TDS on Contracts: GST Regime vs. Section 194C – A Comprehensive Comparison (FY 2025-26)
- Dipali Waghmode
- Jul 22
- 17 min read
Understanding Tax Deducted at Source (TDS) for contracts in India can initially seem perplexing, primarily because provisions for it exist under two separate legislations: the Goods and Services Tax (GST) law and the Income Tax Act. The TDS on contract work GST regime is governed by Section 51 of the CGST Act, while TDS Section 194C falls under the Income Tax Act, 1961. This article aims to clearly delineate these two types of TDS. Readers will learn about the crucial difference between GST TDS and Income Tax TDS, their specific applicability, compliance requirements, and how these two distinct TDS mechanisms for TDS on contracts India can sometimes interact. It’s quite a maze, isn't it? But don't worry, we'll break it down. This guide is tailored for the Financial Year 2025-26.
The complexity of TDS often arises when businesses must determine which law applies or if both do. The Goods and Services Tax (GST) framework introduced its own TDS rules, distinct from the long-standing provisions within the Income Tax Act, 1961. Knowing the nuances of each, especially for contracts, is vital for accurate tax compliance. This article will navigate you through who needs to deduct, when, at what rates, and the necessary paperwork for both GST TDS and TDS under Section 194C.
Table of Content
What is TDS?
What is TDS you ask? Tax Deducted at Source (TDS) is a method the Indian government uses to collect tax. The TDS mechanism India ensures that tax is collected at the very source of income. The payer, before making certain types of payments to the payee, deducts a specified percentage of tax (TDS) and deposits this amount with the government. The primary purpose of TDS is to facilitate early tax collection. It also helps create a trail of financial transactions and broadens the tax base by bringing more transactions into the tax net. Think of it as a pay-as-you-earn system, but for specific transactions.
This system of Tax Deducted at Source (TDS) makes the tax collection process more efficient. It shifts the responsibility of tax collection from the payee (the one receiving income) to the payer (the one making the payment) for practical reasons. This advance tax collection helps the government manage its revenue flow throughout the year.
TDS on Contract Work under the GST Regime
The TDS under GST for contracts is a specific provision that requires certain registered persons to deduct tax when making payments to suppliers for contract work. Section 51 of the CGST Act, 2017, governs these TDS provisions. This mechanism under GST applies to contracts involving the supply of taxable goods or taxable services or both. The primary aim here is to ensure tax compliance and track transactions within the GST framework, specifically for high-value contracts undertaken for specified recipients.
Who is Liable to Deduct TDS under GST?
The responsibility of who deducts TDS GST falls upon specific categories of persons or entities. Persons liable for GST TDS include:
A department or establishment of the Central Government or State Government.
Local authorities.
Governmental agencies.
Public Sector Undertakings (PSUs).
An authority or a board or any other body, set up by an Act of Parliament or a State Legislature or established by any Government, with fifty-one percent or more participation by way of equity or control, to carry out any function.
Societies established by the Central Government or the State Government or a Local Authority under the Societies Registration Act, 1860.
Such other persons or category of persons as may be notified by the Government on the recommendations of the Council.
These GST TDS deductors play a crucial role in the indirect tax system.
When is TDS Deducted under GST (Applicability & Threshold)?
When is GST TDS applicable is a common question. GST TDS comes into play if the total value of a taxable supply under a single contract exceeds ₹2.5 lakhs. This GST TDS threshold applies to the supply of taxable goods or services or both. It's important to note that this contract value for GST TDS does not include the Central tax, State tax, Union territory tax, Integrated tax, and Cess indicated separately in the invoice. TDS must be deducted at the time of making payment or crediting the amount to the supplier, whichever is earlier.
Rate of TDS under GST
The GST TDS rate is clearly defined. For intra-state supplies (where the location of the supplier and the place of supply are in the same state), the rate of TDS under GST is 2%. This 2% is split into 1% CGST (Central Goods and Services Tax) and 1% SGST/UTGST (State Goods and Services Tax / Union Territory Goods and Services Tax). For inter-state supplies (where the supplier is in one state and the place of supply is in another state), the TDS rate is 2% as IGST (Integrated Goods and Services Tax). However, a key point for CGST SGST IGST TDS on inter-state supplies is that no TDS is to be deducted if the location of the supplier and the place of supply are in a State or Union territory which is different from the State or Union territory of registration of the recipient.
