TDS — Tax Deducted at Source

Tax Deducted at Source (TDS) is a mechanism under the Indian Income Tax Act where the person making a payment deducts tax before paying the vendor and remits it to the government on the vendor's behalf. For a manufacturing business, TDS applies to a wide range of payments — contractor charges for fabrication work, professional fees for consulting engineers, commission to sales agents, and even purchase of goods above a threshold.

Getting TDS right is both a legal obligation and a matter of vendor relationships. Deducting the wrong amount — or forgetting to deduct at all — creates problems during quarterly TDS return filing and can attract interest and penalties. This chapter explains the TDS sections relevant to manufacturing, how Udyamo ERP Lite handles TDS through the TdsSection model, and how to configure vendors and bills for automatic TDS calculation.

What You Will Learn

• The concept of TDS and who is required to deduct it
• Common TDS sections applicable to manufacturing businesses
• Threshold limits and rates for each section
• The TdsSection model in Udyamo ERP Lite
• How TDS is calculated and applied on vendor bills
• TDS reporting for quarterly returns
• Step-by-step: setting up TDS sections, configuring a vendor for TDS, creating a bill with TDS deduction

Prerequisites

• Vendors are created in the vendor master (Chapter 26)
• Bills (vendor invoices) workflow is understood (Chapter 28)
• You have Owner or Admin role access

Who Must Deduct TDS?

Under the Income Tax Act, the following persons are required to deduct TDS:

• Companies — All companies, regardless of turnover
• Partnership firms and LLPs — Required to deduct TDS on most payments
• Individuals and HUFs — Required only if they were subject to a tax audit in the previous year (i.e., turnover exceeding the threshold under Section 44AB — Rs 1 crore for business, Rs 50 lakh for profession, with higher limits for digital transactions)

If your manufacturing business is a private limited company, an LLP, or a proprietorship with audit-level turnover, you are required to deduct TDS on applicable payments.

Warning: Failure to deduct TDS when required makes the entire payment amount disallowable as a business expense under Section 40(a)(ia) of the Income Tax Act. Additionally, interest under Section 201(1A) is charged at 1% per month for non-deduction and 1.5% per month for non-payment after deduction.

Common TDS Sections for Manufacturing

The following sections are the ones most frequently encountered by manufacturing SMBs:

Section 194C — Payment to Contractors

This is the most common TDS section for manufacturers. It covers payments to contractors and sub-contractors for carrying out any work, including:

• Fabrication and machining work outsourced to job workers
• Annual maintenance contracts for machinery
• Construction and civil work at the factory
• Labour supply contracts
• Transport contracts (if not covered under 194C exemptions)

TDS is deducted if a single payment exceeds Rs 30,000 or if the aggregate payments to the contractor during the financial year exceed Rs 1,00,000.

Section 194H — Commission or Brokerage

Covers commission paid to sales agents, brokers, and distributors.

Section 194J — Professional or Technical Services

Covers fees paid to professionals (chartered accountants, engineers, consultants) and technical service fees (software development, technical testing, quality certification).

Tip: The distinction between technical services (2%) and professional services (10%) under Section 194J can be nuanced. Payments for technical services such as testing, calibration, and specialized machining are typically at 2%. Payments for professional advice — legal, accounting, engineering design consultancy — are at 10%. When in doubt, consult your tax advisor.

Section 194Q — Purchase of Goods

Introduced in July 2021, this section requires buyers to deduct TDS on purchase of goods if:

• The buyer's turnover exceeded Rs 10 crore in the preceding financial year
• The aggregate purchases from the seller exceed Rs 50 lakh during the current financial year

This section applies to the purchase of raw materials (steel, bearings, components) from vendors whose aggregate billing crosses Rs 50 lakh in a year. The rate is low (0.1%) but the threshold monitoring requires careful tracking.

TDS Rate Summary Table

Warning: These rates are subject to change by the Finance Act each year. Surcharge and cess are not applicable on TDS. If the vendor does not furnish a PAN, TDS must be deducted at the higher rate of 20% (or 5% for 194Q). Always verify current rates before the start of each financial year.

The TdsSection Model in Udyamo ERP Lite

Udyamo ERP Lite maintains a master list of TDS sections through the TdsSection model:

You configure these sections once during initial setup. The system ships with common sections pre-configured, but you should verify the rates and thresholds against the current year's Finance Act.

Managing TDS Sections

TDS sections are managed through the route Tax & Compliance > TDS Sections. You can:

• Create a new section if your business encounters a section not already in the system
• Edit an existing section to update the rate or threshold after a budget change
• Deactivate a section that is no longer applicable by setting active to false

TDS on Vendor Bills

The practical application of TDS in Udyamo ERP Lite happens when you create a bill (vendor invoice). The workflow is:

1. Vendor configuration. Each vendor record can be linked to a TDS section. When a vendor is marked as TDS-applicable and assigned a section (e.g., 194C), the system knows to calculate TDS on bills from this vendor.

