Understanding TDS under GST: A Layman's Guide

Tax Deduction at Source (TDS) is a familiar concept in income tax, but it also plays a key role in the Goods and Services Tax (GST) regime. Under Section 51 of the CGST Act, 2017, TDS ensures timely tax collection and transparency in high-value transactions. This article explains TDS under GST in simple terms, covering its legal framework, procedural requirements, and recent updates, such as the inclusion of metal scrap dealers.

What is TDS under GST?

TDS under GST is the tax deducted by certain entities (called deductors) when making payments to suppliers (deductees) for taxable goods or services, provided the contract value exceeds a specific threshold. The government introduced TDS to track large transactions and ensure GST is collected promptly.

Legal Basis: Section 51 of the CGST Act, 2017

Section 51(1) mandates specific entities to deduct TDS at 2% of the taxable value (excluding GST components like CGST, SGST, IGST, or cess) when:

• The total contract value (excluding GST) exceeds Rs. 2.5 lakh.

• The supplier is a registered person under GST.

For intra-state supplies, the TDS rate is 1% CGST + 1% SGST/UTGST (total 2%). For inter-state supplies, it is 2% IGST.

Who Must Deduct TDS?

• The following entities are notified as deductors under Notification No. 50/2018-Central Tax:

• Departments of the Central or State Government,

• Local authorities,

• Government agencies,

• Entities with 51% or more government equity/control (as clarified by Circular No. 76/50/2018-GST),

• Notified persons, such as metal scrap dealers (per Notification No. 25/2024-Central Tax, effective 10.10.2024).

Key Points:

• TDS is deducted only on the taxable value, not on GST components.

• The deducted TDS must be deposited by the deductor by the 10th of the following month (Section 51(2)).

• A TDS certificate in FORM GSTR-7A must be issued to the deductee within 5 days of depositing the TDS (Section 51(3), Rule 66(3)).

• The deductee can claim the TDS amount in their electronic cash ledger to offset GST liabilities (Section 51(5)). This is not considered Input Tax Credit (ITC) under Section 16.

When is TDS Not Applicable?

• TDS under GST does not apply if:

• The total contract value (excluding GST) is Rs. 2.5 lakh or less,

• The supplier is an unregistered person (unless specifically notified),

• The transaction involves exempt or non-taxable goods/services,

• The supply is between government entities (as clarified by Circular No. 76/50/2018-GST).

TDS Registration Requirement: Rule 12 of CGST Rules

Entities required to deduct TDS must register under GST using FORM GST REG-07 (Rule 12(1)). If they do not have a PAN, they can apply without one (Rule 12(1A)).

Entities with no physical presence in the State/UT of deduction can register by specifying a different State as their principal place of business, as facilitated by the GST portal. Upon approval, a certificate is issued in FORM GST REG-06.

If a deductor is later found not liable to deduct TDS, their registration is cancelled using FORM GST REG-08 as per Rule 12(3).

Recent Developments and Notifications

1. Notification No. 25/2024-Central Tax – Metal Scrap Dealers

Effective 10.10.2024, Notification No. 25/2024-Central Tax inserts Section 51(1A), mandating registered buyers of metal scrap (classified under Chapters 72 to 81 of the Customs Tariff Act, 1975) to deduct TDS when purchasing from another registered supplier. This targets tax evasion in the informal scrap trade sector.

To comply:

• Buyers must register using FORM GST REG-07.

• In Part B, Table 2 under "Constitution of Business," select "Others" and enter "Metal Scrap Dealers" in the textbox.

2. Notification No. 17/2024-Central Tax – Sequential Filing of GSTR-7

Effective 01.11.2024, Notification No. 17/2024-Central Tax amends Rule 66(1) to enforce sequential filing of GSTR-7. The GST portal prevents filing for a later period (e.g., November) if an earlier period (e.g., October) is pending. Even if no TDS is deducted in a month, a NIL GSTR-7 must be filed (Rule 66(1)).

GSTR-7: Return Filing for TDS

GSTR-7 is the monthly return filed by TDS deductors, containing:

• Supplier details (GSTIN),

• Amount paid,

• TDS deducted,

• Amount deposited to the government.

Upon filing GSTR-7, the TDS amount is credited to the deductee's electronic cash ledger, which they can use to pay GST liabilities.

TDS Deducted Before Registration

Some metal scrap dealers faced issues in October 2024, having deducted TDS before receiving registration in November. Since GSTR-7 cannot be filed for a month prior to registration, GSTN advised reporting the combined TDS deducted from 10.10.2024 to 30.11.2024 in the November GSTR-7 return.

Circular No. 76/50/2018-GST – Clarifications

Circular No. 76/50/2018-GST clarifies:

• Only entities with 51% or more government equity/control are liable to deduct TDS under Section 51.

• TDS does not apply to supplies between government entities or for exempt services.

• TDS is applicable only to taxable supplies from registered suppliers.

Interest and Penalty for Non-Compliance

If a deductor fails to deposit TDS:

• Interest is payable under Section 50(1),

• Recovery proceedings may be initiated under Sections 73, 74, or 74A,

• No refund is allowed to the deductor if the TDS is credited to the deductee’s ledger (Section 51(7)).

If TDS is deducted in error or excess:

• A refund can be claimed under Section 54 and Rule 89.

• If the TDS is credited to the deductee’s ledger, the deductee claims the refund.

• If not credited, the deductor can claim it.

• No refund is granted to the deductor if the amount is credited to the deductee (Section 54(8)(b)).

Summary for Easy Reference

Conclusion

TDS under GST is a compliance mechanism to ensure tax collection from high-value transactions and formalize sectors like metal scrap trading. With recent updates, including Notification No. 25/2024 and sequential GSTR-7 filing, the GST regime promotes accountability and transparency. Businesses must comply with registration, return filing, and TDS deposit requirements to avoid penalties. By understanding these simplified rules, even small traders can navigate TDS under GST confidently. For complex cases, consulting a tax professional is advisable.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.