Understanding ESI/PF Obligations and Payment Categorization for a Sole Proprietor Contractor in Uttar Pradesh

My company is engaged in the business of supplying, erecting, and commissioning Fire Alarms and CCTV systems. We undertook a project at a public sector unit in the state of Uttar Pradesh, where, in addition to our own employees, we engaged a contractor who is a sole proprietor. This individual visited the site periodically and conducted installation and wiring work personally over a span of 6 months. We paid him approximately Rs 4.5 Lakhs for the job in his name and deducted TDS at 1.03% under section 194C.

ESI/PF Obligations for Contractors

Would there be any ESI/PF obligations on our part due to this contractor?

Payment Categorization

How should we categorize his payment - as Labour Charges, Consultant, or Outsourcing Agent? PF inspectors tend to scrutinize anything categorized under Labour Charges.

From your post, I understand that this person is not an independent contractor for the erection of your equipment but has been engaged to do so along with your own employees. He is only a casual laborer to whom you pay a fixed sum, say, Rs 4.5 lakh, over a period of time, say, 6 months. Therefore, it should be booked only as Labor Charges. As the payout per month is Rs 75,000, neither ESI nor PF liability will arise. However, make sure that he has done the work independently and without hiring anybody else to assist him. If so, he will have to show the accounts and payments to his workers by way of wages, and that would decide the ESI/PF liability upon him or you as the Principal employer, as the case may be.

Regards,
Madhu.T.K

Dear Manoj, After reviewing your concerns, I noticed that you are worried about PF and ESIC liabilities. Additionally, TDS at 1.03% has also been paid.

TDS Payment Details

1) While paying TDS, under which income head did you deduct and pay? If it was under a contract payment, as an individual, you can convert such amounts into other expenses like furniture repairing or any other nature of write-off expenses in partial booking expenses in the way you made the payment.

Expense Management for PF and ESIC

2) Show the maximum amount for all conveyance, transportation, or any other entertainment expenses paid for welfare activities. This will help prevent any incidents of PF and ESIC liability from arising. Make sure to prepare all dummy bills for the same.

I hope my solutions will be helpful for you.

Regards,
Sunil Choughule.

Can we not deduct TDS under 194C at 1.03% for an individual who is working on his own without hiring any other person?

Mr. Sunil,

You have suggested that since we have deducted TDS for this person, we cannot show it as labor charges. Why? Also, is there a separate section for TDS rates for labor charges? If not, we have no other option but to use section 194C even when the contractor is a single person.

Clarification on PF and ESIC Obligations

I would like to inform you that your primary concern was regarding the applicability of PF and ESIC. As a single person acting as a contractor, PF will not apply. However, ESIC will certainly apply due to labor charges.

For your information, wherever labor charges, repairing charges, or maintenance charges are involved, ESIC will definitely apply, but not PF. Additionally, as a contractor, if you have deducted the TDS amount by showing labor charges and any other items, you will need to deduct ESIC as well.

Thirdly, the deduction of TDS under section 194C is appropriate, but the ESIC contribution should be in addition to the TDS deduction. The only way to avoid ESIC is to convert these labor charges into some other expenses so that they do not attract ESIC.

The bill should not show labor charges but rather as a labor welfare activity for employees, which is the safest way to avoid ESIC liability.

Regards,
Sunil Choughule (LSS)