2. Bill creation. When you create a bill for a TDS-applicable vendor, the system calculates the TDS amount based on the section's rate and the bill's taxable amount.

3. TDS on the bill. The bill record includes a tds_amount field. For example, if you receive a bill for Rs 1,00,000 from a fabrication contractor (Section 194C, 2% rate), the TDS amount is Rs 2,000. The bill shows:

Tip: TDS is calculated on the taxable value (before GST), not on the total invoice value including GST. This was clarified by CBDT Circular No. 23/2017. If the bill does not separately show the GST component, TDS is deducted on the total amount.

4. Payment. When you pay the vendor, you pay the net amount (Rs 1,16,000 in the example above). The TDS amount (Rs 2,000) is deposited to the government through TDS challan.

TDS Reporting and Quarterly Returns

TDS is not just a deduction — it triggers reporting obligations:

For a manufacturing business, Form 26Q is the relevant quarterly return. It contains details of every payment on which TDS was deducted: the vendor's PAN, the section, the amount paid, the TDS deducted, and the date of deduction and deposit.

Udyamo ERP Lite captures all the data needed for Form 26Q through the bills and payment records:

• Vendor PAN (from the vendor master)
• TDS section and rate (from the TdsSection and vendor configuration)
• Bill amount and TDS amount (from the bill record)
• Payment date (from the payment record)

You can export this data to prepare your quarterly TDS return using your tax filing software or through your chartered accountant.

Required: After filing Form 26Q, you must issue TDS certificates to vendors. Form 16A is the certificate for non-salary TDS. It must be issued within 15 days of filing the quarterly return. Vendors need this certificate to claim credit for the TDS deducted from their income.

Step by Step: Setting Up TDS Sections

1. Navigate to Tax & Compliance > TDS Sections.
2. Review the existing sections. Verify that the rates and thresholds match the current year's Finance Act.
3. To add a new section, click New TDS Section.
4. Enter the following:
   • Section: 194C
   • Description: Payment to Contractors
   • Rate: 2.0 (for companies/firms; create a separate entry at 1.0 for individual/HUF contractors if needed)
   • Threshold: 30000
   • Active: checked
5. Save the record.
6. Repeat for other sections your business needs (194H, 194J, 194Q).

Step by Step: Configuring a Vendor for TDS

1. Navigate to Purchases > Vendors and open the vendor record — for example, "Precision Fabricators Pvt. Ltd."
2. In the vendor form, locate the TDS configuration fields.
3. Mark the vendor as TDS Applicable.
4. Select the TDS Section — for example, 194C - Payment to Contractors.
5. Verify that the vendor's PAN is recorded. TDS cannot be correctly reported without the vendor's PAN.
6. Save the vendor record.

Warning: If a vendor does not provide their PAN, you must deduct TDS at the higher rate of 20% instead of the section-specific rate. Update the vendor's TDS configuration accordingly until they furnish their PAN.

Step by Step: Creating a Bill with TDS Deduction

1. Navigate to Purchases > Bills and click New Bill.
2. Select the vendor — for example, "Precision Fabricators Pvt. Ltd." (configured for 194C at 2%).
3. Add the line items. For example:
   • Fabrication of gear housing — 25 units at Rs 4,000 each = Rs 1,00,000
4. The system calculates GST: CGST Rs 9,000 + SGST Rs 9,000 = Rs 18,000 (assuming intra-state, 18% GST).
5. The system calculates TDS: 2% of Rs 1,00,000 = Rs 2,000. This appears in the tds_amount field.
6. Review the bill summary:
   • Taxable value: Rs 1,00,000
   • GST: Rs 18,000
   • Total: Rs 1,18,000
   • TDS: Rs 2,000
   • Net payable: Rs 1,16,000
7. Save or approve the bill.
8. When making payment, pay Rs 1,16,000 to the vendor. Deposit Rs 2,000 as TDS to the government using Challan 281 (ITNS 281) by the 7th of the following month.

Tips & Best Practices

• Set up TDS sections at the start of each financial year. Review rates and thresholds after the Union Budget in February. Update any changed rates before April 1.
• Collect PAN from every vendor before the first payment. Missing PAN triggers 20% TDS, which creates cash flow problems for the vendor and administrative burden for you.
• Monitor threshold limits for Section 194C. A single payment may be below Rs 30,000, but if your aggregate payments to the same contractor cross Rs 1,00,000 in the year, TDS becomes applicable on all subsequent payments — and potentially retroactively on earlier payments.
• Deposit TDS on time. TDS deducted in any month (except March) must be deposited by the 7th of the following month. For March, the due date is 30 April. Late deposit attracts interest at 1.5% per month.
• Reconcile TDS with Form 26AS. Your vendors can see the TDS you have deposited against their PAN on the TRACES portal (Form 26AS). Ensure your deposits match your deductions to avoid disputes.
• Issue Form 16A promptly. Vendors often need TDS certificates for their own tax filings. Delayed certificates strain vendor relationships.

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