Tax Deducted at Source (TDS) under Goods and Service Tax

What is TDS Under GST?

Tax Deducted at Source (TDS) under GST is a system where a predefined percentage of tax is deducted by the payer (deductor) at the time of making payments to suppliers for goods and services. The deducted amount is then deposited with the government, ensuring that the tax is collected upfront and reducing the chances of tax evasion.

The GST TDS applicability criteria specify that only certain transactions and deductors fall under this requirement. The deduction ensures that suppliers fulfill their tax obligations on time, enhancing overall tax compliance in the GST regime.

Key Features of TDS Under GST:

• Tax Collection at Source: The government ensures tax collection directly from payments made to suppliers.
• Applicability Based on Threshold Limit: Deduction applies only when the contract value exceeds the prescribed GST TDS threshold limit.
• Mandatory TDS Compliance for Certain Entities: Only notified entities like government departments, PSUs, and local authorities must deduct GST TDS.
• Seamless Credit for Suppliers: Suppliers can claim credit for the GST TDS deduction against their tax liability.
• Separate TDS Return Filing Obligation: Deductors must file a GST TDS return (GSTR-7) to report deducted amounts and issue a GST TDS certificate (GSTR-7A) to suppliers.

Example Calculation of GST TDS Deduction

Let’s say a government department procures goods worth ₹3,00,000 (excluding GST). Since this transaction falls under TDS applicability under GST, the department must deduct GST TDS before making the payment. The calculation is as follows:

• 1% Central GST (CGST) = ₹3,000
• 1% State GST (SGST) = ₹3,000
• Total GST TDS Deduction = ₹6,000

Thus, instead of paying ₹3,00,000 to the supplier, the department will transfer ₹2,94,000, while depositing ₹6,000 as GST TDS payment with the government.

Why is TDS Under GST Important?

The GST TDS mechanism plays a crucial role in the tax administration system. It ensures that tax is deducted at the point of transaction, preventing tax leakages and improving transparency in tax collection. Key benefits include,

• Reduces Tax Evasion: As tax is collected at the source, it becomes difficult for suppliers to underreport sales.
• Enhanced Compliance: Businesses and suppliers maintain better tax records and adhere to GST laws more effectively.
• Ensures Smooth Tax Credit Flow: Suppliers can claim credit for deducted TDS, reducing the overall tax burden.
• Facilitates Government Revenue Collection: The government receives tax payments in advance, improving cash flow in the system.

Understanding the GST TDS process is essential for businesses, as timely GST TDS deductions, GST TDS return filing, and GST TDS compliance can help avoid penalties, interest, and unnecessary financial burdens. By staying updated with the latest GST TDS guidelines, businesses can ensure smooth financial operations and maintain a good compliance track record.

Who is Required to Deduct TDS Under GST?

Not all businesses are required to deduct TDS under GST. The TDS applicability under GST applies to specific entities as notified under GST laws. These include,

• Government Departments – Ministries, state and central government departments responsible for procurement of goods and services.
• Local Authorities – Municipal corporations, Panchayats, and other local governing bodies responsible for public administration.
• Public Sector Undertakings (PSUs) – Companies in which the government holds significant ownership and operate as commercial entities.
• Other Notified Entities – The government has specifically designated for GST TDS deduction.

Entities falling under these categories must ensure GST TDS compliance by deducting and depositing tax on eligible transactions, filing GST TDS return (GSTR-7), and issuing a GST TDS certificate (GSTR-7A) to the supplier.

When is TDS Under GST Applicable?

GST TDS applicability criteria are based on the value of a contract and the type of transaction. Here are the key conditions when GST TDS deduction is required,

• The contract value exceeds the specified amount limit decided by the government (excluding GST).
• The transaction occurs between a registered supplier and a specified deductor.
• The supply is made within the same state (for CGST and SGST) or between different states (for IGST).

If the contract value is below ₹2,50,000, then GST TDS deduction is not required. Businesses must carefully assess each transaction to ensure proper compliance with GST TDS provisions.

GST TDS Rate and Calculation

The GST TDS rate is set at 2% of the taxable value (excluding GST). The tax is divided as follows,

• 1% Central GST (CGST) – Deposited with the central government.
• 1% State GST (SGST) – Paid to the state government.
• 2% Integrated GST (IGST) – Applied to inter-state transactions.

Example Calculation
Suppose a Public Sector Undertaking (PSU) procures services worth ₹5,00,000 (excluding GST). The GST TDS deduction will be:

• CGST = 1% of ₹5,00,000 = ₹5,000
• SGST = 1% of ₹5,00,000 = ₹5,000
• Total GST TDS Deduction = ₹10,000

The PSU will pay ₹4,90,000 to the supplier and deposit ₹10,000 as GST TDS payment with the government.

