Section 194C of the Income Tax Act, 1961 is an important provision that deals with the deduction of tax at source from payments made to contractors and sub-contractors. This section was recently amended by the Finance Act, 2020 and has been in effect since 1st April 2020. In this blog, we will discuss the key provisions of Section 194C of the Income Tax Act, 1961.
What is Section 194C of the Income Tax Act?
Section 194C of the Income Tax Act, 1961 is a provision that mandates the deduction of tax at source by the payer while making payments to a contractor or a sub-contractor for carrying out any work (including supply of labour for carrying out any work). The tax deduction is applicable to payments made to contractors or sub-contractors who are engaged in carrying out any work in pursuance of a contract between the contractor/sub-contractor and the payer.
The rate of tax deduction under Section 194C is 1% if the payee is an individual or a Hindu Undivided Family (HUF), and 2% if the payee is a person other than an individual or an HUF. However, if the contractor or sub-contractor has obtained a certificate of lower deduction of tax at source from the assessing officer, then the tax deduction can be made at the rate specified in the certificate.
Who is a Contractor/Sub-Contractor?
A contractor is a person who enters into a contract with the payer for carrying out any work, which may include the supply of labour or materials. A sub-contractor, on the other hand, is a person who is engaged by the contractor to carry out a part of the work agreed upon between the contractor and the payer.
For example, if a company hires a contractor to construct a building, the contractor may engage a sub-contractor to carry out the electrical and plumbing work. In this case, both the contractor and the sub-contractor are covered under Section 194C of the Income Tax Act.
When is tax deduction under Section 194C not applicable?
The provisions of Section 194C do not apply in certain cases. For example, tax deduction is not required if the payment made to the contractor or sub-contractor does not exceed Rs. 30,000 or if the contract is for personal purposes and not for business purposes.
Additionally, tax deduction is not required if the contractor or sub-contractor is engaged in the business of transport of goods and holds a valid PAN and GSTIN. In this case, tax is required to be deducted at the rate of 0.75% if the payment is made by the payer to the contractor or sub-contractor using any electronic mode of payment.
Applicability of Section 194C:
Section 194C is applicable to payments made to contractors or sub-contractors for carrying out any work, including the supply of labour for carrying out any work. The work may be carried out by the contractor or sub-contractor at the premises of the payer or at any other location. The payment may be made in cash or by any other mode.
Tax Deduction Rate:
As mentioned earlier, the tax deduction rate under Section 194C is 1% if the payee is an individual or an HUF, and 2% if the payee is a person other than an individual or an HUF. However, if the contractor or sub-contractor has obtained a certificate of lower deduction of tax at source from the assessing officer, then the tax deduction can be made at the rate specified in the certificate.
Contractor/Sub-Contractor’s Obligations:
The contractor or sub-contractor is required to furnish their PAN and other details to the payer to ensure proper tax deduction at source. Additionally, if the contract value exceeds Rs. 1 crore, the contractor or sub-contractor is required to get their tax audit done and furnish the audit report to the payer.
Exemptions from Tax Deduction:
As mentioned earlier, tax deduction is not required if the payment made to the contractor or sub-contractor does not exceed Rs. 30,000 or if the contract is for personal purposes and not for business purposes. Additionally, tax deduction is not required if the contractor or sub-contractor is engaged in the business of transport of goods and holds a valid PAN and GSTIN. In this case, tax is required to be deducted at the rate of 0.75% if the payment is made by the payer to the contractor or sub-contractor using any electronic mode of payment.
Consequences of Non-Compliance:
If the payer fails to deduct tax at source or deducts tax at a lower rate than prescribed under Section 194C, they may be liable to pay interest and penalties under the Income Tax Act. Additionally, the contractor or sub-contractor may also be liable to pay interest and penalties if they fail to comply with the provisions of Section 194C.
In conclusion
Section 194C of the Income Tax Act is an important provision that governs the deduction of tax at source from payments made to contractors and sub-contractors. It is important for payers to understand the provisions of this section and comply with the tax deduction requirements to avoid any penalties or legal consequences. The contractor or sub-contractor also has certain obligations to ensure proper compliance with the provisions of Section 194C.
Read more useful content:
- section 234e of income tax act
- section 286 of income tax act
- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
Q: What is Section 194C of the Income Tax Act?
A: Section 194C of the Income Tax Act governs the deduction of tax at source from payments made to contractors or sub-contractors for carrying out any work, including the supply of labour for carrying out any work.
Q: Who is required to deduct tax under Section 194C?
A: The payer, who makes payments to the contractor or sub-contractor for carrying out any work, is required to deduct tax at source under Section 194C.
Q: What is the tax deduction rate under Section 194C?
A: The tax deduction rate under Section 194C is 1% if the payee is an individual or an HUF, and 2% if the payee is a person other than an individual or an HUF.
Q: Is it mandatory to deduct tax at source under Section 194C?
A: Yes, it is mandatory to deduct tax at source under Section 194C, unless the payment made to the contractor or sub-contractor does not exceed Rs. 30,000 or if the contract is for personal purposes and not for business purposes.
Q: What are the exemptions from tax deduction under Section 194C?
A: Tax deduction is not required if the payment made to the contractor or sub-contractor does not exceed Rs. 30,000 or if the contract is for personal purposes and not for business purposes. Additionally, tax deduction is not required if the contractor or sub-contractor is engaged in the business of transport of goods and holds a valid PAN and GSTIN.
Q: What are the consequences of non-compliance with the provisions of Section 194C?
A: If the payer fails to deduct tax at source or deducts tax at a lower rate than prescribed under Section 194C, they may be liable to pay interest and penalties under the Income Tax Act. Additionally, the contractor or sub-contractor may also be liable to pay interest and penalties if they fail to comply with the provisions of Section 194C.
Q: What are the obligations of the contractor or sub-contractor under Section 194C?
A: The contractor or sub-contractor is required to furnish their PAN and other details to the payer to ensure proper tax deduction at source. Additionally, if the contract value exceeds Rs. 1 crore, the contractor or sub-contractor is required to get their tax audit done and furnish the audit report to the payer.
