TDS filing for payments to contractors and sub-contractors

Posted In | Finance | Accounting Software | India Accounting Tax

Tax Deducted at Source (TDS) is a means of collecting income tax in India, under the Indian Income Tax Act of 1961. Any payment covered under these provisions shall be paid after deducting prescribed percentage. It is managed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue managed by Indian Revenue Service (IRS). It has a great importance while conducting business transactions and also in other transactions done by Taxpayer.

 

1. Who is liable to deduct TDS?

As per the TDS provisions, any person making specified payments mentioned under the Income Tax Act are required to deduct TDS at the time of making such specified payment. But no TDS has to deducted if the person making the payment is an individual or HUF whose books are not required to be audited.

 

2. TDS on Payments to Contractors and Sub-Contractors

As per Section 194C of the Income Tax Act, any payment to a contractor or sub-contractor attracts the TDS provision. Here, a contractor is a person who enters into a contract with the Central Government, State Government, or any other entity for the purpose of carrying out any work including supply of labour. A sub-contractor, on the other hand, is a person who enters into a contract with the contractor for conducting any part of the work.

 

3. Rate of TDS Deduction

The rate of TDS to be deducted is 1% where the payee is an individual or a Hindu Undivided Family (HUF), and 2% in other cases. However, if the payee does not provide PAN, the rate of TDS will be 20%.

 

4. When to Deduct TDS

TDS on payments to contractors and sub-contractors should be deducted at the time of credit of such sum to the payee’s account or at the time of payment, whichever is earlier. The payment can be in cash, cheque, draft or other methods.

 

5. TDS Return Filing

Once the TDS is deducted, the deductor should deposit the tax deducted to the government. After this, the next step is to file the TDS return. TDS return is a quarterly statement to be given to the I-T department. It is compulsory for deductors to submit a TDS return on time. The details required to file TDS returns are PAN of the deductor and the deductees, amount of tax paid to the government, TDS challan information, and other detailed data.

 

TDS is a crucial aspect of Indian taxation system that ensures the government's tax collection is smooth. Understanding the nuances of TDS filing, especially with respect to payments to contractors and sub-contractors, can help businesses stay compliant and avoid penalties. Always remember, being tax compliant reflects positively on your business.