09 Oct 2017Posted By: Arvind

No TDS shall be deductible on GST component of Invoice

No TDS shall be deductible on GST component of Invoice

Recently the Central Board of Direct Taxes (CBDT) clarified that the GST paid on services will be excluded from the scope of TDS provisions when in the GST portion is shown in the invoice separately. Previously, CBDT had excluded the service tax portion from the amount paid or payable as per the agreement entered by the service provider and the service recipient. From 1st July 2017 (after the rollout of GST), several references received by the CBDT in relation to the treatment of Goods and Service Tax (GST) portion on services. Goods and Service Tax subsumed all the previous indirect taxes which includes excise duty, VAT, and Service tax mainly. In order to provide a proper clarification on the above issue, CBDT stated that the rationale for excluding the tax portion from the TDS purview under the new GST regime remains valid, the Board hereby elucidates that wherever in terms of engagement or any agreement/contract between the provider of the service and the recipient, the portion of ‘GST on services’ included in the amount payable to a resident person is indicated separately, TDS will be deducted at source under the provisions of the Income Tax Act on the amount actually paid or payable without comprising such ‘GST on services’ component. Goods and Service Tax (GST) for these purposes shall include State Goods and Services Tax, Central Goods and Services Tax, Integrated Goods and Services Tax and Union Territory Goods and Services Tax.

The rate of TDS and who shall collect it:

The rate at which TDS is to be deducted is 1 percent of payments made to the supplier services, where value of total supply, under an individual contract, exceeds rupees 2,50,000.

Let's understand this with an example, if Mr. A, a taxable provider of services (supplier of service) charges Rupees. 1 lakh as the gross value of supply of services from Mr. B and also charges Rupees. 9,000 as Central Goods and Service Tax (CGST) @9% and Rupees. 9,000 as State Goods and Service Tax (SGST) @9% in the invoice separately, the total invoice value being Rupees 1,18,000, then Mr. B will deduct TDS U/s 194J of the Income Tax only on the value of supply of service (without including GST component) i.e. on Rupees. 1,00,000 and not on Rupees. 1,18,000 (which is the full value of invoice). Similarly, if Mr. A charges Integrated Goods and Service Tax (IGST) in the case of interstate supply of service and show the GST component separately on the invoice , then the service recipient will deduct TDS U/s 194J only on the value of supply of service i.e. on Rupees 1,00,000 (without including IGST component).

However, if Mr. A charges Rupees. 1,18,000 as the gross value of supply of services including  GST component from Mr. C and doesn’t mention 'GST on Services' component in the invoice separately, then Mr. C will be liable to deduct TDS U/s 194J on the full invoice value i.e. Rs. 1,18,000 (including the GST component). Also, in the existing contract or under an existing agreement entered by the payer and payee prior to 01.07.2017 then any reference to 'service tax ' shall be considered as 'GST on services'. So, the provisions containing in the circulars will apply to the ongoing projects and also on the contract or agreement entered prior to 01.07 .2017 mutatis mutandis.

The reason is to give effect to such provision of the IT Act, 1961, that the GST paid by the service recipient does not partake the nature of "income" of the service provider (supplier of the service) of such service. The service provider only acts as a collecting agent for Government for collecting the GST. The impact of such provision for the business, especially for the supplier of the service will be imperative. It will ensure minimum blockage of funds in TDS and thus lessen the working capital requirement.


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