Understanding Section 194C of the Income Tax Act

Section 194C of the Income Tax Act, 1961 plays a vital role in ensuring tax compliance in India. It mandates the deduction of Tax Deducted at Source (TDS) from specific payments made to resident contractors and subcontractors for carrying out designated work. This provision safeguards the government's tax revenue stream while also introducing a layer of responsibility for those making such payments.

Who Needs to Deduct TDS Under Section 194C?

The onus of deducting TDS under Section 194C falls on the entity making the payment to the contractor. This entity can be broadly classified as a "specified person" as defined by the Income Tax Act. This encompasses a wide range of organizations, including:

·       Central and State Government bodies

·       Local authorities

·       Statutory corporations

·       Companies registered under the Companies Act

·       Cooperative societies

·       Universities and other educational institutions

·       Registered societies

·       Any other person responsible for fulfilling household needs (e.g., housing societies)

What Work Attracts TDS Under Section 194C?

Several types of work contracts come under the purview of Section 194C. Here's a list of the common activities that necessitate TDS deduction:

• Services Contracts: This includes advertising services, broadcasting and telecasting services, and catering services.
• Transportation Contracts: The movement of goods or passengers (excluding railways) falls under this category.
• Manufacturing or Supply Contracts: This applies to situations where a contractor manufactures or supplies goods based on the customer's specifications, using materials provided by the customer.

It's important to note that supplying goods alone, without any element of work involved, generally doesn't attract TDS under Section 194C.

TDS Thresholds and Exemptions

While Section 194C mandates TDS deduction, there are certain thresholds and exemptions to consider:

• Thresholds:
• No TDS is deducted if the total payment to a contractor in a financial year is less than ₹30,000.
• If the total payment exceeds ₹30,000 but remains below ₹1,00,000 in a year, TDS applies.
• Exemptions:

o   PAN-based Exemption: Contractors who furnish a valid PAN and the total payment for the year stays below ₹1,00,000 are exempt from TDS.

o   Transportation Exemption: Contractors solely engaged in the business of transporting goods, with a fleet of ten or fewer vehicles in the preceding financial year, are exempt from TDS.

o   Specific Contract Exemptions: Certain specific types of contracts are exempt from TDS. These include government supply of raw materials for projects, construction of dams or buildings where the contractor provides labour, and some contracts with local authorities.

TDS Rate Applicable Under Section 194C

The TDS rate for payments made under Section 194C varies depending on contractor type:

• 1%: This rate applies to payments made to individuals and Hindu Undivided Families (HUFs).
• 2%: This rate is applicable to all other entities like companies, trusts, and partnership firms.

However, it's crucial to remember that if the contractor fails to provide a PAN, the TDS rate surges to a steep 20% irrespective of the contractor's type. This underlines the importance of PAN verification for both the payer and the contractor.

Timely Deposit of Deducted TDS

The timeframe for depositing the deducted TDS depends on the depositor's category:

• Government or Government Agencies: The deducted TDS needs to be deposited on the same day as the payment is made to the contractor.
• Non-government entities:
• March payment: Deposit by the 30th of April.
• Other months: Deposit within a week from the month-end when TDS is deducted.

TDS Certificate Issuance

The entity deducting TDS is obligated to issue a TDS certificate (Form 16A) to the contractor on a quarterly basis. The specific issuance dates vary depending on the quarter and the depositor type (government or non-government).