TDS on Transportation Charges (Freight): Learn All About Section 194C

TDS stands for Tax Deducted at Source which simply refers to the idea of deducting a chunk from payments such as salary, interest, contract payments, profession fee, etc. as taxable money before the payment is to be made to the receiving party. Hence, you see that TDS can be levied on all areas of financial transactions, including freight charges.

Transportation tax is another term for TDS on freight charges. Freight charges can be classified as payments made to owners of goods and carriages or payments made to people who aren't owners of goods carriages. Such charges and TDS applied to these charges are regulated by Section 194C of the Income Tax Act of 1961. This has certain privileges, exemptions and compulsions attached to it, which will be specified further.

TDS on transportation or TDS on freight charges involves two distinct parties: the client or the individual/institution paying in exchange for a service, and a contractor/subcontractor who is the essential service-provider. Here, when the client makes a payment to the contractor or subcontractor for plying, hiring or lending of goods carriages, the client is liable to deduct a certain amount from the contractual payment as per the Income Tax Act of 1961.

This section primarily deals with the TDS levied on transactions made between an individual and their subsequent service-providing contractor/subcontractor. According to this section of the Income Tax Act, the individual or organisation making the original payment in exchange of a service from a contractor or subcontractor is required to deduct the taxable amount from the payment itself. 

However, this too has a few deviations from the thumb rule as stated by the standard guidelines of this act and each section that explains these deviations or special circumstances are as follows. 

It is crucial to understand every individual or organisation that could be involved in a transaction wherein a person or party has made a payment to a (sub)contractor. Hence, you will find below definitions of the various parties that could be involved in such a transaction and which categories of business/society fit into those definitions. 

• Definition of a Person

A ‘Person’ in the context of Section 194C refers to an individual or party who has formed a contractual partnership entailing an exchange of goods or services with a (sub)contracting party. Firms, companies, a co-operative society, corporations, universities, authorities involved for the fulfilment of housing needs, corporations, a local authoritarian body, the State Government or the Central Government are included in this definition. 

• Definition of Work

Should a person require a service pertaining to the manufacturing or transportation of goods or products from the subcontractor or contractor, it would be considered ‘Work’ under the Section 194C; however, the manufacturing of the product is to be undertaken by using the materials purchased from the aforementioned client/person specifically. 

‘Work’ also includes advertising service, catering, production or broadcasting services and transportation of goods or people. 

• Definition of Contractor and Subcontractor

Any individual or party that contractually agrees with a person or client to carry out any form of work, including the supply of labour/man-power to uphold the contract and the services contractualized therein is referred to as the contractor. The contract must involve the State Government, the Central Government, a company, a corporation, a co-operative society or a local authority. 

Hence, a subcontractor refers to any individual or party that agrees to be an active participant in the aforementioned contract which involves a contractor as stated above. A subcontractor is required to carry out the responsibilities and tasks as agreed to by the contractor. In addition to this, the supply of manpower to the extent stated in the agreement is also a responsibility the subcontractor must uphold.

Here, if the contractor, in terms of transportation, owns less than 10 goods carriages and is involved in a contractual deal with a client wherein the contractor is providing the client with the services of plying, hiring or leasing goods carriages, will not be required to have a taxable amount/TDS deducted from the payment they receive. This comes with the condition that the contractor or subcontractor needs to possess a PAN. 

Hence, when the client is paying the contractor or subcontractor the stipulated amount as stated in the contract that all parties have agreed upon, the client does not have the liberty to deduct a taxable amount on freight from the payment they intend to make to the service-provider for goods carriages.

The Subsection 7 of Section 194C requires the contractualised client or payer carrying out a transaction with a recipient who has offered their services through allowing the payer to hire, rent or ply goods carriages as per a mutually agreed contract to deduct a specific tax amount as TDS before the payment to the recipient is made. Moreover, this subsection states that this payer or client is expected to submit this deducted tax as in a form and time-frame as prescribed by the regulations that fit their circumstances.

