corporation.
• Any Corporation established under a Central, State or Provincial Act.
• Any Company, whether listed on a recognised stock exchange or not.
• Any co-operative society.
• Any society registered under the Societies Registration Act, 1860 or under any similar laws.
• Any authority established under the law for managing and developing municipal, panchayat or other local funds to meet the needs of housing accommodation or that of planning development or improvement of cities, towns or villages.
• Any firm.
• Any trust constituted for charitable or religious purposes.
• Any University deemed or otherwise.
• Any government of a foreign state or foreign enterprise or any association or body established outside the Indian frontiers.
• Any person being an individual, HUF, AOP or BOI having total sales from business exceeding 1 crore or total receipts from profession exceeding 50 lakh during the previous financial year.

Contractor and Sub-contractor

A contractor is engaged in any work including supply of labour for carrying out any work.

A sub-contractor is engaged by the contractor to execute a part or whole of the work that has been undertaken by the contractor.

The sub-contractor is hired by the main contractor to perform part or whole of the work that is originally undertaken by the main contractor.

Works contracts that qualify for the deduction of TDS under Section 194C

• Advertising services.
• Carriage of goods and passengers by any mode other than railways.
• Catering services.
• Manufacture and supply of products to the customer using materials provided by such customer as defined under Section 40A(2). This doesn’t include the manufacture or supply of a product according to the specifications of a customer by using the materials purchased from a person who is not the customer.
• Supply of labour for works contract.
• Broadcasting and telecasting services including the production of programs of such broadcasting or telecasting.

When to deduct TDS

TDS is to be deducted at the time of credit of such sum to the payee’s account or at the time of payment whichever is earlier.

The meaning of credit to the payee’s account in the books of account of the payer can mean an account under the name ‘Suspense account’ or any other name, when credited with the sum shall be considered.

Rates of TDS for Contractors

• 1% where the payment is being made or credit is being given to a resident individual or HUF.
• 2% where the payment is being made or credit is given to any other resident entity, other than a resident individual or HUF.

Threshold limit for deduction of tax at source under Section 194C

• No TDS is required to be done if the payment for the contract does not exceed ₹ 30,000.
• TDS is to be deducted if the payments to contractors exceed ₹ 30,000 in a single payment or ₹ 1,00,000 in aggregate during the financial year.
• TDS is to be deducted if either of the above is met. So TDS shall be deducted even if a single payment does not exceed ₹ 30,000 as long as the aggregate payments made to the contractors in the financial year exceeds ₹ 1,00,000.

Note : While deducting the tax, the GST component is to be ignored, i.e., no TDS on the GST component.

Time limit for deposit of the Tax Deducted at Source

• Payment made by or on behalf of the Government – tax to be deposited on the same day.

• In any other case –

1. The amount credited in March – tax to be credited on or before April 30th.
2. In other months – tax is to be credited within 7 days from the end of the month in which the deduction is made.

Due Date for filing TDS returns

Quarter	Due Date
April to June	31st July
July to September	31st October
October to December	31st January
January to March	31st May

Due Date for the Issue of TDS Certificate

Quarter	Government Deductor	Non-Government Deductor
April to June	15th August	30th July
July to September	15th November	30th October
October to December	15th February	30th January
January to March	30th May	30th May

Cases where TDS for contractors is not required

• TDS under Section 194C is not required to be deducted if the payment for one single payment doesn’t exceed ₹ 30,000 or ₹ 1,00,000 in aggregate during a financial year.
• TDS on payments to transport operators is not required when the transporter is a person who is engaged in plying, leasing or hiring of goods carriages. This is only applicable if the transporter does not own more than 10 goods carriage vehicles during the financial year. For this exemption to be availed, the transporter has to furnish his PAN.
• Payments made by an individual or HUF to a resident contractor are not subject to TDS under section 194C if the payments are made for personal purposes. Example: hiring a contractor to renovate your house, section 194C shall not be attracted.

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