Understanding TDS Provisions under GST Law

Section 51 of the CGST Act prescribes for tax deduction at source. Earlier the provision was not brought in force. Now vide Notification 51/2008-CGST dated 13.09.2018, the section has been brought in force, with effect from 01.10.2018.

Section 51 of the CGST Act provides that (a) a department or establishment of the Central Government or State Government; or (b) local authority; or (c) Governmental agencies; or (d) such persons or category of persons as may be notified by the Government are liable to deduct tax at the rate of one percent from the payment made or credited to a supplier of taxable goods or services, where the total value of such supply, under a contract, exceeds two lakh and fifty thousand rupees.

The notification provides that all authorities, board or any other body setup by an Act of Parliament or State Legislature or such bodies established by the Government shall deduct tax. All societies registered by the Government and Public Sector Undertakings has been notified as persons liable to deduct taxes.

No deduction is required to be made if the location of the supplier and the place of supply is in a State or Union territory which is different from the State or Union territory of registration of the deductor. Location of supply and place of supply; both must be different from the state of the deductor. If any one is in the state where the deductor is located; TDS provision shall be applicable.

The provision can be explained in the following situations:

(a) Supplier, place of supply and recipient are in the same state. It would be intra-State supply and TDS (Central plus State tax) shall be deducted. It would be possible for the supplier (i.e. the deductee) to take credit of TDS in his electronic cash ledger.

(b) Supplier as well as the place of supply are in different states. In such cases, Integrated tax would be levied. TDS to be deducted would be TDS (Integrated tax) and it would be possible for the supplier (i.e. the deductee) to take credit of TDS in his electronic cash ledger.

(c) Supplier as well as the place of supply are in State A and the recipient is located in State B. The supply would be intra-State supply and Central tax and State tax would be levied. In such case, transfer of TDS (Central tax + State tax of State B) to the cash ledger of the supplier (Central tax + State tax of State A) would be difficult. So in such cases, TDS would not be deducted. Thus, when both the supplier as well as the place of supply are different from that of the recipient, no tax deduction at source would be made.

Salient features of the TDS provision are as follows:

(a) The deduction of tax shall be made by the recipient of supply of goods are services or both, when total value of supply, under a contract is more than two lakh and fifty thousand rupees. Value of supply shall not include the taxes or cess paid under GST provisions.

(b) No such deduction shall be made in case location of supplier and place of supply is in a state different from the state of recipient.

(c) Deduction shall be made at the rate of one percent.

(d) The amount so deducted shall be credited to the Government by tenth day of next month, and a certificate shall be issued to the deductee by the deductor, within five days from making payment to the government.

(e) The deductee shall claim the credit of the amount so deducted in the electronic cash register.

(f) Failure to pay the amount within specified period shall attract interest and penal provisions, and any amount of default can be recovered in the manner specified in Section 73 or 74 of the CGST Act.

Tax Deduction at Source (TDS) is a system, initially introduced by the Income Tax Department. It is one of the modes/methods to collect tax, under which, a certain percentage of amount is deducted by a recipient at the time of making payment to the supplier. It is similar to “pay as you earn” scheme also known as Withholding Tax, in many other countries. It facilitates sharing of responsibility of tax collection between the deductor and the tax administration. It also ensures regular inflow of cash resources to the Government. It acts as a powerful instrument to prevent tax evasion and expands the tax net, as it provides for the creation of an audit trail.

The deductor is also required to file a return in Form GSTR-7 within 10 days from the end of the month. If the supplier is unregistered, name of the supplier rather than GSTIN shall be mentioned in the return.