TDS on Vendor Payments: The 0.1% Nobody Deducted — and the 30% It Costs

Every factory I have worked with books vendor bills carefully. The purchase invoice is matched to the PO, the quantity is checked against the receipt, the GST is split correctly into IGST or CGST and SGST, and the vendor is paid on terms. And then, somewhere in that same ledger, there is a job worker who was paid ₹18 lakh across the year on which nothing was deducted, because the first bill was ₹12,000 and nobody went back.

That is the shape of almost every TDS problem in a small manufacturing business. It is not refusal and it is rarely dishonesty. It is a threshold that was crossed quietly, in a ledger nobody reads vendor by vendor, on a payment type that did not feel like a “contract” at the time. The deduction itself would have cost you nothing — the vendor gets credit for it. The failure to deduct costs you a share of the expense.

And from 1 April 2026 there is a second thing to get right, because the section numbers you have used for twenty years are gone.

One section, ninety-two codes

The Income-tax Act, 2025 took effect on 1 April 2026 and replaced the Income-tax Act, 1961. For TDS the change is structural rather than financial. The entire 194-series — 194C, 194I, 194J, 194H, 194Q and the rest — was collapsed into two provisions:

• Section 392 — TDS on salary.
• Section 393(1) — everything else, as a table of roughly ninety-two four-digit payment codes running from 1001 to 1092.

The rates and the thresholds were largely carried across unchanged. What changed is the vocabulary of compliance: the section you cite in a vendor agreement, the code you quote on a challan, and the form you file. Form 26Q became Form 140. Form 26AS, the statement your vendors check their credit in, became Form 168.

Practically, most people will keep saying “194C” in conversation for years, the way everyone still says Form C. That is fine in a meeting. It is not fine on a challan, where the code decides the rate.

The payments a factory actually makes

Ignore the full table. A typical manufacturing SME touches five or six codes all year, and they are these:

The two rows that carry almost all the money and almost all the risk are the first two, and they behave in opposite ways. One deducts on the excess. The other deducts on everything.

Purchase of goods: the ₹50 lakh line and the ₹10 crore test

This is the one most owners have never applied, because it does not feel like TDS. You are buying steel. You pay the invoice. Why would you deduct tax?

Because since 2021 the buyer has been the deductor on large purchases. Two conditions have to be true together:

Note which year the turnover test uses. If FY 2025-26 closed at ₹14 crore, you are a deductor for the whole of FY 2026-27 even if this year turns out slow. And if last year was ₹9.4 crore, you are not a deductor this year no matter how much you buy. It is a status you acquire in April and keep till March.

The threshold is tested per seller, cumulatively across the year — not per invoice. In practice that means the deduction starts in the middle of a relationship, in whichever month the running total crosses:

August is the month that catches people. Nothing about the August invoice is different from the July invoice; the cumulative figure is. Which is why this cannot be run from the bills on a desk — it has to be run from a vendor-wise ledger somebody actually looks at monthly.

Three details worth holding on to

• GST comes out of the base. Where GST is shown separately on the invoice, it is excluded from the amount you compute 0.1% on — CBDT Circular 13/2021. On a ₹1 crore purchase the GST is not small, so this matters.
• No PAN means 5%. Fifty times the rate, on the excess. For a seller you buy a crore from, that is the difference between a rounding error and real money, and it is entirely avoidable at onboarding.
• The seller-side TCS is gone. Collection on sale of goods under Section 206C(1H) was removed with effect from 1 April 2025. The old confusion — buyer deducts or seller collects on the same transaction — no longer exists. Only the buyer-side deduction survives. If your sales invoices still print a TCS line on goods, it should have come off eighteen months ago.

Job work, manpower and freight: where the whole amount gets hit

This is the bigger exposure for most factories, because it covers the things a job shop buys constantly and rarely thinks of as contracts.

• Job work — heat treatment, plating, galvanising, powder coating, CNC machining sent out, anodising.
• Manpower supply — the contractor who supplies twelve helpers on the shop floor. The 2025 Act is explicit that manpower supply is covered, which removes an argument some people used to make.
• Transport of goods — freight paid to a transporter, subject to the declaration below.
• Fabrication, civil work, maintenance contracts, housekeeping, security.

