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Guide to the TDS Mechanism under GST

TDS is a means of collection of tax. The payer of the payment deducts a certain amount from the payee’s income at the time of payment, then this deducted/collected amount is transferred to the Government Account by the payer. The CBDT (Central Board of Direct Taxes) manage the provision of TDS under IRS (Indian Revenue Service) as per the Income Tax Act, 1961. The government had set a specified limit where TDS is not deducted, however, if an individual’s income exceeds the limit, TDS will be deducted from his/her income.

Section 51 of Central Goods and Service Tax (CGST) 2017, describes the authority and procedure for ‘Tax Deduction at Source’. Following persons are eligible to deduct Tax at Source

  • Local Authority.
  • Government Agencies.
  • A department or an establishment of the Central Government or State Government.
  • An individual or a category of individuals who are notified by the government on the recommendations of the council.

Under this, the tax is deducted at 1% from the payment made to the supplier for the taxable goods and services. Under a contract, the total value of supply should exceed Rs. 2,50,000 Lakhs, excluding the amount of Central Tax, State Tax, Union Territory Tax, Integrated Tax and Cess mentioned in the invoice. If the contract value is more than Rs. 2,50,000 Lakhs then TDS will be deducted. However, no TDS will be deducted if the location of the supplier and place of supply is different from the state of registration of the recipient.

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To whom TDS is Payable

TDS collected should be paid to the appropriate government which means:

  • The Central Government in the case of Integrated Goods and Service Tax (IGST) and Central Goods and Service Tax (CGST).
  • To the State Government in the case of State Goods and Service Tax (SGST).

The TDS should be collected within 10 days from the end of the month in which TDS is deducted.

Important Points Required for Deductors to Follow

  • The deductor needs to get registered under Section 23.
  • Obtaining tax deduction and Collection Account Number (TAN), which is issued under Income Tax Act is compulsory.
  • They must deposit the TDS collected by the 10th day of the month, succeeding the month in which TDS was collected and should report it in GSTR-7.
  • The amount which will be deposited as TDS will be shown in the electronic cash ledger of the supplier.
  • As prescribed under the act, non-deduction or non-payment of TDS is an offense under the act and the minimum penalty for this is Rs. 10,000.
  • They are liable to issue a certificate for the TDS deducted within 5 days of the deduction. The certificate contains particulars such as; contract value, the rate of education, the amount deducted and the amount paid to the government.

Consequence for not Complying with the TDS Provisions

Event Consequence
If TDS is not deducted. If interest payable with the TDS amount is not fulfilled then the amount shall be recovered as per the law.
If TDS certificate is not issued beyond the prescribed 5 days. Late fee fine of Rs. 100 per day subject to a maximum of Rs. 5,000.
TDS which has been deducted but not been paid to the government yet. If the interest payable along with to the amount of TDS is not fulfilled, then the amount will be determined and recovered as per the law.
If the late filing of return is done. Late fee penalty of Rs. 100 per day subject to a maximum of Rs. 5,000.

TDS Certificate

TDS Certificate

TDS is a certificate generally issued at the deductor/employer’s letterhead. It is used to track the TDS deducted from a deductee/employee. Under Section 203 of the Income Tax Act, the certificate of TDS payment needs to be furnished by the payer to the payee. For pension payment, it is offered by the bank making the deduction. It is advisable for everyone to request for TDS certificate if you are not provided with one. There are different types of TDS certificate. For example –

  • Form 16 comprising details about tax computation, deduction, and payment for salaried individuals.
  • Form 16A, with details of tax deduction and payment for a nonsalaried individual.

Defining TDS Refund

Tax Deducted at Source is a taxation system where the tax deduction happens at the time of earning. It is deducted by the payer before payment is made from the payee’s income as per the applicable rate where the deducted excess amount gets refunded later. It is quite usual that in a financial year, the investment calculated, when the year begins, does not match the actual investment made at year end, such difference leads to TDS refund.

Criteria to Apply for Tax Refund

A person is eligible to apply for Income Tax Refund if he/she falls under the following situations –

  • If an individual had paid more tax than the liable tax.
  • If the TDS deducted by the payer/employer is more than the tax liability of the individual.
  • If the taxpayer had paid the same tax twice, ie. in India as well as in a foreign country (the Indian Government had agreed not to apply double-taxation).
  • If an individual had not declared investments during TDS deduction to his/her employer which benefits him/her with tax exemptions.

Claiming for Benefits

Claiming for Benefits

Under sub-section (3) of section 34, the Deductee can claim credit by comparing the tax deducted and reflected in the return of deductor furnished.

If the excess amount is deducted by the deductor, then the excess amount deducted will be refunded back. There are two ways by which amount can be claimed

  • If the amount is claimed by deductee in electronic cash ledger: If the deductee claims the amount in the form of electronic cash ledger then refund in such case is not possible. In such case, it is not possible to claim any deduction of TDS by the deductor.
  • If the amount is not claimed by deductee: Subject to the provisions of refund and procedure of the act, refund of the excess TDS deducted is available to deductor.

Differences Between TDS and Income Tax

The difference between TDS and Income Tax can be shown as follows –

TDS Income Tax
TDS is a small amount which is deducted annually, monthly, periodically or occasionally from an individual’s salary or business income. It is levied on the total income of an employee or business.
It is not limited to salary, it includes interest, commission, fee etc. It is limited to salary/ annual income.
The earned income can be regular or irregular. It is levied on regular income.

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