Work contracts and labour contracts are conglomerates upon which the provisions of Section 194C of the Income Tax Act are applicable. Nonetheless, Section 194C is not applicable to a contract that agrees on the4 sale of any goods or the sole/exclusive supply of goods or products. 

The standard guidelines of Section 194C of the Income Tax Act require the contractor to be an Indian resident. The payments made to this contractor must be initiated by the persons as mentioned in Section 194C of the Income Tax Act. The payment must be made in exchange for a service of any nature, including the supply or provision of manpower/labour force to fulfil any service. 

This payment or monetary exchange should not exceed the limit of ₹30,000 at any given time. Should the payment amount exceed ₹75,000 over the course of a financial year, it will be the client’s or payer’s responsibility to deduct a taxable fee from the total sum, as should be followed in case of the advance payment exceeding ₹30,000 as well. 

As agreed upon by the contractor/subcontractor and the client in the contract, verbally or in writing, the stipulated payment exchange is expected to be made between the contractor and the client. Should it be revealed later that the total of all payments exceeds ₹30,000, at odds with the initial statement provided, then the payer is yet again to ensure that the TDS rate on transportation charges is deducted from the total amount in accordance with previous payments. 

Following is the TDS rate on freight charges and TDS limits on transportation charges depending on specific categories that the contractor/subcontractor and the payer/client could fall under.

Should the party/client own a business that does not overstep the limit of ₹1 Crore over the course of the financial year previous to the year in which the payment as stated in the contract is made, as stated in Section 194C of the Income Tax Act, the provisions of this section shall not be applicable.

Similarly, a turnover of the business owned by the client or payer that does not exceed ₹25 lakhs does not invite the application of Section 194C of the Income Tax Act onto the payments carried out through the current financial year.

The provisions of this section and the current TDS rate on freight charges are not to be applied to the payments made by an individual or a Hindu Undivided Family (HUF) channelled towards personal expenses that were incurred by said individual or HUF.

Here are the various instances wherein the TDS can be deducted under Section 194C of the Income Tax Act.

• When the payer credits the amount to the contractor or subcontractor’s bank. 

• When the client makes the payment to the contractor/subcontractor in the form of cash. 

• When the contractor or subcontractor is paid for their services/labour through a cheque. 

• When any other payment method is used to complete the transaction.

• When the payable amount is transferred to a ‘Suspense Account’ or another account.

Should the contractors or subcontractors at the receiving end of the payment possess a PAN, they are liable to a TDS deduction of 1% for payments made to resident Indians or HUF (Hindu Undivided Family). A TDS deduction of 2% would be applicable if the payment is made to a party who isn’t an Indian resident or HUF. For payments made to transporters, no TDS shall be deducted. 

If the contractors or subcontractors liable to a TDS deduction being made in the payments they receive do not possess a PAN, 20% in TDS will be deducted regardless of whether the individual or party is a resident or identifies as HUF. 20% TDS will be minused even in the case if payments transferred to transporters.

The tax deposit as per Section 194C of the Income Tax Act, needs to be undertaken within a specific time-frame and each time limit is stated as follows:

• The tax needs to be deposited within the same day as the payment made in exchange for a service/labour. 

• In the case of non-government entities, a payment made in March needs to see its subsequent tax deposit fulfilled by 30th April. Should the payment be made in any month other than the month of March, the tax amount needs to be deposited within 7 days after the month in which the payment was made. For example, a payment made on 26 April would require the tax to be deposited by 07 May.

   

Certain instances or circumstances can be exempt of the tax-levy as stated by Section 194C of the Income Tax Act. For instance, should the amount paid to the contractor or subcontractor be less than ₹30,000. Over the course of a financial year, the stipulated amount being less than ₹75,000 will not be liable to any tax deductions. Additionally, no tax liabilities will follow if the payment was made before 1st June 1977 as per Section 194C of the Income Tax Act, to a contractor or subcontractor with regards to subsequent work, labour or services as agreed upon with a client, contractor or co-operative society.