The rate is 1% if the contractor is an individual or HUF and 2% for a company, firm, LLP, AOP or other resident entity. The threshold is ₹30,000 for a single payment or ₹1,00,000 in aggregate across the financial year.

The transporter declaration

A transporter who is in the business of plying, hiring or leasing goods carriages, who owns not more than ten goods carriages at any time during the year, and who gives you a declaration to that effect together with PAN, attracts no deduction. Most small fleet operators qualify.

Two things go wrong with this. The first is that nobody collects the declaration, in which case the payment is an ordinary contract payment at 2% and you have simply under-deducted. The second is subtler: the declaration is collected once, filed in a folder, and cannot be produced three years later when it is asked for. An exemption you cannot evidence is not an exemption. Collect it annually, store it against the vendor, and keep the PAN with it.

Where classification actually bites

The line between a sale of goods and work is where job-shop ledgers get messy, and it decides whether you are at 0.1% on the excess or 2% on everything.

The new risk: picking the wrong code

Before April 2026, the worst case of mis-classifying a payment was usually a demand for the shortfall plus interest. The deduction had happened; only the rate was wrong. Courts took that seriously as a distinction.

Now every payment lives in Section 393(1) and is told apart by a code. The clearest illustration is what happened to old 194J, which split into three:

Eight percentage points sit between the first two rows, and the difference between “technical” and “professional” is not always obvious on an invoice that says consultancy charges. A design consultant who produces drawings is professional. A vendor who commissions a machine and trains your operators is closer to technical. Plenty of real invoices sit between them.

On ₹1,80,000 of fees, code 1026 deducts ₹3,600 where code 1027 would have deducted ₹18,000. You are ₹14,400 short, and 30% of the ₹1,80,000 expense is now arguably exposed under Section 35(b) — because you did not fail to deduct, but you also did not deduct what the code required.

What it actually costs

Here is the arithmetic that makes this worth an afternoon of your time. Take the heat-treatment job worker — a private limited company, billed ₹18,40,000 across FY 2026-27, nothing deducted.

Just under four times the deduction you skipped — and unlike the deduction, none of it comes back. The TDS was the vendor’s money passing through your hands on its way to the government. The disallowance is income tax you pay on an expense you genuinely incurred, which exists purely because of the procedural failure.

Three separate consequences stack, and it is worth knowing which is which:

• Interest — Section 398(3)(a). 1% a month, or part of a month, from the date the tax was deductible to the date it was actually deducted. Then 1.5% a month from deduction to deposit. The second rate is higher on purpose: holding the government’s money after you have taken it from a vendor is treated more seriously than never taking it.
• Late-filing fee — Section 427 (old 234E). ₹200 a day until the statement is filed, capped at the TDS in that statement. A return filed forty days late is ₹8,000 — not a penalty in law, a fee, which means there is no reasonable-cause argument against it.
• Disallowance — Section 35(b) (old 40(a)(ia)). 30% of the sum payable where tax was deductible and was not deducted, or was deducted and not deposited by the income-tax return due date. This is the one that turns a small number into a large one.

What the full year looks like

A ₹14 crore engineering job shop in Gujarat, FY 2026-27. Nothing exotic — this is an ordinary vendor list:

Look at the shape of it. The largest vendor by a distance contributes ₹8,500 — one quarter of what the job worker does on an eighth of the value. Rent alone is nearly half the year’s deduction. The instinct to start with the biggest supplier is exactly backwards: the risk sits in the medium-sized service bills, where the rates are twenty to a hundred times higher and the thresholds are twenty to a hundred times lower.

And the transporter row is the one to respect. ₹7,20,000 attracts nothing — as long as that declaration can be produced.

Dates, forms and the moment the obligation starts

Most of the penalty arithmetic above is avoided by knowing four dates and one rule.

