CBDT Clarification: No TDS on Separately Stated GST in Service Invoices
The CBDT has clarified that Tax Deducted at Source (TDS) should not be applied to the Goods and Services Tax (GST) component of service invoices, provided GST is shown separately. This ruling, issued via Circular No. 23/2017, resolves confusion over potential double taxation on technical and professional services. It ensures that the GST amount is not treated as income for service providers, reducing their working capital blockage. The clarification applies to both new and existing contracts.
The Central Board of Direct Taxes (CBDT) has clarified that Tax Deducted at Source (TDS) should not be applied to the Goods and Services Tax (GST) portion of service invoices. This guidance does not pertain to TDS payments under the GST regime, which are primarily handled by government entities.
Previously, under Circular No. 1/2014 from the CBDT, TDS was not to be deducted on the service tax component if it was itemized separately on an invoice. Following the implementation of GST, the CBDT received numerous inquiries regarding the application of TDS to services and how to treat the GST component within these transactions.
CBDT Circular No. 23/2017 now specifies that if GST for services is distinctly displayed on an invoice, no TDS should be applied to that GST portion. This includes Central GST (CGST), State GST (SGST), Integrated GST (IGST), and Union Territory GST (UTGST).
Clarification's Significance
Specific payments, such as those for technical services, are subject to both 18% GST and TDS under Section 194J of the Income Tax Act. Uncertainty arose regarding whether TDS should be applied to the total amount, including GST. Concerns were raised that taxing the GST component for income tax purposes would result in double taxation, conflicting with GST's fundamental principle of avoiding such scenarios.
The following table outlines items subject to both GST and Income Tax TDS provisions:
| Items | GST Rate | TDS Rate |
|---|---|---|
| Section 194B: Income by way of winnings from lotteries, crossword puzzles, card games and other games of any sort | 28% | 30% |
| Section 194C: Payments to contractors or sub-contractors (works contracts) (a) For HUF / Individuals (b) For Others | 18% | 1% / 2% |
| Section 194J: Any sum paid by way of: (a) Fee for professional services (b) Fee for technical services | 18% | 10% |
The CBDT further clarified that this circular's guidelines also extend to contracts executed prior to July 1st.
Illustrative Scenarios
Consider a situation where SDF Pvt. Ltd. remits INR 1,00,000 to a Chartered Accountant for consultation services. It's important to note that TDS provisions do not apply if the payment is made by an individual or a Hindu Undivided Family (HUF); otherwise, TDS is applicable.
Scenario 1: Intra-state contract
| Contract Price | 1,00,000 | |
|---|---|---|
| GST | ||
| CGST@9% | 9,000 | |
| SGST@9% | 9,000 | |
| Total Price | 1,18,000 | |
| Amount of TDS to be deducted u/s 194J | ||
| 1,00,000 * 10% | 10,000 |
Scenario 2: Inter-state contract
| Contract Price | 1,00,000 | |
|---|---|---|
| GST | ||
| IGST@18% | 18,000 | 18,000 |
| Total Price | 1,18,000 | |
| Amount of TDS to be deducted u/s 194J | ||
| 1,00,000 * 10% | 10,000 |
Scenario 3: GST Not Itemized
| Contract Price (including all taxes) | 1,18,000 |
|---|---|
| Amount of TDS to be deducted u/s 194J | |
| 1,18,000 * 10% | 11,800 |
This provision within the Income Tax Act of 1961 is designed to prevent the GST amount paid by the service recipient from being considered as income for the service provider.
Impact of This Directive
Service providers essentially function as government agents for GST collection. Without this specific rule, service recipients would deduct TDS on the GST amount, compelling service providers to later seek refunds through Input Tax Credit (ITC). This provision significantly benefits businesses by reducing fund blockages due to TDS, thereby improving working capital management.