Tax deducted from the source or TDS is a form of tax collected by the Government of India and administered by the Central Board Of Direct Taxes, i.e., CBDT. According to the Income Tax Act, it is required to deduct tax as TDS if the payment exceeds the limits of the threshold.
For example, when an employer pays an employee his salary, the employer must deduct a percentage of that salary as TDS before making the payment and deposit money with the Government.
A company or person who deducts TDS is called a deductor and the company or person from whom TDS is deducted is a deductee. The payer is required to pay tax to the central government and the taxpayer will be entitled to a tax deduction on the basis of Form 26AS.
Also Read: How To Make TDS Payment Online?
No TDS on GST Component
As we all know, now is the time for the continuous integration of TDS as many face confusion during the tax deduction such as when and how much TDS should be deducted and when the invoice is required to be issued.
The total value of an invoice includes GST. So, the real question here is whether TDS should be deducted from the GST invoice or not? Let's find out the answer to this question based on the TDS on GST circular.
- Listing of services under GST and related changes in laws require providing the number of services of the service provider in each state and their details. For example, under GST, services provided by under contract manufacturing arrangement (CMPA) are under the head 'services'. The above change provides clarity on the service taxability.
- It may be noted that the TDS ( Tax Deducted at Source) on payments made for goods will continue to be collected by the supplier as it would be available as an input tax credit under the GST Act. However, for all the services, the TDS will have to be paid at the time of the payment for the services given.
- The Goods and Services Tax is an inclusive taxation system in which every supplier pays tax on the value of the product supplied to an end customer. However, the liability for the payment of tax is on the supplier who delivers the goods.
- Further, as per the GSTR, the supplier has to identify, separately, all the service providers and assess the tax liability of the supplier in respect of each service. TDS is payable on such payment of tax.
- However, the TDS payable on service tax will be on the total supplies of such services. Further, under GSTR 2, TDS is deducted at the rate of 3% only on taxable supplies made by the business to a person who is a supplier in the business.
- The revised provision shall have the effect of defining 'service' to include value addition, given to the supply of goods and services, and such value addition shall be treated as output tax.
Therefore, when the GST on Services part has been shown separately in the invoice there is no TDS on GST amount.
TDS Deduction on Service Tax
It was previously specified by the Central Board of Direct Taxes (CBDT) that there is no need for deduction of TDS if service tax is shown separately on the invoice.
TDS Deduction Under GST
On the introduction of GST, CBDT received a lot of questions about TDS services and the treatment of the services component of GST.
- CBDT specified in Circular No. 23/2017 that if the GST services are shown separately on the invoice, no tax will be deducted from that GST item. GST includes CGST, SGST, IGST, UTGST.
- There are certain charges, such as technical services that attract GST (18%) and that attract TDS under Section 194J of the IT Act. There was a lot of confusion as to whether TDS would be deducted in full including GST or not.
- People feared that if GST is introduced before TDS deductions, it will lead to double taxation in the form of income tax on GST. This is contrary to the basic idea of avoiding double taxation under the GST.
- Thus CBDT issued the circular to clarify that where the GST on the Services part has been shown separately in the invoice there will be no TDS on GST amount
Also Read: TDS Rate Chart For FY 2021-22
Examples For Your Understanding
Mr. Ajay makes a supply of taxable service to Mr. Bhanu for Rs 2,00,000 and he also charges Rs. 18,000 as CGST at 9% and Rs. 18,000 as SGST (or UTGST) at 9% separately in the invoice, the total value of invoice being Rs, 2,36,000. Then Mr. Bhanu is required to deduct TDS under section 194J only on the taxable value of supply (without including GST) i.e. Rs. 2,00,000 and not on the full value of the invoice of Rs. 2,36,000.
However, if Mr. Ajay charges Rs. 2,36,000 as the value of taxable supply of services inclusive of GST from Mr. Bhanu and does not show ‘GST on Services’ component separately in the invoice, then Mr. Bhanu is liable to deduct TDS under section 194J on the full value of invoice i.e. Rs. 2,36,000.
So in the second case, TDS on GST bill has to be deducted whereas the first one doesn’t require it.
Example 2 (Intra State)
Ajay pays Rs. 1,00,000 towards construction for an office building. As the supply is being made within the state, that is Intra State contract, CGST and SGST at 9% will be applied, that is, Rs. 9,000 for CGST and Rs. 9,000 for SGST. The total amount including intrastate taxes will be Rs. 1,18,000. As per section 194J, the amount of TDS to be deducted at 10% on the contract price will be Rs. 10,000 and the total amount payable by the Ajay will be Rs. 1,08,000.
Example 3 (Inter-State)
Referring to the same example as above (example no. 2), if the supply has been made in different states, that is, Inter-State supply, then IGST will be applied at 18%, that is, Rs.18,000 on the contract price. The total amount including IGST will be Rs. 1,18,000. As per section 194J, the amount of TDS to be deducted @10% on the contract price will be Rs.10,000 and the total amount payable by Ajay will be Rs. 1,08,000.
Example 4 (Service Component Not Shown Separately)
Here, the contract price including all the taxes will be Rs. 1,18,000. As per section 194J, the amount of TDS to be deducted at 10% on the contract price will be Rs. 11,800 and the total amount payable will be Rs. 1,06,200.
All these examples show you how to calculate the TDS on bill amount in different situations.
Also Read: TDS On Salary Under Section 192
Effects Of The Provision
The basic reason behind this TDS on GST provision in the Income Tax,1961 is to ensure that the GST paid by the receiver of the service does not form part of the income of the provider of the service. The service provider acts as a collection agency for the government to collect GST. Without this provision, the service recipient would have to charge TDS to GST and the service provider would later have to claim the same refund in the form of ITC. The result of the provision for businesses (service providers) will mean fewer financial limits and thus reduce operating costs.
Consequences of Not Complying With The TDS Provisions
- If TDS is not deducted by the service provider, the amount of TDS and interest must be paid, otherwise, the amount will be determined and determined in terms of the Act.
- If the TDS certificate is not issued on time or is delayed, a fine of Rs. 100 per day subject to maximum Rs. 5000.
- If payment is delayed, interest must be paid along with the TDS amount otherwise the amount will be determined and recovered by the government.
- In the event of a late filing of TDS Returns, an amount of Rs.100 will be charged daily and if such failure continues, to the maximum amount of Rs. 5000.
In case any excess or incorrect amount is deducted and paid to the government you can apply for a refund under category 54 of the CGST Act, 2017. However, when deductions have already been entered in the electronic ledger of the supplier, that money will not be refunded.
So in conclusion, it is clear from the discussion above that if the GST Services component is shown separately from the invoice, then there will be no TDS on GST bill. The provisions of this circular apply to all old contracts entered into before 01.07.2017. The advantage of this circular is that it ensures fewer financial restrictions for the service providers and reduces operating costs.