The rule in the first row is the one that is misread most often, and it is the reason a shop with tight cash can still have a clean TDS position. The obligation triggers when you book the bill, not when you pay it. A job-work invoice entered into your books in June is a June deduction, deposited by 7 July, even if the vendor is paid in September. Factories that run a long payable cycle and deduct only on payment are permanently a quarter behind, and every one of those deductions is already carrying interest.

That single fact is also the strongest argument for booking purchase invoices against receipts promptly rather than in a month-end pile — the same argument that procurement discipline makes for entirely different reasons.

A monthly routine that holds

Nothing here needs an expert. It needs the same thing once a month.

Where this lives in OEMup

I want to be careful here, because TDS is one of those areas where software is sold as doing more than it does. No system decides for you whether a payment is technical or professional, and nothing files Form 140 on your behalf. What a system can do is hold the three things the routine above depends on — the PAN, the booked bill and the vendor-wise running total — so the decision is made against facts rather than memory.

The PAN arrives before the first bill

In OEMup a vendor is added by auto-filling the profile from the GST number, then setting the account ledger purpose, currency, purchase manager, contacts, bank details and permissions. For vendors you would rather not chase, there is an invitation and self-registration flow: you send an invitation, the vendor completes a secure multi-step form themselves — GST, PAN, addresses, KYC documents, contacts and bank details — and you review and approve the submission before they are live.

That matters more than it sounds. The no-PAN rates in this article — 20% on contract payments, 5% on purchase of goods — are entirely a paperwork failure, and they are only ever avoided before the relationship starts. A registration flow that will not complete without PAN and KYC removes the problem at the only point it is cheap to remove. The same screen is where you would hold a transporter’s declaration against the vendor rather than in a folder.

Every payment has a document behind it

The deduction point is the booking, not the payment, so the booking has to be real. OEMup runs indent → RFQ → purchase order → purchase invoice, and the purchase invoice is booked against its PO with delivered quantity, discounts, tax and grand total, with payment status visible in the invoice register. That is the object the obligation attaches to, and it is dated, which is what interest under Section 398(3)(a) is computed from.

The vendor-wise total you have to look at

Thresholds are crossed by running totals, and running totals come from the ledger. OEMup holds a chart of accounts and ledgers with each vendor mapped to its account, and financial reports — Trial Balance, Profit & Loss, Balance Sheet, Cash Flow and GST reports — alongside bank reconciliation against the statement. The ₹50 lakh and ₹1,00,000 questions in this article are read off a vendor’s cumulative figure, which is exactly what that ledger is.

Recording the deduction

There is a TDS management function for recording and managing TDS entries as per applicable regulations, and payments and wallets for tracking what has gone out, advances held against vendors and automatic payment reminders. Between them, the deduction is booked where the rest of the accounting is, rather than in a side spreadsheet that reconciles to nothing.

The bottom line

TDS on vendor payments is cheap to comply with and expensive to ignore, and the gap between those two is wider than in almost any other compliance a factory carries. The deduction itself costs you nothing — it is the vendor’s tax, credited to the vendor, passing through your hands. The failure costs you 30% of the expense, disallowed under Section 35(b), plus interest and a daily fee.

Three things to take away. First, the section numbers changed on 1 April 2026: it is all Section 393(1) now, with four-digit codes and Form 140, and the old protection for deducting under the wrong section was written about a statute that no longer exists — so on a genuinely uncertain code, deduct at the higher rate. Second, goods and contracts behave in opposite ways: 0.1% on the excess above ₹50 lakh for goods, and 1% or 2% on the whole year once ₹30,000 or ₹1,00,000 is crossed for contracts. Third, deduct at booking, not at payment, because that is where the Act puts the trigger and where interest starts counting.

If you change one habit this month, make it the fourth step of that routine: once a month, read the vendor ledger instead of the invoice pile. Every expensive TDS failure I have seen was a threshold crossed in a running total that nobody had looked at. The bills all looked fine individually. They always do.

Related reading: Procurement Management for Indian Manufacturers for the indent-to-invoice chain the deduction hangs off, Job Work and ITC-04 for the GST side of the same job-work payments, E-Way Bill Rules 2026 for the dispatch-side compliance, Factory Payroll in India for the salary deductions this article deliberately leaves out, and Vendor Portal Software for getting PAN and KYC on file without chasing anybody.

