Budget 2026: Clear TDS Rules for Manpower Supply Contracts Under Section 393(1)

The Finance Bill, 2026 introduces an important clarification on how tax is to be deducted at source (TDS) on payments for supply of manpower. For several years, there has been uncertainty on whether such payments should be treated as contractual payments for “work” or as “fees for professional or technical services”, resulting in different TDS rates being applied in practice and frequent disputes during assessments.

Through Clause 78 of the Finance Bill, 2026, the law is proposed to be amended so that supply of manpower working under the payer’s supervision, control or direction is explicitly treated as “work” under section 402(47) of the Income-tax Act, 2025. Once brought within the meaning of “work”, such payments will be squarely covered by the contractor TDS provisions under section 393(1) and not under the provisions for fees for professional or technical services.

This legislative clarification is intended to bring uniformity in TDS deduction practices on manpower supply payments, reduce litigation, and align the treatment across different categories of assessees. The amendment is proposed to come into force from 1 April 2026.

Background: Why Manpower Supply TDS Was Uncertain

Different TDS Regimes Under Section 393(1)

Under section 393(1) of the Income-tax Act, 2025, TDS is to be deducted at varying rates depending on the nature of payment and the status of the payee.

The provision is structured through a table of entries, including:

  1. Section 393(1) [Table: Sl. No. 6(i)] – Contractor payments for “work”
    This covers payments made to contractors for carrying out “any work”. The applicable TDS rates are:

    • 1% when the payee is an individual or HUF
    • 2% where the payee is any other person (such as a company, firm, LLP, etc.)

  2. Section 393(1) [Table: Sl. No. 6(iii)] – Fees for professional or technical services
    This entry governs deduction of tax at source from payments classified as fees for professional or technical services, royalty for sale, distribution or exhibition of cinematographic films, or payments to a business engaged in operating a call centre. The applicable TDS rates are:

    • 2% where the payment represents fees for technical services or royalty for cinematographic films or is paid to a call centre business
    • 10% in all other cases covered under this entry

  3. Section 393(1) [Table: Sl. No. 6(ii)] – TDS by individual/HUF on specified payments
    This applies where an individual or HUF deducts tax at source in respect of the following, to the extent not already covered under Table: Sl. No. 6(i) or Table: Sl. No. 6(iii):

    • Payments to contractors for carrying out any work
    • Payments by way of commission or brokerage
    • Payments by way of professional services not otherwise covered under Table: Sl. No. 6(iii)

    The TDS rate prescribed here is 2% on such payments.

The Core Issue: Where Does Manpower Supply Fit?

In practice, many businesses engage specialised entities for supply of manpower – for example:

  • A manufacturing company engaging a manpower agency to deploy workers on its shop floor
  • An IT company hiring outsourced staff to work in-house under its control
  • A logistics entity using contract staff supplied by an external vendor for warehouse operations

In such situations, officers and assessees have differed on classification:

  • One view was that manpower supply is in the nature of a works contract, being a service for provision of labour under the contract, and therefore should fall under contractor payments governed by section 393(1) [Table: Sl. No. 6(i)/(ii)].
  • The contrary view was that deploying skilled staff could amount to technical or professional services, especially if specific expertise is involved, hence TDS ought to be deducted under section 393(1) [Table: Sl. No. 6(iii)] at higher rates in many cases.

The absence of an explicit statutory reference to “supply of manpower” within the definition of “work” under section 402(47) gave rise to this interpretational conflict, resulting in inconsistent treatment across assessees and jurisdictions.

Proposed Change Under Finance Bill, 2026

Inclusion of Manpower Supply Within “Work” – Section 402(47)

To remove doubt and ensure a consistent TDS framework, Clause 78 of the Finance Bill, 2026 proposes to amend section 402 of the Income-tax Act, 2025, which contains definitions relevant for Chapter XIX-B.