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Whether TDS under GST is attracted on exempted supply?
The TDS Notifications bring into force section 51 of the GST Act, specifying the persons under section 51(1)(d) of the Act and have mandated and laid down the mechanism for deduction of TDS.
Name of the applicant: Dipak Kanti Mazumder Dynamic Engineers (GST AAR West Bengal)
Facts of the case:
- The Applicant is stated to be providing conservancy/solid waste management service to the Howrah Municipal Corporation (hereinafter the HMC). The HMC, however, is deducting TDS while paying consideration for the above supply in terms of Notification No. 50/2018—Central Tax dated 13/09/2018(corresponding State Notification No. 1344 — FT dated 13/09/2018) and State Government Order No. 6284 — F(Y) dated 28/09/2018 (hereinafter collectively referred to as TDS Notifications).
- SI No. 3 of the Exemption Notification exempts from payment of GST any “pure service” (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a Governmental authority or a Government Entity by way of any activity in relation to any function entrusted to a Panchayat under Article 243G of the Constitution or in relation to any function entrusted to a Municipality under Article 243W of the Constitution. SI No. 3A of the Exemption Notification extends it to a “composite supply of goods and services” in which the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply.
- The Applicant submits that the recipient, being a municipal corporation, is a local authority. He submits copies of the work orders issued, specification and terms and conditions of the work etc. to establish that he supplies pure service and, therefore, the exemption under SI No. 3 of the Exemption Notification applies to his supplies.
Findings & conclusion:
- Authority has gone through circular and exemption which has submitted by the applicant, they found that the above Circular leaves no doubt that the phrase ‘in relation to any function’, as applied to SI No. 3 or 3A above, makes no substantial difference between SI No. 25(a) of the ST Notification and SI No. 3 or 3A of the Exemption Notification. Also under the GST the ambit has been broadened to include any such functions that are performed by a panchayat or a municipality under specific provisions of the Constitution. These functions are in the nature of public welfare service that the governments on their own, and sometimes through governmental authorities/entities, do provide to the citizens. When the activity is in relation to any such function, the supply to the governments or governmental authorities/entities or local authorities is exempt from paying GST under SI No. 3 or 3A of the Exemption Notification, provided it is either a pure service or a composite supply, where supply of goods does not constitute more than 25% of the value.
- authority also check three aspects for claiming exemption: (1) whether the supply being made is pure service or a composite supply, where supply of goods does not exceed more than 25% of the value of the supply, (2) whether the recipient is government, local authority, governmental authority or a government entity, and (3) whether the supply is being made in relation to any function entrusted to a panchayat or a municipality under the Constitution, as clarified in the above paragraphs.
- The recipient is a municipal corporation, which is a local authority as defined under section 2(69) of the GST Act.
- Applicant performs compaction service and transport compacted garbage to the dumping station with the help of hook loaders mounted in compactor machine. There is, however, no reference to any supply of goods in the course of executing the work. The consideration to be paid measures the work only in terms of the quantity of the garbage lifted and removed. Based on the above documents, it may, therefore, be concluded that the Applicant’s supply to HMC is a pure service.
- Furthermore, Article 243W of the Constitution that discusses the powers, authority and responsibilities of a Municipality, refers to the functions listed under the Twelfth Schedule as may be entrusted to the above authority. SI No. 6 of the Twelfth Schedule refers to public health, sanitation, conservancy and solid waste management. The Applicant’s supply to HMC is a function mentioned under SI No. 6 of the Twelfth Schedule.
- The Applicant’s service to HMC, therefore, is exempt under SI No. 3 of the Exemption Notification.
- Section 51(1) of the Act provides that the Government may mandate inter alia a local authority to deduct TDS while making payment to a supplier of taxable goods or services or both. As the Applicant is making an exempt supply to HMC the provisions of section 51 and, for that matter, the TDS Notifications do not apply to his supply.
Conclusion: As the Applicant is making an exempt supply, the provisions of section 51 and, for that matter, Notification No. 50/2018 — Central Tax dated 13/09/2018 (corresponding State Notification No. 1344 — FT dated 13/09/2018) and State Government Order No. 6284 — F(Y) dated 28/09/2018, to the extent they mandate and deal with the mechanism of TDS, do not apply to his supply.
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