FAQ

Which section covers TDS on vendor payments from 1 April 2026?

Section 393(1) of the Income-tax Act, 2025. The whole 194-series of the 1961 Act was consolidated — salary into Section 392, everything else into Section 393(1) as a table of roughly ninety-two four-digit payment codes from 1001 to 1092. Rates and thresholds were largely carried over unchanged. What changed is the section you cite, the code you quote on the challan, and the return — Form 140 in place of Form 26Q, with Form 168 replacing Form 26AS.

What is the TDS rate on purchase of goods?

0.1%, under what used to be Section 194Q and is now Section 393(1), code 1031. Two conditions apply together: your own turnover in the immediately preceding financial year must have exceeded ₹10 crore, and purchases from that one resident seller must exceed ₹50 lakh this year. You deduct only on the value above ₹50 lakh. GST shown separately is excluded from the base (CBDT Circular 13/2021), and where the seller has no PAN the rate becomes 5%.

Is TDS deducted on job work and labour contractor bills?

Yes. Job work, manpower supply, freight and most contracted services fall under old Section 194C, now Section 393(1), codes 1023 and 1024. The rate is 1% for an individual or HUF and 2% for a company, firm, LLP or other resident entity, from ₹30,000 for a single payment or ₹1,00,000 in aggregate. Once either is crossed the deduction applies to the whole amount, not only the excess — the opposite of how purchase of goods works.

What happens if TDS is not deducted on a vendor payment?

Three consequences stack. Interest under Section 398(3)(a) at 1% a month from when the tax was deductible to when it was deducted, then 1.5% a month to deposit. A fee under Section 427 of ₹200 a day, capped at the TDS in that statement. And Section 35(b) — the old 40(a)(ia) — disallowing 30% of the expense. On an ₹18,40,000 job-work bill the TDS was ₹36,800 and recoverable by the vendor; the disallowance is ₹5,52,000 of expense, roughly ₹1,43,520 of extra tax at 25% plus cess.

Do I still need to collect TCS on sales of goods?

No. Seller-side collection on sale of goods under Section 206C(1H) was removed with effect from 1 April 2025. Only the buyer-side deduction on purchase survives, so the old question of whether the buyer deducts or the seller collects on the same transaction no longer arises. If your sales invoices still print a TCS line on goods, it should have come off.

Is TDS deducted on transporter freight bills?

Usually not — but only if you hold the paperwork. A transporter in the business of plying, hiring or leasing goods carriages who owns not more than ten goods carriages at any time in the year, and who gives you a declaration to that effect with PAN, attracts no deduction. Without the declaration on file it is an ordinary contract payment at 2%. Collect it annually and store it where you can produce it years later.

What is the risk of deducting under the wrong payment code?

New, and largely untested. Under the 1961 Act, where a deductor deducted under the wrong section but genuinely paid, courts generally held that 40(a)(ia) did not apply, because tax had been deducted. The 2025 Act puts everything in one section and separates payments only by code, so a wrong code looks less like a wrong section and more like a short deduction. Code 1026 at 2% where the payment was professional fees at code 1027 and 10% leaves you 8% short and exposes 30% of the expense. On the uncertain ones, deduct higher.

When must TDS be deposited and the return filed?

Deposit by the 7th of the following month, with March allowed until 30 April. File Form 140 quarterly — 31 July, 31 October, 31 January and 31 May — and issue the vendor’s certificate within 15 days of that due date. Deduction itself happens at credit to the vendor’s account or payment, whichever is earlier, which is why booking the purchase invoice, not paying it, is the moment that starts the clock.

Does TDS apply to the GST on a vendor invoice?

For purchase of goods, no — where GST is shown separately on the invoice it is excluded from the base you compute 0.1% on, per CBDT Circular 13/2021. For other payments the position depends on the code and on how the invoice is drawn, and it is worth settling with your CA once for the handful of vendors it affects rather than deciding it per bill.