TDS is a system where tax is deducted on income as it accrues. As invoice value includes GST component, a question may arise whether tax is required to be deducted at source on the GST component. As per the CBDT clarification, tax shall be deducted at source on the amount paid or payable without including such GST component.
Tax Deduction under Pre-GST Framework
The Central Board of Direct Taxes (CBDT) vide Circular No. 1/2014 dated 13.01.2014 clarified that wherever in terms of the agreement or contract between the payer and the payee, the Service Tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Income-tax Act, 1961 on the amount paid or payable without including such Service Tax component. Accordingly, tax is not required to be deducted on service tax component if service tax component is indicated separately in the invoice.
Tax Deduction under GST Framework
As under the new GST regime, the rationale of excluding the tax component from the purview of TDS remains valid, the CBDT further clarified vide Circular No 23/2017 dated 19.07.2017 that wherever in terms of the agreement or contract between the payer and the payee, the component of ‘GST on services’ comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Income-tax Act, 1961 on the amount paid or payable without including such ‘GST on services’ component. GST for these purposes shall include Integrated Goods and Services Tax, Central Goods and Services Tax, State Goods and Services Tax and Union Territory Goods and Services Tax. (para 4)
Therefore, tax is not required to be deducted at source on the GST component.
The CBDT further clarified that for the purposes of this Circular, any reference to ‘service tax ‘ in an existing agreement or contract which was entered prior to 01.07.2017 shall be treated as ‘GST on services’ with respect to the period from 01.07.2017 onward till the expiry of such agreement or contract.
Example
Intra-state
In this case, the deductor is required to deduct tax at source on Rs 10,000/- @10% i.e. Rs 1,000/- and the total amount payable to the deductee would be Rs 10,800/-.
| Professional Fee (Taxable Value) | Rs 10,000.00 |
| CGST @ 9% | Rs 900.00 |
| SGST @ 9% | Rs 900.00 |
| Invoice Value | Rs 11,800.00 |
Interstate
| Professional Fee (Taxable Value) | Rs 10,000.00 |
| IGST @ 18% | Rs 1,800.00 |
| Invoice Value | Rs 11,800.00 |
In this case, the deductor is required to deduct tax at source on Rs 10,000/- @10% i.e. Rs 1,000/- and the total amount payable to the deductee would be Rs 10,800/-.
Where GST is not shown separately
| Invoice Value (including GST) | Rs 11,800.00 |
In this case, the deductor is required to deduct tax at source on Rs 11,800/- @10% i.e. Rs 1,800/- and the total amount payable to the deductee would be Rs 10,000/-.
Note: It is assumed that rate of TDS is 10%