Value for TDS Deduction under GST
The value for GST TDS deduction is an important calculation. TDS under GST is deducted on the taxable value of the supply. This means that if the GST TDS on invoice value is being calculated, the GST components themselves (like CGST, SGST, UTGST, IGST, and Cess) must be excluded, provided they are shown separately in the invoice. So, the deduction is on the base amount before taxes, ensuring no GST TDS excluding tax is levied on the tax itself.
Compliance for GST TDS
GST TDS compliance involves several key steps for the deductor. Firstly, the deductor must mandatorily obtain registration as a TDS deductor, which is TAN-based. The deducted TDS amount must be deposited with the government by the 10th day of the month succeeding the month in which TDS was deducted. This payment is made through the electronic cash ledger.
A crucial part of GSTR-7 filing is that the deductor needs to furnish a monthly return in Form GSTR-7 by the 10th of the following month. This return provides details of the TDS deducted, amount paid to the government, and other necessary information. Following the filing of GSTR-7, the deductor must also issue a TDS certificate in Form GSTR-7A to the deductee (the supplier). This certificate allows the deductee to claim the credit of the TDS deducted in their electronic cash ledger. The GST TDS payment due date and return filing timelines are strict to ensure smooth processing.
TDS on Payments to Contractors under Section 194C of the Income Tax Act, 1961
Now, let's shift our focus to TDS Section 194C of the Income Tax Act, 1961. This section governs the Income Tax TDS on contractors. It applies when a person makes a payment to a resident contractor or sub-contractor for carrying out any "work" as defined under the section. The term work under 194C is quite broad and covers various services. It is crucial to understand the 194C applicability to ensure correct tax deduction for payments made to resident contractors.
Who is Liable to Deduct TDS under Section 194C?
The responsibility of who deducts TDS u/s 194C lies with certain "specified persons". These persons liable for 194C TDS include:
The Central Government or any State Government.
Any local authority.
Any corporation established by or under a Central, State or Provincial Act.
Any company.
Any co-operative society.
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.
Any society registered under the Societies Registration Act, 1860 or under any law corresponding to that Act in force in any part of India.
Any trust.
Any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956.
Any firm.
Any individual or a Hindu undivided family (HUF) whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor.
These 194C deductors must comply with the provisions of this section.
Meaning of 'Work' under Section 194C
The definition of work 194C is quite specific and plays a key role in determining applicability. The scope of Section 194C includes the following types of contracts 194C:
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 or its associate. However, it 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 or its associate.
Understanding this definition is essential.
When is TDS Deducted under Section 194C ?
The 194C TDS threshold determines when deduction becomes necessary. TDS under Section 194C is applicable if a single payment credited or paid to a contractor exceeds ₹30,000. Alternatively, if the aggregate payment credited or paid to the contractor during the financial year exceeds ₹1,00,000, TDS must be deducted, even if individual payments are below the ₹30,000 limit. So, Section 194C applicability hinges on these monetary threshold limits. The deduction must occur 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.
Rate of TDS under Section 194C
The 194C TDS rate depends on the status of the payee. If the payment is made to a resident individual or Hindu Undivided Family (HUF), the TDS rate for contractors is 1%. If the payment is made to any other resident person (like a company or a firm), the rate is 2%. It's very important to note that if the contractor does not furnish their Permanent Account Number (PAN), a much higher TDS rate, typically 20%, will apply. This highlights the importance of obtaining the PAN of the contractor for correct tax rate application.
Value for TDS Deduction under Section 194C
When determining the 194C TDS on what amount, it's crucial to consider the GST component. As per CBDT Circular No. 23/2017, if the GST component is indicated separately in the invoice, TDS under Section 194C should be deducted on the invoice value excluding such GST. The deduction is on the basic value of the service. However, if the GST component is not shown separately in the invoice, then TDS would apply to the gross amount of the invoice. This clarification on TDS on GST component 194C helps in accurate 194C calculation.
Compliance for Section 194C TDS
194C compliance involves several steps for the deductor. The TDS deducted must be deposited with the government using Challan ITNS 281 by specified due dates. Generally, the due date is the 7th of the next month. However, for TDS deducted in March, the due date is April 30th.
Deductors are also required to file quarterly TDS returns inForm 26Q. After filing the quarterly returns, the deductor must issue TDS certificates in Form 16A to the deductee (contractor). These certificates provide details of the TDS deducted and deposited. Adhering to the 194C TDS payment due date and return filing timelines is essential to avoid penalties.
