Section 194C: TDS on Transportation Charges (Freight)

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

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

1. Tax must be deposited on the same day for payments made by the government or on its behalf 

2. 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