TDS APPLICABILITY ON GOVERNMENT CONTRACTS UNDER GST (Under Section 51 of the CGST Act, 2017)

[CASanjay Kumawat]

Introduction

Tax Deducted at Source (TDS) is a system introduced by Income Tax Department, where person responsible for making specified payments such as salary, commission, professional fees, interest, rent, etc. is liable to deduct a certain percentage of tax before making payment in full to the receiver of the payment. It is one of the modes/methods to collect tax, under which, 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.

The Central Excise Act, 1944 or the provisions contained in Chapter V of the Finance Act, 1994 did not make any provisions for deduction of tax at sources for supply of goods or for supply of services. The VAT of the State Government made provisions in respect to deduction of tax at sources from the buyer and depositing the same with the State Government. The deductor was also required to issue TDS certificate to the deductee.

Under the GST regime, section 51 of the CGST Act, 2017, makes provisions relating to tax deducted at sources. Accordingly, it prescribes the authority and procedure for ‘Tax Deduction at Source’.

Tax to be deducted by specified person

As per section 51(1) of the CGST Act, 2017, the tax shall be deducted on supply of goods and services only by specified persons. The Government may order the following persons (the deductor) to deduct tax at source:

1. A department or an establishment of the Central Government or State Government; or

In case of department of Government, the numbers of departments are attached to a particular Ministry headed by the Chief Minister (State) / Prime Minister (Centre). For example, Department of Revenue, Department of Banking and Insurance, etc. is attached to the Ministry of Finance of Central Government. The establishment of Central Government of Central Government and State Government is not defined.

2. Local authority; or

As per section 2(69) of the CGST Act, 2017, “local authority” means – a “Panchayat” as defined in clause (d) of article 243 of the Constitution; a “Municipality” as defined in clause (e) of article 243P of the Constitution; a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund; a Cantonment Board as defined in section 3 of the Cantonments Act 2006; a Regional Council or a District Council constituted under the Sixth Schedule to the Constitution; a Development Board constituted under article 371 of the Constitution; or a Regional Council constituted under article 371A of the Constitution.

3. Governmental agencies; or

A Government or state agency, often an appointed commission, is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an intelligence agency. There is a notable variety of agency types. Although usage differs, a Government agency is normally distinct both from a department or ministry, and other types of public body established by Government. The functions of an agency are normally executive in character, since different types of organizations (such as commissions) are most often constituted in an advisory role-this distinction is often blurred in practice however. A Government agency may be established by either a national government or a state government within a federal system. The term is not normally used for an organization created by the powers of a local government body. Agencies can be established by legislation or by executive powers. The autonomy, independence and accountability of government agencies also vary widely. The term agency in India has several meanings; for example, the Cabinet and the parliament Secretariat describes itself as a "nodal agency for coordination amongst the ministries of the Govt. of India". Most notably as an international feature, what appear to be independent agencies (or apex agencies) include some that have active roles for Ministers, such as, The National Security Council, The Indian Council of Agricultural Research, The Aeronautical Development Agency The Defence Intelligence Agency, and the Planning Commission, which is chaired ex officio by the Prime Minister.

4. Such persons or category of persons as may be notified by the Government on the recommendations of the Council.

The Central or State Government has power to specify such person or a category of such persons as may be notified on the recommendations of the GST Council.

Accordingly, in continuation to the smooth applicability of TDS provisions, the Central Government vides Notification No. 33/2017 – Central Tax, dated 15.09.2017, has specified the category of person to whom TDS is required to be deducted, are as follows:

1. an authority or a board or any other body, -
   1. set up by an Act of Parliament or a State Legislature; or
   2. established by any Government,

with fifty-one percent or more participation by way of equity or control, to carry out any function;

2. society established by the Central Government or the State Government or a Local Authority under the Societies Registration Act, 1860 (21 of 1860);

3. public sector undertakings

Further, it is also 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.

Quantum of tax

As per section 51(1) of the CGST Act, 2017, the tax would be deducted @1% of the payment made or credited to the supplier (the deductee) of taxable goods or services or both. As per explanation to the section 51(1) of the CGST Act, 2017, the value of supply shall be taken as the amount excluding the central tax, State tax, Union territory tax, integrated tax and cess indicated in the invoice.