Differences: TDS on Contract under GST vs. TDS under Section 194C
This section provides a direct comparison TDS contract GST Income Tax. Understanding the difference GST TDS vs 194C is crucial for businesses. While both are TDS mechanisms applicable to contracts, they operate under different laws with distinct parameters. The table below offers a GST TDS Section 194C side by side comparison:
The key takeaway from this table is that while both TDS provisions relate to contracts, their legal basis, the definition of deductor and deductee, thresholds, rates, and compliance procedures are quite distinct. Businesses must be aware of both to avoid any oversights. For instance, a government entity (deductor under GST TDS) making a payment to a company for an advertising contract (covered under Sec 194C) might need to comply with both sets of rules if the thresholds are met.
Navigating the Overlap: When Can Both GST TDS and Section 194C TDS Apply?
It's a very pertinent question: can both GST TDS and 194C apply to the same transaction? Yes, there are scenarios where a single payment for contract work can attract TDS under both the GST law and the Income Tax Act. This TDS overlap GST Income Tax typically occurs when the deductor is a specified person under both laws, and the transaction meets the threshold criteria for both.
For example, imagine a Central Government department (a specified deductor under Section 51 of the CGST Act) enters into a works contract with a company (a resident contractor). If the contract value for taxable supplies exceeds ₹2.5 lakhs (triggering GST TDS) and the payment to the company also exceeds ₹30,000 (triggering Section 194C TDS), then the government department would need to deduct TDS under both GST and Income Tax provisions. This leads to a simultaneous TDS deduction and an increased compliance burden.
Businesses must carefully assess their status as a deductor under both laws and evaluate each contract. If both apply, they need to ensure compliance with deduction, payment, return filing, and certificate issuance under both Section 51 of the CGST Act and Section 194C of the Income Tax Act independently. It means two sets of calculations, two deposit procedures, and two types of returns and certificates for the same underlying contract payment.
Here’s a simple way to think about it:
Does GST TDS (Section 51) apply?
Is the deductor a specified entity (Govt., PSU, etc.)?
Is the contract value for taxable goods/services over ₹2.5 lakhs?
If yes to both, GST TDS applies.
Does Income Tax TDS (Section 194C) apply?
Is the deductor a specified entity (Govt., company, firm, audited individual/HUF, etc.)?
Is the payment for "work" as defined?
Is the single payment over ₹30,000 OR aggregate payments in the FY over ₹1,00,000?
If yes to all relevant conditions, Section 194C TDS applies.
If the answer is 'Yes' to both sets of questions, then both TDS provisions are applicable.
Practical Examples
Let's look at some TDS calculation examples to understand the applicability better.
Example 1: Contract below GST TDS threshold but above 194C threshold.
Scenario: A private limited company pays ₹50,000 to an individual contractor for advertising services. The company's turnover in the preceding year was subject to tax audit.
GST TDS Applicability: GST TDS under Section 51 is not applicable because the deductor (private company) is not a specified person under GST TDS rules (like government departments or PSUs). Also, even if it were, the contract value might be assumed to be below the ₹2.5 lakh threshold if this is a one-off contract.
Section 194C TDS Applicability: Section 194C TDS is applicable. The payer is a company, the service is advertising (covered under 'work'), and the payment of ₹50,000 exceeds the single payment threshold of ₹30,000.
Calculation (Sec 194C):
Payment amount (excluding GST, assuming GST is shown separately): ₹50,000
TDS rate (for individual contractor): 1%
TDS amount: 1% of ₹50,000 = ₹500
Net Payment to Contractor: ₹50,000 - ₹500 = ₹49,500 (plus GST collected by contractor, if any)
Explanation: Only Section 194C TDS applies here.
Example 2: Contract above both thresholds, with a government deductor.
Scenario: A State Government Department makes a payment of ₹3,00,000 (taxable value, excluding GST) to a partnership firm for a works contract (e.g., construction).
GST TDS Applicability: GST TDS is applicable. The deductor (State Government Dept.) is a specified person. The contract's taxable value (₹3,00,000) exceeds the ₹2.5 lakh threshold.
Calculation (GST TDS - assuming intra-state):
Taxable Value: ₹3,00,000
CGST TDS Rate: 1%
SGST TDS Rate: 1%
CGST TDS: 1% of ₹3,00,000 = ₹3,000
SGST TDS: 1% of ₹3,00,000 = ₹3,000
Total GST TDS: ₹6,000
Section 194C TDS Applicability: Section 194C TDS is applicable. The payer (State Govt. Dept.) is a specified person. The payment is for a works contract, and the amount (₹3,00,000) exceeds both the single payment threshold of ₹30,000 and the aggregate threshold of ₹1,00,000.
