Tax Deducted at Source (TDS) is not a new concept in the Indian Taxation Regime. However, as far as Indirect Tax system of India is concerned, this concept has been introduced in it for the first time. TDS is a method under which, certain percentage of amount to be deducted by a recipient at the time of making payment to the supplier, though not all supplies of goods or services or both are liable for tax deduction, only supplies where contract value exceeds rupees two lakh and fifty thousand (INR 2,50,000/-) are liable to deduct TDS under GST Act. TDS concept has been adopted by various countries like U.K, U.S, Ireland and Australia termed as “Withholding Tax” and draw its similarities from “pay as you earn” scheme.
In India, until now TDS concept is used under Income Tax Act of 1961 deducted from Income of the person, wherein any payment covered under these provisions shall be paid after deducting a prescribed percentage. Government has panned out TDS to ensure that it acts as a powerful tool to prevent tax evasion and expands tax net paving the way for audit trail. Moreover, it also ensure regular inflow of cash resources to the government.
Let us understand the meaning of ‘Deductor’ with respect to TDS under GST
The deductor could be one of the following bodies mentioned below:
- Municipal committee, Zila Parishad, District board or any other authority legally entitled to, or entrusted by Central Government / State Government / Union Territory
- Cantonment Board
- Regional Council or District Council
- Development Board
- Department or establishment of central or state government (Drawing and Disbursing Officers).
- Government Agencies established by central or state government excluding organization created by powers of local authority.
As per the latest notification by the government vide Notification No. 33/2017 – Central Tax dated 15th September, 2017 the provisions of clause (a) and (b) of Sec 51(1) of the CGST Act shall come into force with effect from 18th September, 2017.
The above notification also declared the persons specified under clause (d) of the same section, in addition to the above mentioned persons, on whom these provisions of section 51(1) dealing with the TDS shall be applicable. Such persons are:
(a) an authority or a board or any other body,
(i) set up by an Act of Parliament or a State Legislature; or
(ii) established by any Government,
with fifty-one percent or more participation by way of equity or control, to carry out any function;
(b) society established by the Central Government or the State Government or a Local Authority under the Societies Registration Act, 1860 (21 of 1860);
(c) public sector undertakings:
Provided that the said persons shall be liable to deduct tax from the payment made or credited to the supplier of taxable goods or services or both with effect from a date to be notified subsequently, on the recommendations of the Council, by the Central Government.
Registration requirement for Deductor
Supply of goods or services or both received from unregistered supplier (only in case of intra-state supplies) are exempt and deductor is not liable to deduct any tax on payment received from such unregistered person.
Cases where TDS to be deducted
Value of Supply for TDS and rates thereof
- Total Value of Supply > INR 2,50,000/- (excluding the amount of Central tax, State tax, Union Territory tax, Integrated tax and Cess indicated in the invoice).
- Intra-state supply, the deductor is required to deduct tax at the rate of 2% (CGST 1% + SGST 1%).
- Inter-state supplies, 2% (IGST) from the payment made or credited to the supplier of taxable goods and/or services.
For instance, suppose a supplier makes a supply worth INR 10,00,000/- to a recipient and the GST @ rate of 18% is required to be paid. The recipient, while making the payment of INR 10,00,000/- to the supplier, shall deduct 1% CGST+ 1% SGST viz INR 20,000/- as TDS. The value for TDS purpose shall not include 18% GST.
One fact has to be kept in mind that the tax deducted at source is not input tax credit. However, the amount deducted shall be credited to the electronic cash ledger (upon being accepted by the deductee in his Form GSTR-2A) of the and can be utilized for payment of output tax.
- Certificate to be issued within 5 days of crediting the amount in GSTR 7A. Certificate furnished to deductee by deductor shall mention the contract value, rate of deduction, amount deducted, amount paid to appropriate government, such other particulars as may be prescribed in this behalf.
- Failure to furnish such certificate deductor will be liable for sum of INR 200 per day (CGST INR 100 + SGST INR 100) after expiry of such five-day period subject to INR 10,000 (INR 5000 + INR 5000 for CGST & SGST respectively).
Interest Liability of Deductor
- Interest @ 18% has to be paid as communicated vide notification No. 6/2017 (dated 28th June 2017 of IGST, if deductor fails to make payment of tax deducted to the credit of appropriate government).
We can assume that introduction of TDS will bound to increase compliance requirement by companies and plug leakages as tax evasion was a major concern for government under service tax. No doubt this would be an additional burden of compliance on the deductor’s part and blockage of funds for a month for the deductee as well. Government is however hopeful for the benefits of this concept keeping in mind the successful mechanism under the existing Income Tax Law.
Disclaimer: This article may not be referred as a legal opinion or consultancy in any manner. The actual position may differentiate from this on case to case basis depending upon the various factors such as time, any amendment, circular, notification and other factors.
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