TDS Under GST: A Comprehensive Guide for Deductors and Suppliers

Tax Deducted at Source (TDS) is a fundamental mechanism in any tax system to ensure the collection of tax at the very point where income or value is transferred. Under the Goods and Services Tax (GST) regime in India, a similar provision exists under Section 51 of the CGST Act, 2017, requiring specific entities to deduct tax at source from payments made to suppliers of taxable goods or services or both.

Introduced primarily to prevent tax evasion and ensure a compliance trail in transactions involving government bodies and other specified entities, TDS under GST operates differently from TDS under Income Tax. Understanding its nuances is crucial for both the deductor (the entity making the payment and deducting tax) and the deductee (the supplier receiving the payment after TDS).

Latest GST Council Updates

23rd July 2024
In Union Budget 2024, the Finance Minister announced that TDS deductors are required to file a return every month u/s 39 of the CGST Act, irrespective of any deductions made during the month, and also to provide for an enabling clause prescribing the time limit for filing such returns.

It was clarified that a person registered solely to deduct TDS under section 51 of the CGST Act should be treated as a person not registered for the purpose of clause (f) of section 31(3) of the said Act. So, the deductor is not required to issue a self-invoice.
*The same is yet to be notified by the CBIC.

10th July 2024
The CBIC released CGST Notification No. 12/2024 dated 10th July 2024 amending the format of the GSTR-7 return, to allow invoice-level reporting. Taxpayers are required to report the invoice/document details, the amount paid to the deductee liable for TDS, the TDS amount, the value of the transaction, and IGST/CGST/SGST details.

What is TDS Under GST?

TDS under GST refers to the mechanism where a specified recipient of goods or services is required to deduct a certain percentage of the payment made to the supplier as tax and deposit it with the government. This deduction is made at source, meaning at the time of making the payment or crediting the amount to the supplier’s account, whichever is earlier.

The deducted amount is not a final tax liability but rather a credit available to the supplier, which they can utilize to set off their own GST liabilities.

Who is Liable to Deduct TDS Under GST? (The Deductor)

Section 51 of the CGST Act, 2017 mandates TDS deduction by the following entities:

1. A department or an establishment of the Central Government or State Government.
2. A Local Authority.
3. Governmental Agencies.
4. Such persons or categories of persons as may be notified by the Government on the recommendations of the GST Council. This category includes:
   • An authority or a board or any other body set up by an Act of Parliament or a State Legislature; or established by any Government, with fifty-one percent or more participation by way of equity or control, to carry out any function.  
   • A society established by the Central Government or the State Government or a Local Authority under the Societies Registration Act, 1860.
   • Public Sector Undertakings (PSUs).  

It is important to note that these entities are required to deduct TDS irrespective of whether they are otherwise registered under GST as a normal taxpayer. They need to obtain a specific registration as a TDS deductor.

Applicability Threshold and Rate of TDS

TDS under GST is not applicable to all transactions involving the above-mentioned entities. It is applicable only if:

• The total value of taxable supply of goods or services or both under a single contract exceeds INR 2.5 Lakhs.
• The “value of supply” for this threshold calculation excludes the Central Tax, State Tax, Union Territory Tax, Integrated Tax, and Cess indicated in the invoice. In simpler terms, TDS is deducted on the taxable value of the supply before adding GST.

The rate of TDS to be deducted is 2% of the value of the taxable supply. This 2% is bifurcated as follows:

• 1% under the CGST Act + 1% under the SGST Act (for intra-state supplies).
• 2% under the IGST Act (for inter-state supplies).

Example 1: Intra-State Supply

A State Government department in Maharashtra enters into a contract with a supplier in Maharashtra for renovation services. The contract value (excluding GST) is INR 4,00,000. The applicable GST rate is 18% (9% CGST + 9% SGST).

• Contract Value (excluding GST): INR 4,00,000
• Threshold Check: INR 4,00,000 > INR 2.5 Lakhs. TDS is applicable.
• TDS Rate: 1% CGST + 1% SGST = 2%
• TDS Amount: 2% of INR 4,00,000 = INR 8,000 (INR 4,000 CGST + INR 4,000 SGST)
• Payment to Supplier: INR 4,00,000 (value) + INR 72,000 (GST) – INR 8,000 (TDS) = INR 4,64,000. The department will also deposit INR 8,000 as TDS with the government.

Example 2: Inter-State Supply

A Central Government agency in Delhi awards a contract for software development to a supplier in Karnataka. The contract value (excluding GST) is INR 6,00,000. The applicable GST rate is 18% (IGST).

• Contract Value (excluding GST): INR 6,00,000
• Threshold Check: INR 6,00,000 > INR 2.5 Lakhs. TDS is applicable.
• TDS Rate: 2% IGST
• TDS Amount: 2% of INR 6,00,000 = INR 12,000 (IGST)
• Payment to Supplier: INR 6,00,000 (value) + INR 1,08,000 (GST) – INR 12,000 (TDS) = INR 6,96,000. The agency will also deposit INR 12,000 as TDS with the government.

When to Deduct TDS

The liability to deduct TDS arises at the time of payment or credit of the amount to the supplier’s account, whichever is earlier.

