Circular No. 539

What it does

Tells deductors to add surcharge to contractor deductions. Section 194C required 2 per cent to be deducted from a sum paid to a resident contractor by the Central or a State Government, a local authority, a corporation established by a Central, State or Provincial Act, a company or a co-operative society, and 1 per cent from a payment by a contractor to a resident sub-contractor, with nothing to be deducted where the consideration of the contract does not exceed Rs. 10,000. Following Circular No. 505 dated 19 February 1988, which had communicated the 5 per cent surcharge brought in by the Finance (Amendment) Act, 1987, the Board now says that under the Finance Act, 1989 the deduction under section 194C is to be made at the rates in the section and then increased by a surcharge for purposes of the Union at 8 per cent of that deduction.

Why it was issued

The Finance Act, 1989 changed the surcharge on deductions at source, and deductors who had been working to the 5 per cent figure of the earlier circular had to be told.

Who it reaches

Government departments, local authorities and public sector corporations paying contractors
Companies and co-operative societies making contract payments
Contractors deducting from sub-contractors
Resident contractors and sub-contractors whose receipts bear the higher deduction

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.194C	s.393, s.402

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

1115. Payments to contractors and sub-contractors - Levy of surcharge
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(a) the Central Government or any State Government; or
(b) any local authority; or
(c) any corporation established by or under a Central, State or Provincial Act ; or
(d) any company ; or
(e) any co-operative society.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made for any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. In this connection attention is invited to Board’s Circular No. 505, dated 19-2-1988. Wherein the levy of surcharge at the rate of 5 per cent as introduced by the Finance (Amendment) Act, 1987 was communicated to you. According to the provisions of the Finance Act, 1989, in cases in which tax has to be deducted under section 194C of the Income-tax Act, the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such deduction.
Circular : No. 539, dated 13-7-1989.

What to watch

The surcharge is 8 per cent of the tax deducted, not 8 per cent of the payment.
It replaces the 5 per cent figure communicated by Circular No. 505 for the earlier period, so the date of credit or payment decides which figure applies.
The 8 per cent rate comes from the Finance Act, 1989 and speaks for that year's deductions only.
The Rs. 10,000 floor on contract consideration and the 2 per cent and 1 per cent rates are those of the section as the text sets them out.

Where you meet it

In a short-deduction demand on a contract payment, or in reconciling a contractor's certificate against the challan.

An example

Ours, not the Board’s: a worked case built from the rule the instrument sets, to show how it falls out.

A company credits Rs. 1,00,000 to a resident contractor. Tax under section 194C is 2 per cent, that is Rs. 2,000, and the surcharge is 8 per cent of Rs. 2,000, that is Rs. 160, so Rs. 2,160 is deducted. On a sub-contractor's bill of the same amount the tax would be Rs. 1,000 and the surcharge Rs. 80.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 09/2012 — Section 194C of the Income-tax Act, 1961 - Deduction of TAX at Source - Payments to Contractors & Sub-contractors - Dedu 17 October 2012
Circular No. 13/2006 — Dated 13/12/2006 13 December 2006
Circular No. 6/2006 — TAX Deduction at Source - Issue of TDS Certificate under section 203 of the Income-tax Act - Cases of Truck/goods-carria 23 June 2006
Notification No. 163 — Rules/amendment Rules 17 June 2005
Circular No. 5/2002 — 1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Fina 30 July 2002
Circular No. 787 — 227. Guidelines regarding taxation of income of artists, entertainers, sportsmen, etc., from international/national/ loc 10 February 2000

← Circular No. 538 · Circular No. 537 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.

What this is