Law and Procedure of Tax Deducted at Source (T.D.S.)

Affecting Contractors and Sub Contractors under the Income Tax Act .

By Dinesh Vithlani

Posted on 29 March 2001

The Government’s Policy of making the assessee to pay tax as they earn income has resulted in various scheme of tax collection. T.D.S. is one of them are major one , for collection of tax .The main purpose for introducing T.D.S. was to bring more and more people into the tax net. The net of T.D.S. was enlarged as it is very economical and beneficial way of collection of tax. Though Government claims that the direct tax laws are simplified for better compliance and larger collection of tax but as far as T.D.S. is concerned it is very much complex ,as is it not possible to know what law is applicable at a particular time and to make situation more worse, frequent changes in the section , rules and procedure are made. Section 192 to 206B of the income tax act deals with the topic T.D.S. It is interesting to note that payer has to do honorary job by acting as an agent to the government to collect tax from the payee and pay to the Government.

Scope and Application of Section 194C Section 194C covers two types of contracts which are 1)Payment to Contractor ,and 2) Payment to Sub-contractor .

Payment to contractors : Any of the following “Person responsible for paying any sum of any resident contractor for carrying out any work including supply of labour for carrying out any work. In pursuance of a contract between contractor and any of the following person shall at the time of credit of such sum to the accounts of the contractor , or to any other account in the books of payer , or at the time of payment whichever is earlier shall deduct tax at source.

The term “person” means and includes the following : The central government or any state government . Any local authority .Any corporation established by or under a central ,state or provincial act. Any authority constituted in India by or under any law engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities town and village or both. Any society registered under the societies registration act 1860 or under any law corresponding to that act in force in any part of India. Any trust. Any University established or incorporated by or under a central , state or provincial act and institution declared to be a university under section of the university grants commission act 1956.

Payment to sub contractor : Any contractor person (other than individual or Hindu undivided family ) responsible for paying any sum to any resident sub- contractor in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, for carrying out the whole or any part of the work undertaken by the contractor or for the supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, deduct tax at the time of credit of such sum to the account of the sub-contractor or to any other account in the books of payer or at the time of payment whichever is earlier.

Following contracts are covered u/s . 194 C (List is not exhaustive, but it only gives broad outline of the contract which are liable for T.D.S. u/s.194 C) 1) Works contracts. 2) Labour contracts. 3) Combination of works and labour contracts.4) Transportation contracts involving supply of labour for loading and unloading. 5) Contract for supply of labour for loading and unloading.6) Contract for hire of cars /buses etc. which includes hire charges and where driver cleaners and maintenance are provided by the contractor .

Which contracts are not covered u/s.. 194 C (List is not exhaustive ) 1) Contract for sale of goods by the contractor. 2) Contract for rendering professional services.3) Transportation contract where element of labour is very less. 4) Contract to hire of cars where there is no involvement of any supply of service .5) Payment made to bank for discounting bill collecting / recovery payment through cheque , draft, opening and negotiating letter of credit etc. 6) work executed under national rural employment program and rural landless employment guarantee program.

When payer makes payment to any payee if it is government , the R.B.I., any mutual fund specified v/s. 10 (23D) , a corporation establishment by or under a central act which is exempt from income tax by virtue of any law for example :- L.I.C., U.T.I., etc. Then no deduction of tax at source is required to be made (v/s. 196 as T.D.S provision are not applicable to them .

What are formalities for obtaining tax deduction account number (TAN) (Section 203A) The payer has to apply in form no 49 B within one month of deduction of tax in duplicate for obtaining tax deduction account number (TAN) . The form should be submitted to the income tax officer or to the other assessing officer who has been assigned the job of allotting TAN.

When payment can be made without deduction of tax payment can be made without deduction of tax where payment to contractor or sub-contractor , are made for any sum credited or paid in pursuance of a contract , where the amount for the contract does not exceeds Rs. 10,000/- in other words if the contract amount is 10,000/ -or more tax has to be deduct at applicable rate.

When tax has to be deducted Tax has to be deducted at the time of credit of such amount in the accounts of a contractor or to any other account in the books of payer or at the time of payment whichever is earlier . It is to be keep in mind that the tax has to be deducted at the earlier point of time either payment or credit I the account of the contractor or in any other accounts in the books of payer whichever is earlier .

What are rare of deduction of tax. In case of contractor if payee is domestic company rate including surcharge is 2.30% and if payee is non domestic company or any other person than the rate including surcharge is 2.24%.

In case of sub contractor if the payee is domestic company rate including surcharge is 1.15% and if payee is non domestic company or any other person the rate including surcharge is 1.12%

When the tax deducted has to be paid to the government . In case of a (payer who is carrying on business or profession and where contract amount is credited to (payees) account or any other account in the books of the payer (i.e. where payment is not made). The payment of tax has to be made within two months from the end of the month in which credit is given and in any other case, (i.e. where payment is made) within one week from the last day of the month in which deduction is made .

For example ,(1) In case of a payer who carries on business, amount is credited (but not paid) on the last day of accounting year i.e. say 31.3.1993. The payment can be made before 30.05.1993. (2) If payment is made to payee on say 10.1.1994 T.D.S. payment has to be made before 7.2.1994.

When to issue T.D.S certificate . In case of a payer who is carrying on business or profession and where the contract amount is credited to the payees amount or any other account of a payer certificate of T.D.S. has to be issued within a week from the expiry of two calendar month in which such credit is given. In any other case, certificate is to be issued within one month and fourteen days from the date of credit or payment of such amount .

In example (1) Given above T.D.S. certificate has to be issued in 1^st situation before 7.6.1993 and in example (2) T.D.S. certificate is to be issued before 24.2.1994.