In the realm of GST compliance, Tax Deduction at Source (TDS) is a crucial concept. Essentially, it mandates that a registered entity, when making payments exceeding the threshold for taxable goods or services, must deduct GST at the source. This procedural requirement, as specified in Section 51 of the CGST Act, involves the deductor withholding a fixed percentage of GST and remitting it to the GST department during the GST return filing process.
Who is liable to deduct TDS
The responsibility for tax deduction under GST falls upon specific entities, as outlined below:
- Departments or establishments of the Central or State Government.
- Local authorities.
- Governmental agencies.
- Individuals or categories of individuals as designated by the Government based on the Council’s recommendations.
This designation was made through Notification No. 33/2017-Central Tax dated 15.09.2017, which was later replaced by Notification No. 50/2018 – Central Tax dated 13.09.2018.
The entities liable to deduct tax include:
- Authorities, boards, or bodies:
– Established by an Act of Parliament or a State Legislature.
– Established by any Government, with 51% or more participation through equity or control, to carry out specific functions.
b) Societies:
Established by the Central Government, State Government, or a Local Authority under the Societies Registration Act, 1860 (21 of 1860).
c) Public sector undertakings:
It is clarified, as per Circular No. 76/50/2018-GST dated 31st December 2018, that the condition “with 51% or more participation by way of equity or control, to carry out any function” in point (a) applies to both items (i) and (ii) of clause (a). Consequently, Section 51 of the CGST Act is applicable only to authorities, boards, or bodies set up by an Act of Parliament or a State legislature or established by any Government where fifty-one percent or more participation by way of equity or control is with the Government.
When Should TDS be deducted under GST
1. Tax Deduction on Total Taxable Value
One key instance when tax should be deducted is when the total taxable value of a supply exceeds ₹2,50,000 under a contract. This threshold triggers the need for tax deduction, ensuring compliance with regulatory requirements.
2. Intra-State Supply – When Supplier, Place of Supply, and Recipient are in the Same State
When the supplier, place of supply, and recipient are all located within the same state, it constitutes an intra-State supply. In such cases, TDS (Central and State tax) is mandated to be deducted. Taking an example where all parties are registered in Delhi, the deduction rate would be 1% each under CGST and SGST.
3. Inter-State Supply – Supplier and Place of Supply in Different States
If the supplier and the place of supply are situated in different states, it qualifies as an inter-state supply. In this scenario, integrated tax comes into play, and TDS (Integrated tax) is deducted. The supplier (deductee) can subsequently credit this TDS in their electronic cash ledger. To illustrate, consider a situation where the supplier is in Chandigarh, the place of supply is in Delhi, and the recipient is registered in Delhi. Here, the applicable tax deduction rate is 2% under IGST.
TDS Returns under GST
- Mandatory Registration for Tax Deductors
According to clause (vi) of section 24 of the CGST Act, individuals or entities obligated to deduct tax at source under section 51 must compulsorily obtain registration. This requirement stands irrespective of whether the person is separately registered or not, and no threshold limit is applicable in such cases.
- PAN Requirement for Registration
Under sub-section (6) of section 25, a Permanent Account Number (PAN) is mandatory for obtaining registration. However, a noteworthy provision in the sub-section’s proviso allows the use of a Tax Deduction and Collection Account Number (TAN) in lieu of PAN, fulfilling the registration requirement.
- Return Filing Obligations
As per section 39(3) in conjunction with rule 66, every registered person obligated to deduct tax at source must electronically file their return using Form GSTR-7 within 10 days after the end of the deduction month. This ensures timely compliance with return filing obligations.
- New Provision Restricting Return Filing Duration
A recent development introduced through the Finance Act 2023, as notified on July 31, 2023, adds a new sub-section (11) to section 39. This provision imposes a limitation on registered persons, restricting them from filing returns after the expiration of a period of 3 years from the due date of furnishing the return.
Valuation of Supply
When it comes to tax deduction, the valuation of supply plays a crucial role, especially under the GST framework. To ensure accurate deductions, it’s essential to grasp the intricacies involved in determining the value of supply.
One fundamental principle is that the value of supply should exclude taxes like CGST, SGST, UTGST, IGST, and Cess. In simpler terms, tax deduction is applicable only to the taxable value of the supply. The taxes mentioned in the invoice, such as CGST, SGST, UTGST, IGST, and Cess, are not subject to deduction. This ensures that tax is calculated based on the actual value of the goods or services provided.
Furthermore, it’s important to note that no tax deduction should be made on the value of exempted goods or services, even if they are invoiced together with taxable supplies. This means that when exempt and taxable supplies are listed in the same tax invoice, tax deduction applies only to the taxable portion.
