TDS under GST: Rates, Exemption & Compliance

TDS under GST serves as a critical compliance mechanism to enhance transparency and ensure timely tax collection within India’s GST framework. It mandates specified entities to deduct tax on payments for taxable supplies, significantly influencing financial operations and statutory adherence. In this article, you will learn about TDS under GST, the key legal provisions, who it applies to, the deduction rates, and the steps needed to stay compliant.

What is TDS under Goods and Services Tax?

TDS under Goods and Services Tax refers to the mechanism where the recipient of certain goods or services is obligated to deduct a specified percentage of tax from the payment made to the supplier. Unlike traditional TDS under the Income Tax Act, which applies to income earned, TDS under GST applies to payments for taxable supplies of goods or services.

TDS under GST is given in Section 51 of the CGST Act and Rule 66 of the CGST Rules. It came into effect on 1st October 2018. The main aim of TDS under Goods and Services Tax is to make tax collection easy, ensure compliance, and create a record of transactions to stop tax evasion.

Who is Liable to Deduct TDS under the GST Law?

Below is a detailed list of who is liable to deduct TDS under GST law:

• Local authorities
• Departments and Establishments of the central or state government
• Authorities boards or other bodies set up by the Parliament or State Legislatures with 51% or more government control
• Government Agencies
• Public Sector Undertaking (PSUs)
• The government established this society and registered it under the Societies Registration Act, 1860.

Rate and Calculation of TDS under GST

Under section 51 of the CGST Act, 2017, TDS under GST applied across India. Here is a list of the prescribed along with sample calculation:

For Intra-State Supplies:

• 1% CGST
• 1% SGST
• Total: 2%

For Inter-State Supplies:

• 2% IGST

TDS is deducted only on the taxable value of the supply, excluding GST. It is applicable when the contract value exceeds ?2.5 lakhs.

Example Calculation

Suppose a government department in India enters into a supply contract worth ?4,00,000 with GST @18%:

• Taxable Value (Supply Value): ?4,00,000
• GST: 18% of ?4,00,000 = ?72,000
• Total Invoice Value: ?4,72,000
• TDS Calculation(CGST+SGST=1%+1%): 2% of ?4,00,000 = ?8,000
• Net Payment to Supplier: ?4,72,000 - ?8,000 = ?4,64,000

When Is TDS Applicable Under GST?

Under the Goods and Services Tax (GST) regime in India, Tax Deducted at Source (TDS) is a compliance mechanism meant to track large business transactions, primarily involving the government and public sector bodies. It is governed by Section 51 of the CGST Act, 2017.

Two key conditions must be met for TDS under GST to apply:

1. The Recipient Must Be a Government Department, Local Authority, or a Notified Entity

TDS provisions are not applicable to all buyers or recipients. The law specifically targets certain public-sector-related bodies to deduct TDS when they make purchases.

These include:

• Central and State Government departments
• Local authorities (e.g., Municipal Corporations, Panchayats)
• Government agencies (e.g., Railways, Irrigation Departments)
• Public Sector Undertakings (PSUs)
• Entities notified by the government, such as statutory bodies, universities, or boards funded by the government

The rationale behind this is that these entities handle large volumes of public money and are expected to help enforce tax compliance among suppliers and contractors by deducting tax at source.

2. The Supply Must Be Made Under a Contract

TDS under GST is not applicable to casual or ad-hoc purchases. The supply of goods or services must occur under a formal or structured contract between the supplier and the recipient. This ensures traceability and proper record-keeping.

Common examples include:

• Works Contracts: These involve construction, repair, or renovation projects where materials and labor are supplied.
• Service Contracts: These include consultancy, manpower services, IT support, or maintenance agreements.
• Supply Contracts: Where goods are delivered in bulk under a signed agreement or tender.

If there’s no contract, or if the contract value is below the specified threshold (currently ?2.5 lakh excluding GST), TDS will not apply, even if the recipient is a government body.

Example Scenario:

A State Government department enters into a contract with a registered supplier for ?4,00,000 (excluding GST) to provide civil construction services.

• Since the recipient is a government department
• The supply is made under a formal contract
• The value exceeds ?2.5 lakh

TDS @ 2% must be deducted by the department and deposited to the government.

Registration Requirement and Process:

Listed below are the registration requirements and process to deduct TDS under Goods and Services Tax:

Step 1: Mandatory Registration

Every entity that deducts TDS under Goods and Services Tax must obtain a separate GST registration as a TDS deductor. This rule applies to government departments, local authorities, and other notified bodies. The law does not set any turnover limit for this registration. This ensures that all transactions subject to TDS fall under GST oversight. The government uses this oversight to maintain transparency and accountability in tax collection.

Step 2: Use of TAN for Registration

A valid Tax Deduction and Collection Account Number (TAN) under the Income Tax Act, 1961, is essential for TDS deductor registration under GST. TAN identifies the deductor and links their GST records with their income tax obligations. The GST system accepts TAN instead of the usual PAN, which simplifies registration for government departments and other agencies.

Step 3: PAN is not Mandatory

For most GST registrations, a Permanent Account Number (PAN) is mandatory. However, the GST rules provide an exception for TDS deductors. TDS deductors do not need a PAN to register under GST. Instead, the law allows them to use their TAN to complete the process. This provision simplifies compliance for government departments and agencies that already hold a TAN.

