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Legal and Practical Implications of TDS on Contractor Payments : Clause 393(1)[Table: S.No. 6(i)] and Clause 393(4)[Table: S.No. 8] of the Income Tax Bill, 2025 Vs. Section 194C of the Income-tax Act, 1961
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....ically governed by section 194C of the Income-tax Act, 1961. The new Bill addresses these under Clause 393(1)[Table: S.No. 6(i)] and provides for specific exemptions under Clause 393(4)[Table: S.No. 8]. This commentary undertakes a detailed analysis of these proposed provisions, their objectives, detailed mechanics, practical implications, and a comparative assessment with the existing regime u/s 194C. The analysis also highlights areas of continuity and divergence, and anticipates the likely impact of the legislative changes on various stakeholders. Objective and Purpose The principal objective of TDS provisions on payments to contractors is to ensure early and efficient collection of taxes from the income earned through contractual work....
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....in pursuance of a contract between the contractor and a designated person. * Payer: Any designated person. * Rate: * 1% if contractor is an individual or Hindu undivided family (HUF); * 2% if contractor is a person other than an individual or HUF. * Threshold Limit: * Rs. 30,000 for a single payment; and * Rs. 1,00,000 in aggregate during the tax year. A notable feature is the explicit inclusion of supply of labour, and the continued focus on the contractual relationship. The provision also retains the established practice of lower TDS rates for individual/HUF contractors, and a higher rate for other entities (firms, companies, etc.). Mechanics of Deduction The deduction is to be made: * On the entire amount if the paymen....
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....ue separately. If not, TDS is to be applied on the gross amount. This aligns with the current position u/s 194C(3). Scope of "Work" Although the Bill does not reproduce the detailed definition of "work" as in the Explanation to section 194C, the phrase "carrying out any work (including supply of labour...)" is broad, and the reference to section 402(47)(e) in the Note suggests that the detailed scope will be specified elsewhere in the Bill, likely mirroring the 1961 Act's inclusive approach (covering advertising, broadcasting, carriage, catering, and certain manufacturing contracts). II. Clause 393(4)[Table: S.No. 8] - Exemptions from TDS on Payments to Contractors Text and Structure Clause 393(4)[Table: S.No. 8] provides that no d....
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....y individuals or HUFs is a longstanding feature, designed to ensure that TDS provisions do not intrude into private, non-business transactions. This is particularly relevant for household repairs, personal contracts, or services engaged for family events. Procedural Safeguards The Bill requires that the paying entity (payer) must furnish particulars of the exempted payments to the income-tax authority, in a prescribed form and within a prescribed time. This ensures that the exemption is not abused and that the tax authorities have visibility into the quantum and nature of such payments. Practical Implications For Businesses and Payers * Compliance: The Bill largely preserves the compliance framework familiar to businesses u/s 194C, in....
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....cy: Higher thresholds and targeted exemptions reduce the administrative burden of processing TDS returns and refunds for small transactions. Comparative Analysis with section 194C of the Income-tax Act, 1961 Similarities * Core Structure: Both provisions apply TDS to payments for carrying out any work (including supply of labour) under a contract with a specified/designated person. * Rates: The 1% (individual/HUF) and 2% (others) rate structure is retained. * Thresholds: The aggregate threshold of Rs. 1,00,000 is preserved; the single-payment threshold is increased to Rs. 30,000 in the Bill (from Rs. 20,000 under the original Act, but Rs. 30,000 under current law). * Material Component Rule: Both provisions adopt the "invoice valu....
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....ly clear and accessible. * Declaration Compliance: The requirement for transport contractors to furnish declarations and for payers to report may pose practical challenges, especially for small operators with limited administrative capacity. * Overlap with Other Provisions: As the Bill introduces more granular TDS categories (e.g., for professional services, e-commerce, digital assets), there is potential for overlap and confusion regarding which provision applies to a given payment, though the Bill attempts to clarify precedence rules. Conclusion Clause 393(1)[Table: S.No. 6(i)] and Clause 393(4)[Table: S.No. 8] of the Income Tax Bill, 2025, represent a thoughtful continuity and modernization of the TDS regime applicable to payments ....