Clarification from CBDT for No TDS on GST Component in Services

CBDT has issued Circular No. 23/2017, clarifying that TDS would not be deducted from the GST component (which includes CGST, SGST, IGST, and UTGST) of services if it is indicated separately in the invoice. It also clarified that even if GST on commodities is specified individually in the invoice, no duty will be levied on the GST component. 

This came in response to a number of queries received after implementing the Goods and Services Tax. 

The Central Board of Direct Taxes (CBDT) is a statutory body established by the Central Board of Revenue Act of 1963. In their ex-officio status, the Committee's officials also serve as a Department of the Ministry responsible for taxation collection and levy. The CBDT stated in Circular No. 23/2017 that GST is mainly composed of CGST, SGST, IGST, and UTGST.

Did You Know? CBDT emphasised that when TDS is deducted at the time of "credit," the TDS under 194Q should be calculated based on the amount credited, excluding the GST component.

Understanding TDS (TAX Deducted At Source)

TDS is a tax imposed by the Government of India and regulated by the Central Board Of Direct Taxes, abbreviated CBDT. For example, when an employer pays an employee's salary, he or she must subtract a percentage of the wage as TDS before payment is made. The employer must deposit funds with the authorities.

TDS Deduction in the Post-GST Scenario

Due to the adoption of GST on July 1, 2017, taxpayers were experiencing issues processing the GST component of services. CBDT explained in Circular No. 23/2017, dated July 19, 2017, that if GST on processing activities is stated individually in the invoice, no tax will be collected at the source on such GST component. (Chapter XV Il-B of the Income Tax Act, 1961).

Also Read: Income Tax Deductions on Section 80, Section 80C, 80CCC, 80CCD & 80D

Example of TDS Deduction on GST

For a better understanding of TDS deduction on GST components, consider the following example: 

If Mr. WYZ supplies a taxable service to Mr. PQR for ₹2,00,000 and charges ₹18,000 as CGST @9% and ₹18,000 as SGST (or UTGST) @9% separately in the invoice, the total value of the invoice being ₹2,36,000, Mr. PQR is required to deduct TDS under Sec 194J only on the taxable value of supply (without including GST), i.e.,₹2,00,000. 

However, if Mr. A charges Mr. B ₹2,36,000 as the amount of taxable provision of services inclusive of GST and does not individually reflect the 'GST on Services' component in the invoice, Mr. B is required to deduct TDS under section 194J on the face price of the invoice, i.e., ₹2,36,000.

Current TDS Rate (2022-23)

The individual is required to deduct TDS at the rate of 1% CGST, 1% SGST or 2% IGST. It is critical to remember the following points:

TDS is to be collected if the overall value of the provision under a contract exceeds ₹2.50 lakhs; the supply amount must exclude any taxes reflected in the invoice, such as CGST, SGST, IGST, UTGST, or cess. 

Section 194J 

Section 194J has been receiving attention with the adoption of the finance bill 2020, which included modifications that came into effect on April 1, 2020. The Income Tax Act of 1961, Section 194J of TDS, outlines guidelines for deducting TDS on deductions for scientific and skilled services.

Type of Payment in Section 194J of Income Tax Act 2016- 2017

• Fees for technical services.
• Fees for professional services
• Compensation for directors 
• Royalty
• Payments in the form of non-compete clauses

Also Read: How to Verify Your Income Tax Return Online | Verify ITR

Income Tax Act TDS Rate: Section 194J

The following rates apply for services specified in Section 194J of the Income Tax Act 2017-2018

Amendment to Section 194J (Finance Bill 2022)

In the Finance Bill 2020, Section 194J of the TDS was amended. These are some examples:

• Tax will be collected at the rate of 2% on the amount charged for technical services. In other instances, the rate may reach 10%.
• An individual must deduct TDS if his output, total receipts, or revenue in his business or work exceeds ₹1 crore (for business) or ₹55 lakh (for the profession) during the financial year immediately before the one in which interest was credited or paid.