Calculation (Sec 194C):
Payment amount (basic value): ₹3,00,000
TDS rate (for partnership firm - "other than individual/HUF"): 2%
TDS amount: 2% of ₹3,00,000 = ₹6,000
Net Payment to Contractor (after both TDS): ₹3,00,000 - ₹6,000 (GST TDS) - ₹6,000 (194C TDS) = ₹2,88,000 (plus GST collected by contractor, if any, on the original ₹3,00,000)
Explanation: Both GST TDS and Section 194C TDS are applicable and need to be deducted.
Example 3: Contract for a service taxable under GST but not explicitly 'work' under 194C (e.g., pure software development by a company for another private company where materials aren't customer-supplied).
Scenario: A private limited company (Company A) pays ₹70,000 to another private limited company (Company B) for developing a custom software. Company A's turnover was audited last year.
GST TDS Applicability: GST TDS is not applicable as Company A (the deductor) is not a specified government entity or PSU.
Section 194C TDS Applicability: This is nuanced. Pure software development, if not involving material supply from the customer or fitting squarely into advertising, broadcasting, carriage, or catering, might be debated as 'work' under 194C. Often, such services are considered 'fees for technical services' under Section 194J. However, if the contract is structured as a 'works contract' for software, it could potentially fall under 194C. Assuming it's not considered 'work' under 194C for this example and is more aligned with technical services:
Section 194C TDS: Not applicable (assuming it's not 'work').
Section 194J (Fees for technical services) TDS: Might be applicable at 2% (for payee company if it's for technical services not being professional services) or 10%, if the payment exceeds the ₹30,000 threshold for such fees, assuming no lower deduction certificate. This shows the importance of correctly classifying the nature of the service.
Explanation: Careful classification of the service is key. If it's not 'work' under 194C, then 194C doesn't apply. GST TDS doesn't apply due to the nature of the deductor. Other TDS sections (like 194J) might come into play.
These Section 194C TDS illustrations and GST TDS contract examples show how varied the application can be.
Consequences of Non-Compliance
Failure to comply with TDS provisions can lead to significant consequences of 194C non-compliance and penalties for not deducting TDS under GST.
Under GST Law (Section 51):
Interest: If TDS is not deducted or deducted but not paid to the government, interest is applicable. Failure to pay deducted tax to the government attracts interest from the date following the due date of payment until the actual date of payment.
Penalty: A penalty can be levied for failure to deduct TDS, deducting less TDS, or failure to pay the TDS to the government. This could be a fixed amount or an amount equivalent to the TDS not deducted/paid. Failure to furnish GSTR-7 (TDS return) by the due date attracts a late fee. Failure to issue the TDS certificate (GSTR-7A) can also lead to penalties.
The officer may initiate action for recovery of tax, and this can involve managing GST notices.
Under Income Tax Act (Section 194C):
Interest: Interest is levied for non-deduction/short deduction of TDS and for non-payment/late payment of TDS to the government. For late deposit of TDS after deduction, interest is 1.5% per month or part of a month from the date of deduction to the date of deposit. For non-deduction or short deduction, interest is 1% per month or part of a month from the date tax was deductible to the date of actual deduction.
Penalty: Penalties can be imposed for various defaults, including late filing of TDS returns (Form 26Q). A penalty equal to the amount of TDS not deducted or not paid can also be levied.
Disallowance of Expenditure: If TDS is not deducted or not paid on payments made to residents as per Section 194C, 30% of such expenditure can be disallowed under Section 40(a)(ia) while computing the payer's taxable income.
Prosecution: In severe cases of default, prosecution provisions can also be invoked.
The interest on late TDS payment and other penalties can significantly increase the financial burden on businesses.
Key Considerations for Businesses
To ensure effective managing TDS on contracts, businesses should adopt a proactive approach. Here's a TDS compliance checklist for businesses offering some tips for TDS contract payments:
Identify Deductor Status: Determine if your entity is a specified deductor under GST (Section 51) and/or Income Tax (Section 194C).
Verify Contract Value: Accurately determine the total contract value to check against the respective threshold limits (₹2.5 lakhs for GST TDS, ₹30,000 single / ₹1,00,000 aggregate for 194C TDS).
Ascertain Nature of Supply/Work: Clearly understand if the transaction involves taxable goods/services for GST TDS and if it qualifies as 'work' under Section 194C.
