PAYMENTS TO THE CONTRACTORS

[Mr. M. GOVINDARAJAN]

Under the existing provisions Section 194C of the Income Tax Act, if certain persons make payment for carrying out any work to a contractor then tax is deductible at source at the rate of one per cent. In the case of payment for advertising contract the rate is two per cent. When a contractor makes a payment to a sub contractor tax is deductible at source at the rate of one per cent. No tax shall be deductible at source on payment or credit up to twenty thousand rupees. If the aggregate payment or credit exceeds fifty thousand rupees in a year then tax is deductible at source. Exemption is also there from tax deduction at source on payment made to a sub contractor during the course of business of plying, hiring or leasing goods carriages on fulfillment of certain conditions.

Clause 60 of the Finance (No.2) Bill, 2009 seeks to substitute the existing Section 194 of the Income Tax Act relating to deduction of tax at source on payment to contractors and sub contractors. This new provision will come into effect from 01st October, 2009.

According to the newly substituted provision any person responsible for payment any sum to any resident (contractor) for carrying out any work, including supply of labor for carrying out any work, in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to:

> One per cent, where the payment is being made or credit is being given to an individual or a Hindu Undivided Family;

> Two per cent, where the payment is being made or credit is being given to a person other than an individual or a Hindu Undivided Family of such sum as income tax on income comprised therein.

For the purposes of this section, 'specified person' means-

> The Central Government or any State Government; or

> Any local authority; or

> Any corporation established by or under a Central, State or Provincial Act; or

> Any company; or

> Any co-operative society; or

> 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, towns and villages, or for both; or

> Any society registered under the Societies Registration Act, or under any law corresponding to that Act in force in any part of India; or

> Any trust; or

> Any University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under Sec.3 of the University Grants Commission Act, 1956;

> Any Government of a foreign State or a foreign enterprise of any association or body established outside India; or

> Any firm; or

> Any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person:

* Does not fall under any of the above; and

* Is liable to audit of accounts under Sec. 44AB (a) of (b) during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor.

The term 'contract' shall include sub contract.

The term 'work' shall include-

> Advertising;

> Broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

> Carriage of goods or passengers by any mode of transport other than by railways;

> Catering;

> Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer;

but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.

The term 'goods carriage' means any motor vehicle constructed or adopted for use solely for the carriage of goods, or any motor vehicle not so constructed or adopted when used for the carriage of goods.

Where any payment is credited to any account whether called 'suspense account' or by any other name in the books of account of the person liable to pay such income, such credit shall be deemed to be credit of such income to the account of the payee and tax is deducted at source.

Where any sum is paid or credited for carrying out any work of manufacturing or supplying a product according to the requirement of specification of a customer by using material purchased from such customer, tax shall be deducted at source:

> On the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or

> On the whole of the invoice value, if the value material is not mentioned separately in the invoice.

In the following cases no tax deduction at source is required:

> No individual or Hindu Undivided Family shall be liable to deduct income tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purpose of such individual or any member of Hindu Undivided family;

> No deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed twenty thousand rupees; but if the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds fifty thousand rupees, the person responsible for paying such sums shall be liable to deduct income tax.

> No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, on furnishing of his permanent account number, to the person paying or crediting such sum. The person responsible for paying or crediting any sum to the person shall furnish to the prescribed income tax authority or the person authorized by it, such particulars, in such form and within such time as may be prescribed.