Point of taxation

As per section 51(1) of the CGST Act, 2017, TDS is require to be deducted by the deducter where the total value of supply of taxable goods and/ or services, under a contract, exceeds 2,50,000/- (excluding the amount of Central tax, State tax, Union Territory tax, Integrated tax and cess indicated in the invoice). Thus, individual supplies may be less than ₹ 2,50,000/-, but if contract value is more than ₹ 2,50,000/-, TDS will have to be deducted.

This can be understood by way of following example:

Department of Health has entered into three agreements with a supplier, are as follows:

1. Contract for cleaning : Contact value -  ₹ 2,20,000/- (including GST of ₹ 20,000/-)
2. Contract for renting of vehicle, i.e., Cars : Contact value -  ₹ 2,95,000/- (including GST of ₹ 45,000/-)
3. Contract for security guards : Contact value -  ₹ 3,50,000/-(including GST of ₹ 60,000/-)

Let’s analyze the impact of TDS on these contracts in the same order as given above:

1. No TDS is required to be deducted as the value of contract is less than ₹ 2,50,000/-

2. No TDS is required to be deducted as the value of contract is equal to ₹ 2,50,000/- (Rs. 2,95,000- ₹ 45,000/-)

3. TDS is required to be deducted as the value of contract exceeds ₹ 2,50,000/- (Rs. 3,50,000- ₹ 60,000/-)

No Deduction of TDS

As per proviso to section 51(1) of the CGST Act, 2017, no deduction shall be made if the location of the supplier (LOS) and the place of supply(POS) is in a State or Union territory, which is different from the State, or as the case may be, Union Territory of registration of the recipient(LOR).

This proviso can be explained in the following situations:

1. LOS, POS and LOR are in the same state/union territory. It would be intra-State/Union Territory supply and TDS (CGST plus SGST/UTGST) shall be deducted. It would be possible for the supplier (i.e., the deductee) to take credit of TDS in his electronic cash ledger.
2. LOS as well as POS is in different states. In such case, IGST would be levied. TDS to be deducted would be TDS (Integrated tax) and it would be possible for the supplier to take credit of TDS in his electronic cash ledger.

3. LOS as well as POS is in Mumbai State and the recipient is located in Rajasthan State. The supply would be intra-State supply and CGST plus SGST would be levied. In such case, transfer of TDS (CGST plus SGST of Mumbai State) to the cash ledger of the supplier (CGST plus SGST of Mumbai State) would be difficult as it will require the registration of recipient in the state of Mumbai. So in such case, TDS would not be deducted.

Thus, when both the supplier as well as the place of supply is different from that of the recipient, no TDS would be made.

These situations can be understood by way of following Table:

Particulars	Situation (a)	Situation (b)	Situation (c)
LOS	Rajasthan	New Delhi	Mumbai
POS	Rajasthan	Rajasthan	Mumbai
LOR	Rajasthan	Rajasthan	Rajasthan
TDS applicability	Yes (CGST plus SGST)	Yes (IGST)	No [Covered by proviso to section 51(1) of CGST Act, 2017].

No deduction of TDS in other cases

The amount deducted by the deductor (or recipient) as TDS can be claimed as credit by the deductee (or supplier) in its electronic cash ledger. For the purpose of transfer of credit to the deductee, deductor has to file GSTR-7 and where GSTIN, value of contract, etc. has to be furnished. Accordingly, to claim credit, supplier must be registered under the GST law. However, for this situation, Section 24 of the CGST Act, 2017, does not mandate to the deductee (or supplier) to take registration under GST if he is otherwise not required to take registration in other cases. Therefore, supplier is not required to take registration under GST for this case.

Further, the Central Government vide Notification No.9/2017-Central Tax (Rate) dated 28.06.2017 has exempted intra-State supplies of goods or services or both received by a deductor (or recipient) under section 51 of the CGST Act, from any supplier, who is not registered, from the whole of the CGST leviable thereon under sub-section (4) of section 9 of the CGST Act, i.e., supplies from unregistered persons, subject to the condition that the deductor is not liable to be registered otherwise than under sub-clause (vi) of section 24 of the CGST Act.

