Understanding Tax Deducted at Source (TDS) in India's GST Regime

The Tax Deducted at Source (TDS) mechanism under the Goods and Services Tax (GST) requires specific entities to deduct tax at a rate of 2% from payments made to suppliers for taxable goods and/or services. This deduction applies when the total value of the supply under a single contract surpasses INR 2,50,000. This article explains the fundamentals of TDS under GST, including its application, rates, deduction limits, required forms, and associated penalties.

What is Tax Deducted at Source (TDS) under GST?

TDS is a method of tax collection where a certain percentage of the amount payable by a recipient for goods or services is withheld. This withheld tax is then remitted to the government, contributing to its revenue. Section 51 of the CGST Act, coupled with CGST Rule 66, outlines the legal provisions for TDS under GST.

Entities Required to Deduct TDS under GST Law

Under GST law, the following entities are mandated to deduct TDS:

• Central or State Government departments or establishments;
• Local authorities;
• Government agencies;
• Other specified persons or categories of persons as notified by the Government.

As per a notification dated September 13, 2018, additional entities obligated to deduct TDS include:

• Authorities, boards, or other bodies established by Parliament, a State Legislature, or the government, where the government holds at least 51% equity or control.
• Societies registered under the Societies Registration Act, 1860, which are established by the Central, any State Government, or a Local Authority.
• Public sector undertakings.

TDS Deduction Obligation and Rate under GST

A TDS rate of 2% is applicable on payments made to suppliers for taxable goods and/or services when the individual contract value exceeds INR 2,50,000. However, TDS deduction is not necessary if the supplier's location and the place of supply are different from the recipient's state of registration.

Illustrative Examples of TDS Deduction on a GST Bill

The following scenarios demonstrate the applicability of TDS:

TDS under GST is computed based on the contract value excluding GST at the time of billing. For example, if the Karnataka railway department contracts XYZ, a supplier in Karnataka, for anti-corrosion paints worth INR 4,00,000, with an 18% GST rate:

• Contract Value: INR 4,00,000
• GST Amount (18%): INR 72,000
• Total Invoice Value: INR 4,72,000
• Amount for TDS Calculation (excluding GST): INR 4,00,000
• TDS Deduction (2% of INR 4,00,000): INR 8,000 (INR 4,000 CGST + INR 4,000 SGST)

The supplier, XYZ, will receive INR 4,64,000 (INR 4,72,000 - INR 8,000) after the TDS deduction.

Registration Requirements for TDS Deductors

Any person obligated to deduct TDS must register under GST, irrespective of any threshold limit. Registration can be completed using an existing Tax Deduction and Collection Account Number (TAN) issued under the Income Tax Act, eliminating the need for a separate PAN. Therefore, holding a TAN is compulsory for TDS deductors.

Timelines and Payment Recipient for TDS

TDS must be paid within 10 days following the end of the month in which the tax was deducted. This payment is to be reported in Form GSTR-7 and remitted to the appropriate government:

• The Central Government for IGST and CGST.
• The State Government for SGST.

Provisions for Issuing TDS Certificates under GST

Similar to income tax regulations, the entity deducting tax under GST must issue a TDS certificate in Form GSTR-7A to the concerned supplier within five days of depositing the tax with the government. The GST portal automatically makes GSTR-7A accessible to the deductee once GSTR-7 is filed.

Determining the Value of Supply for TDS Deduction

For TDS calculation, the value of supply is the amount indicated on the invoice excluding the tax component. This clarifies that TDS should not be applied to the CGST, SGST, or IGST elements of an invoice. For instance, if supplier A provides services worth INR 5,000 to B, with an 18% GST rate, B will pay INR 5,000 (supply value) + INR 900 (GST) to A, and INR 100 (2% of INR 5,000) as TDS to the government. Hence, the tax element (GST) of a transaction is exempt from TDS deduction.

Required Form for Filing TDS Return

The deductor must file a TDS return using Form GSTR-7 within 10 days after the end of the month in which the tax was deducted.

The CBIC's CGST Notification No. 12/2024, dated July 10, 2024, modified the GSTR-7 return format to enable invoice-level reporting. Taxpayers are now required to detail invoice/document specifics, the amount paid to the deductee for TDS, the TDS amount, the transaction value, and IGST/CGST/SGST details.

It was clarified in the Union Budget 2024 that TDS deductors are required to file a monthly return under Section 39 of the CGST Act, regardless of whether any deductions were made during the month. An enabling clause prescribing the time limit for such returns was also announced. Furthermore, a person registered solely for TDS deduction under section 51 of the CGST Act is not required to issue a self-invoice.

Benefits of TDS for the Deductee (Supplier)

Once the deductor files their returns, the tax deduction automatically reflects in the deductee's (supplier's) electronic cash ledger. The deductee can then utilize this credited amount from their electronic cash ledger to offset other tax liabilities.

Penalties for Non-Compliance with GST TDS Provisions

Non-adherence to GST TDS regulations can result in various penalties:

Process for Claiming a TDS Refund under GST

If an excess amount of TDS is deducted and paid to the government, a refund can be claimed, as this amount is not legitimately owed to the government. However, if the deducted amount has already been credited to the supplier's electronic cash ledger, the deductor cannot claim it back as a refund. Deductees can claim a refund of this tax, adhering to the Act's refund provisions, by following these steps on the GST portal:

1. Log in to the GST portal.
2. Navigate to Services > Refunds > Application for Refund.
3. Select "Refund of excess balance in electronic cash ledger".
4. Choose the relevant tax head (e.g., TDS/TCS under IGST, CGST, SGST).
5. Submit the application with any necessary supporting details.
6. Monitor the status using the generated ARN.