Tax Deducted at Source (TDS) under Goods and Services Tax (GST)

GST TDS is an effective way to enforce tax compliance and collect revenue. TDS under GST came into effect on October 1st, 2018 — this rests specifically with the provisions of section 51 of CGST Act 2017. Certain individuals are required to deduct a certain percentage as taxable income on payment of interest in respect to suppliers of goods and services taxable under this Act.

Entities Liable to Deduct TDS under GST

TDS Under GST Should Be Deducted By The Following Persons:

Central Government Ministries or departments or a State Government
Local authorities
Governmental agencies
They shall include but not be limited to those entities that receive notices from the government;
Authorities or boards constituted under a Law of Parliament or State Legislature in which the Government has a 51% equity holding or more.
Any society that is formed under the Societies Registration Act of 1860, by either the Central Government, State Government, or a local authority.
Public sector undertakings.

Where the value of a single contract for such taxable items is greater than Rs 2,50,000, it becomes necessary to pay the fees as per TDS rules.

TDS Rates and Thresholds

Under GST, TDS is charged at 2% of the amount paid to the supplier. This is further divided into:

Intrastate: 1% each for CGST and SGST
Interstate: Supplies will be charged with 2% of IGST.

TDS will be deductible only if the total value of the taxable supply in a contract exceeds ₹2,50,000 ( GST value will not be included in the contract value) Second, All categories of TDS Where the location of supply is other than the location of devolvement of TDS and Receiver.

You might also be interested in the State-wise e-way bill limit (2024)

Registration Requirements for TDS Deductors

However, it is compulsory to register under GST for TDS deductors regardless of their turnover. Before beginning the registration, it is obligatory to register for it with TAN (Tax deduction and filing Account Number for the TAN released earlier under the Income Tax Act. Above all according to the GST law, TAN is compulsory for TDS registration.

Procedure for Deducting and Depositing TDS

The process for deducting and depositing TDS under GST involves several steps:

TDS deduction: A deductor shall deduct TDS @ 2% from the taxable value of supply (excluding GST) at the time of payment or credit to the supplier.
Deposit: The amount to be deducted is to be deposited with the government within 10 days from the end of the month in which the deduction is made. CGST and IGST are credited to the Central Government while SGSTis paid to the State Government.
Filing of Return: All deductions are required to file a TDS return in Form GSTR-7 within 10 days of the succeeding month. The details of TDS deducted, payable and paid in this return.
Form GSTR-7A: On the filing of GSTR-7, the deductor has to issue in favour of the deductee a TDS certificate (in Form GSTR-7A) within five days of depositing tax. This is an auto-generated certificate on the GST portal.

Implications for Deductees (Suppliers)

On the GST Portal, TDS deducted by the recipient flows to the supplier's electronic cash ledger. This can be used to pay off their tax dues like GST liabilities. With TDS reflected in its cash ledger as soon as it is deducted, supplies can occupy this amount immediately which helps streamline their cash flow management.

Non-Applicability of TDS under GST

The following situations are exempted from TDS under GST:

Value of Supply: When the total taxable value of supply under a contract is less than or equal to ₹2,50,000
GST Exempt Inter Supplies: Payments made for supplies completely exempt from GST
Zero Rated Supply: No tax is levied on these transactions but can get input credit for the taxes paid on them.
Reverse Charge Mechanism (RCM) (source): Supply in which the recipient is liable for tax on a reverse charge basis.
Inter-State Supply: This Means supplier/place of supply from outside from state of the recipient.

Exemptions like these not only save on the pains of the administrative process by ensuring that TDS is deducted only in relevant cases, but they also help those who pay taxes to plan their taxes.

Penalties and Consequences of Non-Compliance

If TDS provisions under GST are not complied with, there could be the following penalties:

Interest: At the rate of 18% per annum from the date on which tax was deductible to the actual deduction date in case no TDS is deducted.
Failure to deposit TDS: Interest at 18% p.a from the date of deduction till the date of payment. In addition to that, a penalty of an equal amount of TDS not deducted or short deducted may be imposed.
Delay in filing of GSTR-7: Late fee of ₹ 100 per day under CGST and ₹ 100 per day under SGST up to a maximum of ₹ 5,000 is applicable.
Delay in issuing: If the TDS certificate is not issued within five days of the deposit of tax, a late fee of ₹100 for every day during which the failure continues, shall be charged with a maximum limit of ₹5,000.

It is important to ensure TDS provisions, failing which companies may incur penalties and complications during GST compliance.

Benefits of TDS under GST

TDS Under GST BenefitsImplementing TDS under GST comes with a variety of advantages:

Improved Tax Collection: TDS reduces tax evasion, ensuring that the revenue is collected at the source of income. Such mechanism forces suppliers to comply with GST since the tax is deducted before payment gets credited into their bank account.
Improved Tax Collection: Tax is collected at the time of payment on behalf of the government which does not involve a delay and less likelihood of default.
Increases Transparency in Transactions: Since the TDS provisions mandate reporting of transactions for each of the vendors, there is an improvement in transparency between the suppliers and the recipients. Such level of documentation will help immensely if the entity calls for audit or assessment ensuring compliance by all stakeholders to tax laws.
Easier Claim of ITC: In the case of suppliers, the Tds Deducted appears on their electronic cash ledger and can be set off against their GST liabilities. We safeguarded the liquidity aspect via this mechanism where funds are open to suppliers to fulfil their tax payment obligations.

Challenges in Implementing TDS under GST

Though TDS under GST does lead to various advantages, there are multiple challenges that it poses:

Administrative Burden: There are additional compliance activities – registration, deduction in time, deposit of tax on time (including late fees), filing return, certificate issuance etc. for the entities that have to deduct TDS. Both of these functions require sophisticated accounting systems and trained staff.
Cash Flow Impact on Suppliers: The immediate deduction of TDS at the time of payment, can adversely affect cash flow for suppliers (especially MSMEs). While the deducted amount is available in the electronic cash ledger, it cannot be used for any other purpose except the discharge of GST liabilities.
Involves Multiple Contract: Tests done by the courts to determine whether a transaction is covered within TDS, often lead to complexity, especially in situations having multiple contracts, mixed supply/varied place of supply etc. This can lead to misinterpretation, not following it accordingly and incurring penalties.
Technological: Deductors and deductees both need to be technologically savvy to comply with the GST portal. Some may find it difficult to comply with timely as well, be it due to digital illiteracy issues or technical malfunctions.

Recent Updates and Amendments

Notifications and amendments on TDS provisions are from time to time released by the GST Council, CBIC:

Invoice-Level Reporting: GSTR-7 Return Format has been amended CGST Notification No. 12/2024–Central Tax dated the 10th July 2024. The new provisions state that the taxpayer shall mention invoice/document details, the amount paid to the deductee liable for paying TDS, TDS amount, the value of the transaction IGST/CGST/SGST etc.
Filing of Returns to Be Compulsory: The Finance Minister announced in the Union Budget 2024 that all TDS deductors shall file a return every month u/s 39 of the CGST Act, regardless of any deduction for that month. The purpose of this amendment is to harmonize the reporting and compliance requirements.

Conclusion

GST-TDS is a key mechanism introduced aiming at improving the tax compliance of a dealer and ensuring timely tax collection. It comes with new obligations laid down on certain entities, but the positive aspects of transparency gains, better compliance and continuous revenue stream outweigh its negatives. While the deductors and deductees need to ensure compliance with the provisions,

Stakeholders may follow the link for detailed guidelines and updates in more detail from the GST portal & gazette notifications by CBIC.