Accordingly, a deductor (or recipient) is not required to pay GST under RCM in case of supplies received from unregistered suppliers provided deductor is not required to take registration in any cases other than case covered by clause (vi) of section 24 of the Act, i.e., ‘persons who are required to deduct tax under section 51, whether or not separately registered under this Act’.

Now, point of discussion is that whether a deductor (or recipient) is required to deduct TDS in respect of supplies received from registered supplier [cases covered by section 9(3)] or unregistered supplier [Section 9(4)], on which recipient will have to pay GST under reverse charge mechanism.

• For cases covered by section 9(3) of the CGST Act, 2017

With reference to the section 24(iii) of the CGST Act, 2017, a person (, i.e., recipient) is required to take registration if he is required to pay GST under reverse charge mechanism [section 9(3)].

Accordingly, deductor (or recipient) will take registration under GST and pay GST under RCM. But, whether deductor is also required to deduct TDS in respect to payment to be made to such deductee (supplier)?

For this purpose, according to one school of thoughts, TDS may not be deducted at the time of making of payment to the supplier. As discussed earlier, TDS is one of the modes/methods to collect tax, under which, certain percentage of amount is deducted by a recipient at the time of making payment to the supplier. It facilitates sharing of responsibility of tax collection between the deductor and the tax administration. Since, deductor would have paid whole tax under RCM, and then there is no requirement to deduct tax at source again at the time of payment.

According to the second school of thoughts, TDS may be deducted at the time of making of payment to the supplier as in section 51 of the CGST Act, 2017, law is silent and it is no where specifically specified that in case of RCM, deductor is not required to deduct TDS.

• For cases covered by section 9(4) of the CGST Act, 2017

With reference to Notification No.9/2017-Central Tax (Rate), dated 28.06.2017, whole tax in respect to all intra-state supplies is exempt from levy of GST under RCM. Accordingly, deductor will not be required to pay GST under RCM [section 9(4)]. But, in this case also, whether deductor is required to deduct TDS on payment to be made to such deductee (or supplier)?

For this purpose, according to one school of thoughts, TDS may not be deducted at the time of making of payment to the supplier. As whole of supply is exempt from levy of CGST by aforesaid Notification therefore, there is no requirement for deduction of TDS at the time of making payment to the supplier.

According to the second school of thoughts, TDS may be deducted at the time of making of payment to the supplier as in section 51 of the CGST Act, 2017, law is silent and it is no where specifically provided that in case of supplies from unregistered suppliers, deductor is not required to deduct TDS.

• Conclusion

The C.B.E. & C vide FAQs (Short) on GST – Part- 4, has clarified that the requirement of deduction depends upon the taxable supply [section 2(108) of the CGST Act, 2017, i.e., means supply which is liable to be taxed] and value of contract rather than the nature of the supplier.

“Q.27 Please clarify ITC credit status for the following condition: on GST deducted commission for distributor registered under GST taxpayer?

Ans. Any deductions under TDS/TCS provisions from amount paid or credited to the supplier shall be credited to the electronic cash ledger which can be used for payment of tax.

Q.28 Please clarify ITC credit status for the following condition: If commission received without deducting GST in cases where distributor under exemption or composition scheme?

Ans. The section concerning GST deduction (section 51 of CGST Act, 2017) has not been operationalized till now. But if the distributor is under threshold exemption or under composition scheme, the requirement for GST deduction depends upon the taxable supply and value of contract rather than the nature of the supplier.”        

Accordingly, if a person is providing taxable supplies and value of contract is exceeding 2.5 lakhs then TDS is required to be deducted by the deductors, i.e., specified persons.

From the above, prima facie, following points may be considered:

1. TDS may not be required to be deducted where recipient is liable to pay whole GST under reverse charge mechanism [Section 9(3) of the CGST Act, 2017].

2. TDS may not be required to be deducted where supply is not a taxable supply or exempt from GST.

3. TDS may not be required to be deducted where supplier is unregistered and recipient is not liable to pay GST under reverse charge mechanism under section 9(4) of the CGST Act, 2017. Exemption is provided by way of Notification No.9/2017-Central Tax (Rate), dated 28.06.2017 in respect to the intra state supplies received by the deductor from the unregistered suppliers.

