TDS under GST and Income Tax ensures transparency and timely tax collection. Businesses dealing with government contracts must comply with TDS provisions to avoid penalties and ensure smooth transactions.
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What is TDS under GST?
TDS (Tax Deducted at Source) under GST is a provision where certain notified entities deduct a portion of the payment made to a supplier of taxable goods or services and deposit it with the government.
It's a mechanism to collect tax directly from the source of income, enhancing tax compliance.
Key Points:
Applicability:
TDS is applicable when the value of supply under a single contract exceeds ₹2,50,000.
It applies to specific entities, including government departments, local authorities, and government agencies.
TDS Rate:
The TDS rate is 2% of the value of the supply (excluding GST). This is broken down into 1% CGST and 1% SGST, or 2% IGST.
Who Deducts TDS?
Central and State Government departments.
Local authorities.
Government agencies.
Public sector undertakings.
TDS not applicable:
TDS is not applicable if the location of the supplier and the place of supply are different from the location of the recipient.
TDS Compliance and Returns
The deductor must deposit the TDS by the 10th of the following month.
TDS returns in Form GSTR-7 must be filed by the 10th of every month.
The deductee (supplier) can claim the deducted TDS as input tax credit (ITC) in their electronic cash ledger.
Example:
A government agency contracts a supplier for contract worth ₹4,00,000. (+18%)
The GST rate is 18%.
Here's how the TDS is calculated:
Contract value: ₹4,00,000
TDS (2% of ₹4,00,000): ₹8,000 (₹4,000 CGST and ₹4,000 SGST)
The government agency will pay the supplier ₹4,64,000 and deposit ₹8,000 as TDS with the government. (excluding TDS under income tax and any other deduction).
Important considerations:
The deductor must issue a TDS certificate (GSTR-7A) to the supplier.
The deducted TDS is reflected in the supplier's GST portal, allowing them to claim input tax credit.
Interest is charged for the delay in depositing the deducted TDS with the government at the rate of 18% per annum.
What is TDS under Income tax?
TDS is essentially a mechanism for collecting income tax at the source of income.
Instead of waiting for individuals or entities to file their income tax returns, the government mandates that certain payers deduct a portion of the payment as tax and deposit it with the government.
This system helps the government collect taxes regularly and prevent tax evasion
This ensures a regular flow of tax revenue.
How TDS Works:
Deductor: The person or entity making the payment (e.g., employer, bank, company).
Deductee: The person or entity receiving the payment.
The deductor deducts TDS at a specified rate (which varies depending on the type of payment) before making the payment to the deductee.
The deductor then deposits the deducted TDS with the government.
The deductee can claim credit for the TDS deducted when filing their income tax return.
Some common TDS sections with their applicable rates:
Section 194C: TDS on Payments to Contractors:
Applies to payments made to contractors for carrying out any work.
TDS rates:
1% for payments to individuals/HUFs.
2% for payments to others.
Threshold: ₹30,000 for a single payment or ₹1,00,000 for aggregate payments in a financial year.
Example: If a company pays a contractor ₹1,50,000 for construction work, they will deduct ₹3,000 as TDS (2% of ₹1,50,000).
Section 194H: TDS on Commission or Brokerage:
TDS rate: 5%.
Threshold: ₹15,000.
Example: If a person earns 20,000 rupees in commission, then 1,000 rupees will be deducted as TDS.
Section 194J: TDS on Professional or Technical Services:
Applicability:
This section applies to payments made for:
Professional services (e.g., legal, medical, engineering, architectural, accountancy).
Technical services.
Royalty.
Non-compete fees.
Fees for directors, excluding salary.
· TDS Rate
10% for Professional Services.
2% for Technical Services.
· Threshold: If the payment exceeds ₹30,000
Example 1: Professional Services (Lawyer's Fees)
A company, "ABC Ltd.," hires a contractor, "Mr. Sharma," for construction of a block.
ABC Ltd. pays Mr. Sharma ₹50,000 for his services.
Since the payment exceeds ₹30,000, ABC Ltd. must deduct TDS at 1%.
TDS amount: ₹500 (1% of ₹50,000).
ABC Ltd. will pay Mr. Sharma ₹49,500 and deposit ₹500 as TDS with the government.
Example 2: Technical Services (Software Development)
A company hires a freelance software developer to create a program. The payment for the services is 40,000 Rupees.
Depending on the nature of the technical service being provided, the TDS rate will either be 10% or 2%. Assuming it is a service that falls under the 2% rate.
The company will deduct 800 rupees and pay the software developer 39,200 rupees.
Important Considerations:
TDS rates and threshold limits can change, so it's essential to stay updated with the latest income tax regulations.
If your income is below the taxable limit, you can submit Form 15G/15H to the deductor to avoid TDS deductions.
It is important to keep accurate records of all TDS deductions, as this information is needed when filling income tax returns.
Merging Income tax and GST TDS: Let us understand with the help of an example
Imagine a government agency hires a contractor for a construction project:
Scenario:
GST (18%): ₹90,000.
Total invoice: ₹5,90,000.
GST TDS:
The government agency must deduct GST TDS.
TDS is calculated on the contract value excluding GST.
GST TDS (2%): ₹10,000 (2% of ₹5,00,000).
The government agency will deposit those 10,000 rupees to the government.
Income Tax TDS:
Depending on the nature of the construction work, income tax TDS might also apply (e.g., under Section 194C).
This TDS would be calculated on the contract value, and rules relating to income tax TDS would be followed.
For simplicity, let us assume that 2% income tax TDS is also applicable. Then that would be 10,000 rupees as well.
The government agency would also deposit those 10,000 rupees to the government.
Result:
The contractor receives the total invoice amount minus both the GST TDS and the Income tax TDS. (5,90,000-10,000-10,000) =5,70,000/-.
Now, Contractor will pay 16% GST when he files its GSTR-3B and claim its 2% income tax TDS when filing ITR.
We hope the above blog was helpful in enhancing your knowledge on the matter. In case of any queries feel free to get in touch with our team of experts.
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