Section 194C of ITA, 1961 : Section 194C: Payments To Contractors

Explanation using Example

Imagine a construction company, BuildCon Pvt. Ltd., has been awarded a contract by the local municipal corporation to construct a new public library. The contract is worth 5 million rupees, and as per the agreement, BuildCon will receive progress payments as the work advances.

When the municipal corporation processes the first payment of 1 million rupees to BuildCon, it is required by Section 194C of the Income-tax Act, 1961, to deduct tax at source (TDS) from this payment. Since BuildCon Pvt. Ltd. is a company, the applicable TDS rate is 2% of the payment amount. Therefore, the municipal corporation will deduct 20,000 rupees (2% of 1 million) and remit it to the government as TDS. The corporation will then pay BuildCon the remaining 980,000 rupees.

In this scenario, the municipal corporation is the 'specified person' responsible for deducting the tax, and BuildCon Pvt. Ltd. is the 'contractor' receiving the payment after the tax deduction. If BuildCon had been a sole proprietorship run by an individual or a Hindu undivided family, the TDS rate would have been 1%, resulting in a deduction of 10,000 rupees instead.

Furthermore, if BuildCon had invoiced for labor separately from the materials, and the labor component of the invoice was, say, 600,000 rupees, the municipal corporation would deduct TDS only on that labor component, provided it was clearly mentioned in the invoice.

Finally, if BuildCon had been a small contractor owning less than ten goods carriages and provided a declaration along with their Permanent Account Number (PAN), the municipal corporation would not have to deduct TDS on payments made to BuildCon for the transportation of goods as per sub-section (6) of Section 194C.