Here are some exceptions to TDS while making payments to contractors as per Section 194C:
- TDS Deduction for Composite Contract
If the Government supplies materials, the decision to deduct TDS while making payments to a contractor rests on the contract and conduct of the parties involved.
When a constructor agrees to develop a dam or building, and the specified person or the Government supplies materials at agreed prices to carry out such work, the concerned payer will deduct TDS on gross payments without adjustments related to material cost.
When a contractor agrees to offer labour to carry to work on a project, and the Government or specified person will supply materials for work, the payable amount to the contractor will be based on services or labour provided and will not cover the material cost.
Therefore, a payer will deduct TDS from payments made to a contractor is 2% or 1% on gross or net payments based on the contract. The TDS rate is 0.75% and 1.5% for payments made from 4th May 2020 to 31st March 2021.
- TDS Deduction In Case a Party Provide Materials to Contractor
In this, no deduction of tax at source is applicable. However, a payer will deduct TDS if he or she pays in kind or cash to a sub-contractor or contractor.
Non-compliance to Section 194C of the Income Tax Act attracts a substantial interest on the payment paid and also disallows a taxpayer to claim a tax deduction on such expenditures. Therefore knowing about this Section is essential to remain tax compliant and avoid increasing tax liabilities.