Registration for TDS Deductors

Entities liable to deduct TDS under GST are required to obtain mandatory registration under GST as a Tax Deductor. There is no threshold limit for this registration requirement. They can obtain this registration by using their existing Tax Deduction and Collection Account Number (TAN) issued under the Income Tax Act.

Compliance Requirements for TDS Deductors

Entities deducting TDS under GST have specific compliance obligations:

1. Monthly Return (GSTR-7): The deductor must file a monthly return in Form GSTR-7 electronically on the common portal. This return contains details of the TDS deducted, the amount paid to the government, and other required information. The due date for filing GSTR-7 is the 10th day of the month succeeding the month in which the deduction was made.
2. Deposit of TDS: The amount of TDS deducted must be deposited with the government by the 10th day of the month succeeding the month in which the deduction was made.
3. TDS Certificate (GSTR-7A): After filing GSTR-7, a TDS certificate in Form GSTR-7A is automatically generated on the GST portal. The deductor is required to make this certificate available to the deductee (supplier) within five days of filing GSTR-7. This certificate serves as proof of TDS deduction for the supplier.

Credit of TDS for the Supplier (Deductee)

For the supplier from whom TDS has been deducted, the amount of TDS reflected in the duly filed GSTR-7 by the deductor will appear in their electronic cash ledger on the GST portal. The supplier can accept or reject this TDS credit. Once accepted, the amount gets credited to the supplier’s electronic cash ledger and can be utilized for paying their GST liabilities (Output Tax).

Consequences of Non-Compliance

Strict penalties are in place for non-compliance with TDS provisions under GST:

• Failure to Deduct or Short Deduction: The deductor is liable to pay the TDS amount along with interest at 18% per annum from the day after the due date of payment till the date of actual payment.
• Late Deduction and Payment: Interest at 18% per annum is applicable from the day after the due date until the actual date of payment.
• Failure to File GSTR-7 or Late Filing: A late fee of INR 100 per day is applicable under the CGST Act and INR 100 per day under the SGST/UTGST Act, totaling INR 200 per day, subject to a maximum of INR 5,000 under each Act.
• Failure to Issue TDS Certificate (GSTR-7A) or Delay: A late fee of INR 100 per day under the CGST Act and INR 100 per day under the SGST/UTGST Act is applicable from the expiry of five days after filing GSTR-7 until the certificate is made available, subject to a maximum of INR 5,000 under each Act.

Common Errors and Practical Issues

Despite the clear guidelines, several common errors occur in TDS compliance under GST:

• Incorrect Threshold Calculation: Deducting TDS on the total invoice value (including GST) instead of the taxable value (excluding GST). The INR 2.5 Lakh threshold applies to the value excluding taxes.
• Ignoring the ‘Per Contract’ Clause: Applying the threshold based on individual invoices rather than the aggregate value under a single contract. Even if individual invoices are below INR 2.5 Lakhs, TDS is applicable if the total contract value exceeds the threshold.
• Incorrect GSTIN of Supplier: Entering an incorrect GSTIN of the supplier in GSTR-7 leads to the TDS credit not reflecting in the correct supplier’s electronic cash ledger, causing reconciliation issues.
• Delayed GSTR-7 Filing: Delays in filing GSTR-7 directly impact the supplier’s ability to claim TDS credit, disrupting their cash flow and compliance.
• Confusing GST TDS with Income Tax TDS: Applying Income Tax TDS rules, rates, or thresholds incorrectly to GST transactions.
• TDS on Exempted/Non-Taxable Supplies: Deducting TDS on supplies that are wholly exempt from GST or are non-taxable. TDS is only applicable on the value of taxable supplies.
• Incorrect Place of Supply Determination: TDS is generally not required if the location of the supplier and the place of supply are in a State/UT different from the State/UT of registration of the recipient (deductor). Incorrect determination can lead to wrong deductions.

Exemptions from TDS Deduction

TDS under GST is not required in certain specific situations:

• Supply of goods or services or both from a PSU to another PSU, or from a Department or Establishment of the Central Government or State Government to a PSU (as notified).
• Supply of goods or services or both by a person located in a SEZ to a person located in a non-SEZ area or vice-versa.
• Supply of exempted goods or services or both.
• Supply where the total value of taxable supply under a contract does not exceed INR 2.5 Lakhs.
• Supplies under Reverse Charge Mechanism (RCM), where the recipient is already liable to pay the full tax.
• Where the location of the supplier and the place of supply are in a State or Union territory, which is different from the State or, as the case may be, Union Territory of registration of the recipient (deductor).

Conclusion

TDS under GST is a critical compliance requirement for specified government entities, PSUs, and other notified bodies. While it adds a layer of responsibility for the deductor, it plays a vital role in ensuring tax compliance and providing a verifiable trail of transactions. For suppliers, understanding the TDS mechanism, ensuring their details are correctly captured by the deductor, and promptly claiming the credit in their electronic cash ledger are essential for smooth financial operations. Adhering to the rules, timely filing of GSTR-7, and proper reconciliation are key to avoiding penalties and ensuring a seamless flow of tax credits within the GST ecosystem. Both deductors and deductees must stay informed about the relevant provisions and potential updates to ensure full compliance.