Transportation tax is another term for TDS on freight charges. Freight charges can be classified as payments made to both owners and non-owners of goods and carriages. Such payments, including the TDS applicable to them, are regulated under Section 194C of the Income Tax Act, 1961.
TDS on transportation or freight charges involves the payer (client or individual/institution) and the essential service provider (contractor/subcontractor). Under Section 194C, the payer must deduct the taxable amount from the payment for services.
If contractors or subcontractors have a PAN, a 1% TDS deduction applies to payments made to resident Indians or HUF. However, if they’re not an Indian citizen or HUF, TDS of 2% would be applicable. For payments made to transporters, no TDS shall be deducted. Here, a transport is responsible for managing the leasing, hiring, or plying of carriages for goods.
In the absence of a PAN, contractors or subcontractors will face a 20% TDS deduction, irrespective of their residency or HUF status. Even in payments transferred to transporters, a 20% TDS will be deducted.
Here are various instances of TDS of freight charges under Section 194C:
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
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The tax deposit as per Section 194C, needs to be undertaken within a specific time frame and each time limit is stated as follows:
Tax must be deposited on the same day for payments made by the government or on its behalf
Payments made by non-government entities:
TDS deposits for payments made in March must be fulfilled by April 30th
If paid in any month except March, tax deposit is due within seven days after that month ends
Below are the definitions of the parties that could be involved in such transactions:
1.Person
In Section 194C, a 'Person' is an individual or entity engaged in a contractual partnership for goods or services exchange with a (sub)contracting party. The below entities are included in this definition:
Firms/companies
Co-operative societies
Corporations
Universities
Authorities involved for the fulfilment of housing needs
Local authoritarian bodies
State or Central Government
2.Work
If someone needs services related to manufacturing or transporting goods from a subcontractor or contractor, it falls under 'Work' in 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 the below service types:
Advertising
Catering
Production
Broadcasting
Transportation of goods or people
3.Contractor and Subcontractor
A contractor is an entity or individual engaging in a contractual agreement to perform work, including supplying labor, to fulfill the specified services within the contract. Meanwhile, a subcontractor is an individual or party actively participating in a contract involving a contractor.
The subcontractor must fulfill agreed-upon tasks and responsibilities, including providing manpower, as agreed to by the contractor. The contract must involve any of the following parties:
State or Central Government
Company
Corporation
Co-operative society
Local authorities
The regulations specified in Section 194C exclusively apply to work or labour contracts. This section is not applicable to a contract that agrees on the sale of any goods or the sole/exclusive supply of goods or products.
TDS deduction u/s 194C is applicable only when the following conditions are met:
Payment to the contractor must be executed by an individual or entity as specified in Section 194C
Payment must adhere to the terms in the agreed contract between the payer and contractor
Contracts formed in a verbal or written form
Payment must not exceed the ₹30,000 limit at any given time
Payments surpassing ₹75,000 in a fiscal year are liable for taxable fee deduction by the payer
Advance payments of over ₹30,000 are also liable for TDS deduction by the payer
Additionally, if cumulative payments to the contractor, initially below ₹30,000, later exceed this threshold, TDS is liable. Here, the payer must deduct TDS from the total amount, including the previous payments.
The provisions mentioned under Section 194C will not apply in the following scenarios:
Client's business turnover was under ₹1 Crore in the fiscal year before the year in which the contractual payment is executed
Client’s business turnover remained under ₹25 Lakhs in the fiscal year before the year in which the contractual payment is executed
Payments diverted towards personal expenses incurred by an individual or HUF
Here is the TDS of transportation charges limits under which certain payments can be exempt of the tax levy as stated by Section 194C, these include:
If the amount does not exceed ₹30,000 in a single transaction
If the amount does not exceed ₹1 Lakh in a financial year
If payment is made by an individual or HUF for any personal expenses incurred
If payment is made to non-resident contracts
FAQs
When is one exempt from TDS on transportation charges?
Under Section 194C (6), no TDS is applicable on freight charges if your business owns 10 or fewer vehicles and provides services to a contractual client. However, your business must be involved in plying, hiring, or leasing goods carriages to be eligible for this exemption.
Am I eligible for tax exemptions on freight charges if I provide contractual services without owning any goods carriages?
Section 194C (6) exempts the contractor from tax on freight charges if they own 10 or fewer goods carriages. If a contractor rents goods carriages from another contractor for services agreed upon with a client, freight charges are tax-deductible.
What would my time limit be to submit the tax deductions?
For non-government entities or individuals, tax deductions should be submitted by April 30th. However, payments from April to February require tax submission by the 7th of the following month.
What is the current TDS rate for freight charges?
Individuals or Hindu Undivided Families (HUFs) will be subject to 1% TDS if the amount exceeds the threshold. For other categories, the rate will be 2%. However, if the individual or entity does not possess a PAN card, they will be charged 20% TDS.
Will TDS on freight charges still be applicable if the payment is made through UPI?
No matter the payment method, a payment of this nature is liable to be deducted with a TDS percentage.
What is the TDS limit for job work?
The following instances will incur TDS deductions:
Payments that surpass ₹30,000 in a single transaction
Aggregate payments exceeding ₹1 Lakh in a financial year
Is TDS applicable to expenses incurred for sales promotion?
Yes. TDS is deductible on expenses related to sales promotions, whether as a professional services payment or under a contract.
Should TDS under 194C be deducted on the gross amount or the net amount with GST?
TDS must be deducted on the invoice value, excluding additional taxes such as GST.
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