Step 4: Online Registration

TDS deductors must register through the GST portal. The process requires the deductor to log in to the portal and submit details such as their TAN and other relevant information. The online system verifies these details and issues a GSTIN for TDS deduction. This digital process avoids paperwork and makes registration quick and efficient.

Exemption from TDS Applicability under GST

Listed below are the exemptions from TDS under GST:

1. Contract Value Below ?2.5 Lakh

TDS deduction does not apply when the total value of a single contract is ?2.5 lakh or less, excluding GST. This threshold excludes smaller transactions from TDS requirements and reduces the administrative burden for both deductors and suppliers.

2. Exempt or Nil-Rated Supplies

Supplies that carry a GST exemption or have a zero GST rate do not attract TDS. This exemption ensures that TDS does not apply to transactions with no GST charge and maintains the principle of not taxing exempt supplies.

3. Transactions Under Reverse Charge Mechanism (RCM)

When GST is paid under reverse charge, the recipient pays the tax directly to the government. Since the recipient pays the tax, TDS is not deducted in these cases.

4. Payments to Unregistered Suppliers

TDS under GST does not apply to payments made to suppliers who are not registered under GST. This exemption prevents difficulties in deducting tax from unregistered suppliers who do not file GST returns.

5. Supplies Between Certain Governments or Specified Entities

Certain government departments or notified entities do not fall under TDS deduction rules. This exception simplifies compliance for organisations that operate under special administrative frameworks.

6. Cess Component of GST

The cess portion of the invoice amount does not attract TDS. TDS applies only to the taxable value, excluding GST and cess, to ensure tax deduction occurs only on the actual supply value.

7. Advance Payments Made Before 1st October 2018

As of 2025, the provisions regarding TDS under GST remain consistent with the original guidelines established in 2018. Specifically, if an advance payment is made before 01-10-2018 and the corresponding invoice is raised on or after this date, TDS is not applicable to those advance amounts. This ensures that there are no retroactive TDS deductions on transactions predating the implementation of TDS under GST.

8. Supplies Not Subject to GST

Certain goods, such as petroleum products, natural gas, and alcohol for human consumption, are outside the GST ambit. Hence, payments for these goods do not require a TDS deduction under GST.

Certificate of TDS under GST

Under GST rules, the person who deducts TDS must give a TDS certificate to the supplier. This certificate shows how much tax was deducted from the payment. The certificate must be given within five days after the tax is paid to the government.

The certificate is called Form GSTR-7A. It is automatically made on the GST website when the TDS deductor files the GSTR-7 return. So, the deductor needs to file this return on time. Both the supplier and the deductor can see this certificate online. Listed below are the important details that form GSTR-7A has:

• Certificate number
• Name and GST number of the deductor
• GST number of the supplier
• Value of goods or services supplied
• TDS rate and amount deducted
• The period when the tax was deducted and paid
• Other important information

This certificate helps the government check if the tax deducted and paid is correct. This system works like the Income Tax system, where the TDS deducted is shown in Form 26AS, helping to match the tax deducted with the tax paid.

Due Date of Depositing TDS with the Government

The person who deducts TDS under GST deposits the deducted tax with the government on or before the 10th day of the month after the month in which the tax deduction happens. For example, if a TDS deduction happens in January, the payment reaches the government on or before February 10. This deadline ensures timely transfer of the deducted amount and keeps compliance with GST rules.

Penalties for Non-Compliance with TDS under GST

Below is a list of the penalties for non-compliance with TDS under Good and Service Tax:

1. TDS Not Deducted

If a person does not deduct TDS when required, they must pay interest at 18% on the TDS amount. If the amount remains unpaid, the government will recover it according to the law.

2. Delay or Failure in Issuing TDS Certificate

If the TDS certificate is not issued within 5 days of payment, a late fee of ?100 per day applies. This fee can go up to a maximum of ?5,000 under each tax act.

3. TDS Deducted but Not Paid or Paid Late

If the deducted TDS is not paid or paid after the due date (10th of the next month), the deductor must pay interest at 18%. The interest starts from the day after the due date until the actual payment day. The government can recover the amount as per the law if not paid.

4. Late Filing of TDS Return

If the TDS return is filed late, a late fee of ?100 per day applies. This fee can reach a maximum of ?5,000 under each tax act.

Refund of TDS under GST:

When a person deducts TDS under GST, there may be a situation where the deducted amount is more than required. In such cases, the extra amount does go to the government, it gets refunded. To get a TDS refund

• If the deducted amount is already added to the electronic cash ledger of the supplier, the deductor cannot claim it as a refund.
• The supplier that is the deductee can claim a refund of the extra tax, but only according to the refund rules of the GST Act.
• The deductee needs to file a refund application as per the GST law. The government verifies the claim before refunding the extra amount.

Conclusion

To sum up, TDS under GST is crucial for tax compliance and transparent business practices in India. It ensures that taxes are collected on time and strengthens accountability for businesses and government agencies alike.

To navigate this complex process smoothly, Online Legal India is your trusted partner. Their expert team simplifies the TDS compliance process, manages all legal paperwork, and ensures you stay on the right side of the law. You can avoid penalties, secure your finances, and focus on growing your business with complete peace of mind. Their expertise keeps your operations compliant and your finances safe.