4. TDS shall not be deducted where contract value is not exceeding the value of 2.5 lakhs.

Registration of TDS deductors

As per section 24(vi) of the CGST Act, 2017, a TDS deductor has to compulsorily register without any threshold limit. The deductor has a privilege of obtaining registration under GST without requiring PAN. He can obtain registration using his Tax Deduction Account Number (TAN) issued under the Income Tax Act, 1961.

Deposit of TDS with the Government

As per section 51(2) of the CGST Act, 2017, the amount of tax deducted at source should be deposited to the Government account by the deductor by 10th of the succeeding month. The deductor would be liable to pay interest if the tax deducted is not deposited within the prescribed time limit.

TDS Certificate

As per section 51(3) of the CGST Act, 2017, a TDS certificate is required to be issued by deductor (the person who is deducting tax) in Form GSTR-7A to the deductee (the supplier from whose payment TDS is deducted), within 5 days of crediting the amount to the Government. The certificate shall contain following:

• Contract value,
• Rate of deduction,
• Amount deducted,
• Amount paid to the Government, and
• such other prescribed particulars.

As per section 51(4) of the CGST Act, 2017, any deductor fails to issue the certificate, would be liable to pay a late fee of ₹ 100/- per day from the expiry of the 5th day till the certificate is issued. This late fee would not be more than ₹ 5000/-. For the purpose of deduction of tax specified above, the value of supply shall be taken as the amount excluding the CGST, SGST, UTGST, IGST and cess indicated in the invoice.

For instance, suppose a supplier makes a supply worth ₹ 1000/- to a recipient and the GST @ rate of 18% is required to be paid. The recipient, while making the payment of ₹ 1000/- to the supplier, shall deduct 1% viz ₹ 10/- as TDS. The value for TDS purpose shall not include 18% GST. The TDS, so deducted, shall be deposited in the account of Government by 10^th of the succeeding month. The TDS so deposited in the Government account shall be reflected in the electronic cash ledger of the supplier (i.e. deductee) who would be able to use the same for payment of tax or any other amount. The purpose of TDS is just to enable the Government to have a trail of transactions and to monitor and verify the compliances.

TDS Return

The deductor is also required to file a return in Form GSTR-7 within 10 days from the end of the month. The details of tax deducted at source furnished by the deductor in FORM GSTR-7 shall be made available to each of the suppliers in Part C of FORM GSTR-2A electronically through the Common Portal and the said supplier may include the same in FORM GSTR-2. The amounts deducted by the deductor get reflected in the GSTR-2 of the supplier (deductee). The supplier can take this amount as credit in his electronic cash register and use the same for payment of tax or any other liability.  The following information will be declared by the deductor in GSTR-7:

S.No.	Particulars
1.	GSTIN of the deductee
2.	Contract Number
3.	Contract Date
4.	Contract Value
5.	Invoice Number
6.	Invoice Date
7.	Invoice Value
8.	Date of payment to deductee
9.	Value on which TDS is to be deducted

Consequences of not complying with TDS provisions

S. No.	Event	Consequence
1.	TDS not deducted	Interest to be paid along with the TDS amount else the amount shall be determined and recovered as per the law
2.	TDS certificate not issued or delayed beyond the prescribed period of five days	Late fee of ₹ 100/- per day subject to a maximum of ₹ 5000/-
3.	TDS deducted but not paid to the Government or paid later than 10th of the succeeding month	Interest to be paid along with the TDS amount else the amount shall be determined and recovered as per the law
4.	Late filing of TDS returns	Late fee of ₹ 100/- for every day during which such failure continues, subject to a maximum amount of five thousand rupees

Refund of TDS amount

As per section 51(8) of the CGST Act, 2017, any excess or erroneous amount deducted and paid to the Government account shall be dealt for refund under section 54 of the CGST Act, 2017. However, if the deducted amount is already credited to the electronic cash ledger of the supplier, the same shall not be refunded.

Transitional provision

As per section 142(13) of the CGST Act, 2017, where a supplier has made any sale of goods in respect of which tax was required to be deducted at source under any law of a State or Union territory relating to Value Added Tax and has also issued an invoice for the same before the 01.07.2017, no deduction of tax at source under section 51 shall be made by the deductor under the section 51 where payment to the said supplier is made on or after 01.07.2017.

Note: Author can be reached at [email protected].