How to determine TDS liability for contractors, consultants and employees

 How to determine TDS liability for contractors, consultants and employees

 

 

 

TDS compliance has always been a prickle for businesses, especially for startups and SMEs. The Indian Income Tax Act necessitates the deduction of tax at source while making specified payments.

TDS is deducted at different rates under different sections, and the minimum exemption limit is distinct under each such section.  Failure to deduct or deposit TDS comes with heavy penalties. So does erroneous classification.

The amounts that a business pays to a party as Salary, contractual payments, professional fees attract different rates of TDS. Hence, it is important to know the difference between these arrangements.

 

Applicability of TDS on contractors [Section 194C]

This Section states that any person responsible for paying any sum to the resident contractor for carrying out any work (including the supply of labor), in pursuance of a contract.

TDS is required to be deducted on payments made to contractors if the payment made to them exceeds Rs. 30000 (in a single tranche) or Rs. 100000 (in a financial year).

The rate of TDS shall be 1% in case of an individual or HUF and 2% in other cases. For contractors not having PAN, TDS has to be deducted @20%.

Whether a person is considered to be a contractor or a professional depends upon the nature of work undertaken by them.

The expression, “work” in this section would include-

 

 

1.Advertising

2.Broadcasting and telecasting including production of programs for such broadcasting or telecasting

3.Carriage of goods and passengers by any mode of transportation, other than railways

4.Catering

5. Manufacturing or supplying of a product according to the requirement or specification of a customer by using the materials purchased from such customer, But does not include manufacturing or supplying of a product according to the requirements or specifications of a customer by using the materials purchased from a person, other than such a customer.

 

 

 

Applicability of TDS on consultants [Section 194J]

 

The type of payments covered under this section is as follows:

1.Professional fees

2.Fees for technical services

3.Remuneration paid to directors excluding salary (For e.g., sitting fees to attend board meetings)

4.Royalty

5. Payments in the nature of non-compete fees (i.e., fees paid to not carry on any business or profession for a specified time and within certain geographical boundaries) or fees paid to not share any technical knowledge or know-how.

 

Tax has to be deducted in case the payment is greater than Rs. 30,000 during the year. However, there is no such limit for payments made to a director. The tax will have to be deducted no matter how small the amount.

 

Any payment covered under this section shall be subject to TDS at the rate of 10%. However, w.e.f. 01.04.2017, the tax on payments made to operators of call centres shall be deducted at a reduced rate of 2%. In case the payee does not furnish his PAN then the rate of deduction would be 20%.

An individual or HUF will also have to deduct TDS under this Section if the turnover, sales or gross receipts from business/profession is more than Rs. 2 crores (tax audit cases).

 The Union Budget 2019 announced insertion of a new section relating to TDS. This is Section 194M. This section requires an HUF or an individual to deduct TDS @5%. This deduction is to be made when they make payments exceeding Rs. 50 lakhs in a year to a contractor or a professional.

 

Read More: Newly inserted Section 194M requires you to pay TDS to contractors & professionals

 

 

 

Applicability of TDS on employees [Section 192]

 

This Section requires deduction of taxes at source while making salary payment to an employee.

The TDS deduction under section 192 under head salary is makes it mandatory that, there exist an employer – employee relationship between deductor and deductee.

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