TDS on contract payment [Deductions on payments to contractor]

According to the finance bill of 2019, the TDS on contract payments made by professionals and resident contractors is applicable mainly where payments are exceeding Rs. 50 lacs, as per Section 194M of the Income Tax Act 1961. It includes all the payments made by professionals or resident contractors from September 1, 2019, at a tax of 5% or 3.75%.

What is TDS on Contract Payments?

TDS on contract payment is charged as per Section 194C of the Income Tax Act. It states that any person is responsible for paying out TDS for the work that is done for a contractual service.

Who all are liable to pay TDS?

• The state government or central government
• Local authorities
• Company
• Co-operative society established under state, central, or provisional act
• Any trust
• Any deemed university
• Any company
• Societies registered under the Society Registration act, 1980, or any such corresponding law to the act in any part of India
• Authorities that are engaged in house accommodations or associated with infrastructural development of cities, towns, and villages

Before understanding TDS on contract payments, it is vital to understand the concept of work of purpose under Section 194C of the Income Tax Act.

The expression ‘work’ in Section 194C includes:

• Broadcasting and telecasting services such as program productions
• Transportation services: Carrying goods by using any mode of transportation services, except railways
• Catering services
• Supplying or manufacturing a product as per the specification or requirement of the contractor. It includes all the materials purchased under Section 40A(2) of the Income Tax Act. But it excludes the TDS on contract payments done as per the specifications of an individual customer.

Know about the rates of TDS on contract payments in India

Exceptions – TDS on contract payments

TDS is deducted on composite contracts on the following grounds:

• If the material supplier is any government body, the deduction will apply to the gross payment of the contractor or its net payment.
• Materials supplied to the government as a part of the contract and parties’ conduct thereto.
• When the contractor has undertaken a contract for constructing a property as a part of a government project. In that scenario, the material is mostly supplied by the government at a stipulated cost. TDS deduction will be done on the gross payment without making any deductions at the time of supplying the material cost.
• If the contractor is responsible only to provide labor for the work, the rest of the ownership is of the government. In this case, you are not required to deduct TDS on contract payments. It will not include the cost of the material supplied.
• On the whole, the TDS on contract payments is made by any person or the government at the rate of 2% or 1% of the gross payment. It will be applicable in those scenarios where the TDS deduction is done on the net payment.

Time of TDS on Contract Payments?

If the TDS deduction is made as per Section 194C of the Income Tax Act, these are the timelines:

• When the amount is credited to the account of the contractor
• When the payment is made in cash or cheque

Who are sub-contractors?

A sub-contractor is a person who is a part of contracts that are made:

• Between the contractor and sub-contractor. It is the responsibility of the contractor to complete the work.
• A person who is supplying labor to complete the work that is undertaken by the contractor.

What is TDS on contract payments – Sub-contractors:

The payment is credited to the account of sub-contractors who are Indian residents. TDS deduction will take place as per Section 6 of the Income Tax Act 1961.

• If you are a residential contractor, you are liable to pay TDS on contract payments.
• Payments are made for conducting any work, including providing labor or supply of raw materials.
• The payment done should be above Rs. 30,000.
• The amount credited in the account of the contractor is undertaken by specific bodies.

Points to keep in mind when making TDS on contract payments:

• Share the PAN details of the deductor/payer for furnishing the information regarding TDS made to the Income Tax Department of India.
• Properly verify the tax deposits made by the deductor or payer as mentioned in Form 26AS. The form is available on the website.
• Ask for Form 16D from the deductor or payer. You can even download the TRACES (TDS Reconciliation Analysis and Correction Enabling System) from the income tax website.
• The deductee or payee – at the time of making TDS on contract payments – can also consult the assessing officer as per Section 197 of the Income Tax Act, and request a lower or nil TDS certificate. If the assessing officer is satisfied with the total income earned of the sub-contractor or contractor, he or she will provide you with the certificate.

Timelines for the issue of TDS certificate:

According to a circular issued by the CBDT (Central Board of Direct Taxes), all the deductors must provide the TDS certificate to the deductee by issuing Form 16A by the generating certificate from the TIN (Tax Information Network). The certificate is issued based on the TDS certificate number.

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FAQs

Q. What is TDS?

Ans. TDS deduction applies to payments such as commission, salary, rent, professional fees, interest, as per the Income Tax Act 1961. All the businesses and professionals have to make TDS deductions as per the categories mandated by the Income Tax Department of India.

Q. Who is responsible to deduct TDS on contract payments?

Ans. The deductee or payer, be it an individual or HUF (Hindu Undivided Family), are liable to deduct TDS on contract payments. After the deduction, you need to deposit the amount in the government treasury.

Q. What is Form 26QD?

Ans. Form 26QD is the challan stating the record of all the transactions taking place under the head – TDS On Contract Payments – for professionals and contractors as per Section 194M of the Income Tax Act 1961. You can download the form from the TIN website.

Q. What are the timelines for filing Form 26QD?

Ans. According to the Income Tax Act of India, an individual is liable to fill the Form 26QD in the following scenarios:

• On the completion of the financial year
• When the contract or services gets terminated
• Payment is made on 1st September 2019

Q. What is Form 16D?

Ans. Form 16D is liable for the central processing cell of TDS. It is available on the website – tdscpc.gov.in.

Q. What is the minimum amount of TDS to be paid under Section 194C of the Income Tax Act 1961?

Ans. If the payment made by the contractor is more than Rs. 30,000 annually, there will be a TDS deduction as per Section 194C of the Income Tax Act of India.