Verify Supplier's PAN: Always obtain and verify the contractor's PAN to apply the correct TDS rate under Section 194C and avoid higher withholding.
Apply Correct TDS Rate: Ensure the appropriate TDS rate (GST and Income Tax) is applied based on the nature of the supply/work and the status of the deductee.
Deduct TDS on Correct Value: For both regimes, deduct TDS on the value excluding the GST component if it's shown separately in the invoice.
Deposit TDS by Due Dates: Remit the deducted TDS to the government within the prescribed timelines (10th of next month for GST TDS; 7th of next month / April 30th for March for 194C TDS).
File TDS Returns Accurately: File GSTR-7 (monthly for GST TDS) and Form 26Q (quarterly for 194C TDS) correctly and on time.
Issue TDS Certificates: Provide Form GSTR-7A (GST) and Form 16A (Income Tax) to the deductees within the stipulated time.
Maintain Proper Records: Keep comprehensive records of all contracts, payments, TDS deductions, deposits, and returns filed.
Reconcile TDS: Regularly reconcile TDS amounts with suppliers/contractors to avoid discrepancies.
Stay updated on any changes in TDS provisions through further tax compliance guidance.
Conclusion: Ensuring Correct TDS Compliance on Contracts
To wrap things up, understanding GST TDS vs 194C is absolutely essential for businesses engaging in contract work in India. While both TDS on contracts under the GST regime and TDS under Section 194C of the Income Tax Act aim for efficient tax collection, they are distinct mechanisms with their own set of rules. The importance of correct TDS deduction, deposit, and reporting cannot be overstated, as non-compliance can lead to interest, penalties, and other unwelcome consequences.
Businesses must exercise due diligence to determine the applicability of one or both TDS provisions to their transactions. Careful record-keeping and adherence to compliance timelines are key. For complex situations or specific clarifications, it’s always a prudent step to Contact Taxbuddy for expert advice. Staying compliant ensures smooth operations and peace of mind.
Frequently Asked Questions (FAQs)
1: Is TDS under GST applicable on all contracts?
Answer: No, TDS under GST is applicable only if the deductor is specified and the contract value is greater than ₹2.5 lakh for taxable supplies.
2: Is Section 194C TDS applicable if I am an individual not running a business?
Answer: Generally no, unless your payment is for business purposes and you were subject to tax audit in the previous FY. Personal payments are exempt.
3: What if the contractor does not provide PAN for Section 194C deduction?
Answer: Higher TDS rate, e.g., 20%.
4: Is there TDS on advance payments made to contractors under Sec 194C and GST?
Answer: Yes, TDS is deductible at the time of credit or payment, whichever is earlier, for both.
5: How does TDS on works contracts involving both material and labour work under Sec 194C?
Answer: TDS is on the entire invoice value if material and labour are not separately specified. If separate, then on the labour/service portion as per contract terms.
6: What is the GSTR form for filing GST TDS returns?
Answer: GSTR-7.
7: What is the due date for depositing Section 194C TDS?
Answer: Generally, by the 7th of the next month; for March, it is April 30th.
8: Can a contractor claim credit for TDS deducted under GST?
Answer: Yes, it reflects in their Electronic Cash Ledger.
9: Does Section 194C apply to payments made to non-resident contractors?
Answer: No, Section 195 applies to non-residents.
10: Is TDS under GST applicable on inter-state supplies?
Answer: Generally no, if the location of the supplier and the place of supply are in a State different from the State of registration of the recipient.
11: What if contract value is ₹2,60,000 (including 18% GST) – will GST TDS apply?
Answer: GST TDS applies on taxable value excluding GST. If the taxable value is greater than ₹2.5 lakh, then yes. For example, ₹2,60,000 / 1.18 = ₹2,20,339. In this case, GST TDS is not applicable as taxable value is
12: If a single payment is ₹25,000 but annual payments to a contractor are ₹1,10,000, is Sec 194C TDS applicable?
Answer: Yes, because the aggregate exceeds ₹1,00,000.
13: Do I need a separate TAN for deducting TDS under GST if I already have one for Income Tax?
Answer: Yes, registration as a TDS deductor under GST is specific and can be obtained using the existing TAN.
14: What is the difference between 'contractor' and 'sub-contractor' for Sec 194C?
Answer: Section 194C applies to payments to both resident contractors and resident sub-contractors.
15: Where can I find the official government resources for TDS provisions?
Answer: Income Tax Department website for Section 194C; CBIC website for GST TDS.
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