Also Read: All You Need To Know About Section 143(1) of Income Tax Act

Payments Protected under Section 194J

In a fiscal year, a person can deduct TDS at a rate of 10% when making the following payments to a citizen (above ₹30,000):

• The amount paid as a fee for professional services: It refers to the services supplied by someone who works in medicine, architecture, civil engineering, or medicine. Other facilities include accounting, interior design, advertising, expert counselling, and other professions recognized by the Board under Section 44AA. 
• Other resources authorized under Section 44AA include film writers, business clerks, and authorized delegates: Athletes, program organizers, journalists, broadcasters, referees and judges, trainers and assistants, chiropractors, team physicians, and sports columnists are also included.
• Amount paid for technical support refers to an employee's counselling, technical, or management services: Because the money earned falls below the recipient's basic wage, assembly, excavation, and production are not considered professional facilities.
• Royalty: Every assessor who is required to deduct TDS must do so at the following rates: payments for technical support (other than business services) or royalties in the form of remuneration for the selling, marketing, or presentation of cinematic films - 2 per cent - 10 per cent of any additional payment covered by section 194J.
• Ownership of a patent, innovation, magic formula, blueprint, concept, or trademark is transferred
• A blueprint, a patent, an innovation, and so on.
• Sharing all relevant information on the usage of an invention, copyright, algorithm, or other comparable property.
• Equipment is employed for agricultural, research, or commercial purposes or has the right to be used for those purposes.
• Transfer of rights to published works, experimental discoveries, films, or videotapes for radio broadcasting, with limited authorization for sale, presentation, or distribution.
•  Non-compete charge: non-compete fees are defined in Section 194J as payments made in a monetary way or kind instead of an agreement forbidding the individual from exchanging any intellectual property rights, license, signed agreement, copyright laws, expertise, business or commercial rights, technique, or information that could be used anywhere else for production, manufacturing, or any other provisional operation.
• Special cases: TDS deduction is also permitted under Sec 194J, as established by the department's case laws and circulars:
• Medical services are provided in hospitals.
• Filmmakers incur professional fees from public relations firms.
• Amount spent on management and human resource consulting firms.
• Companies pay registrars to trade data with them.

Penalties for Non-Compliance

Section 194J of the Income Tax Act implies many penalties or consequences that can be applied if a person or business receiving services has forgotten to deduct TDS or pays late TDS. 

The following are some possible punishments:

• Decreased Tax Benefit instead of Expense: If a person or organization has failed to deduct TDS, 30% of their spending on the service provided will be prohibited for the fiscal year. Tax calculators can claim full tax benefits only after deducting and paying TDS to the authorities.
• Interest accrued until the payment date

Also Read: Section 115BAA of the Income Tax Act – New Tax Rates for domestic companies

No TDS on GST Component Explained

With the continuous implementation and integration of TDS, it becomes even more necessary to understand this. An invoice's net value includes GST. The underlying question is whether TDS should be charged on the GST invoice. 

The list of businesses under GST and related legislative amendments necessitates giving the number of services offered by each service supplier in each state and their contact information. For example, services delivered under a contract manufacturing agreement (CMPA) are classified as services under GST. The above amendment clarifies the taxability of services. 

Certain items are subject to GST in addition to TDS rules under income tax.

 The items are listed below: 

• It should be emphasised that TDS (Tax Deducted at Source) on goods purchases would remain to be collected by the provider because it will be accessible as an input tax credit under the GST Act. 
• The Goods and Services Tax (GST) is an all-inclusive system of taxation in which each supplier pays income tax based on the value of the item delivered to an end user. However, the provider who delivers the products is responsible for paying the tax.
• Furthermore, according to the GSTR, the provider must identify each supplier separately and estimate the supplier's tax liability for each provision. TDS is levied on such tax payments.
• On the other hand, the TDS due on service tax will be based on the overall supply of such commodities. 
• The new clause will broaden the definition of "service" to include value addition to the delivery of goods and services, and such value addition will be taxed as an outcome. As a result, when the GST on the Services portion of the invoice is stated separately, there is no TDS on the GST component.

Without this arrangement, the service receiver would be required to charge TDS to GST and seek the same reimbursement as ITC. Having this offer will result in fewer financial constraints and lower operational expenses for companies (service providers).

Conclusion 

To summarise, it is evident from the explanation above that if the GST on the Services component is specified individually in the invoice, no tax is deducted at the source, which is conversely also true. The contents of these circulars apply to all existing contracts carried out before July 1, 2017. The benefit of this directive is that it guarantees fewer fund obstructions for service providers and minimizes requirements for working capital. We hope this information on “ No TDS on GST” has helped educate you. 
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