How to Register for GST TDS?

Entities required to deduct TDS under GST must obtain a GST TDS registration. Here’s how,

• Visit the GST Portal – www.gst.gov.in
• Click on Services > Registration > New Registration.
• Select “TDS/TCS Deductor” as the type of registration.
• Enter the necessary details, including PAN, TAN, and business entity name.
• Apply and obtain the GST TDS registration certificate upon approval.

Timely GST TDS registration ensures that deductors fulfill their compliance obligations without facing GST TDS penalties or interest charges.

How to Deduct and Deposit GST TDS?

The GST TDS deduction and payment process involves these steps,

• Deduct TDS at the applicable rate while making the payment to the supplier.
• Deposit the deducted TDS with the government by the 10th of the following month.
• File GST TDS return (GSTR-7), providing transaction details.
• Issue a GST TDS certificate (GSTR-7A) to the supplier within 5 days of deposit.

Failure to comply with GST TDS payment timelines can lead to penalties and legal consequences.

GST TDS Return Filing

Entities that deduct TDS under GST must file a GST TDS return (GSTR-7) every month. This return includes,

• GSTIN of the deductor and deductee.
• Invoice details and taxable amount.
• Amount of GST TDS deducted and deposited.
• GST TDS certificate issuance details.

Late Filing Penalties

Late filing of GST TDS return (GSTR-7) attracts penalties of,

• ₹100 per day (CGST) + ₹100 per day (SGST), up to a maximum of ₹5,000.

Staying updated with GST TDS due dates is crucial to avoid unnecessary penalties and interest.

How to Claim TDS Credit?

Suppliers whose tax is deducted can claim GST TDS credit using the following steps,

• Check the electronic cash ledger on the GST portal.
• Use the credited TDS amount to offset GST liabilities.
• Adjust the TDS credit while filing GST returns (GSTR-3B).

The GST TDS compliance checklist ensures that suppliers correctly claim the GST TDS refund process when required.

What Is The Benefit Of TDS To The Deductee (Supplier)?

TDS (Tax Deducted at Source) under GST ensures that tax is collected gradually as transactions occur, rather than waiting until the end of a return period. For the deductee (supplier), this system offers several practical benefits:

• Early tax credit: When GST TDS is deducted by the recipient and deposited on time, the supplier’s input tax credit (ITC) is reflected in their electronic ledger quickly. This means the supplier can use that credit against future tax liabilities without delay.
• Reduced compliance risk: With tax collected at source and recorded directly in the supplier’s account, there is a lower likelihood of mismatches between what the supplier files and what the tax department shows in their records.
• Clear audit trail: TDS entries appear in the supplier’s GST credit ledger and GSTR-2B/2A statements, making reconciliation simpler and reducing disputes during audits.
• Cash flow alignment: Because TDS is collected and credited over the course of the year, large end-of-year tax adjustments are often reduced, helping suppliers manage cash flow more predictably.

In effect, TDS under GST helps suppliers by improving the visibility and timing of tax credits, making compliance smoother and reducing unexpected reconciliation challenges.

Consequences of Non-Compliance with GST TDS Provisions

Failing to adhere to the Tax Deducted at Source (TDS) provisions under the Goods and Services Tax (GST) can lead to severe financial penalties and legal repercussions. Businesses and deductors must ensure timely compliance to avoid unnecessary liabilities. 

Below are the key consequences of non-compliance,

1. Interest on Late Payment
If the deducted TDS amount is not deposited with the government within the stipulated time, an interest penalty is levied. The interest rate applicable is 18% per annum and is calculated from the day following the due date of payment until the actual date of deposit.

2. Penalty for Non-Deduction of TDS
Failure to deduct TDS when required can result in a penalty equal to the amount that was supposed to be deducted. This means the business or deductor may have to bear an additional financial burden equivalent to the TDS amount not deducted.

3. Penalty for Late Filing of GST TDS Returns
Every registered person liable to deduct TDS under GST must file Form GSTR-7 on or before the 10th of the following month. If the return is not filed within the due date, a late fee is applicable as follows,

• ₹100 per day under CGST Act
• ₹100 per day under the SGST Act
• Total late fee = ₹200 per day
• Maximum penalty capped at ₹5,000 per Act (i.e., ₹10,000 combined for CGST & SGST)

The late fee continues to accrue from the due date of filing until the actual date of submission.

How to Avoid GST TDS Penalties?

To remain compliant and avoid penalties, businesses should,

• Deduct GST TDS at the time of payment to suppliers where applicable.
• Deposit the deducted TDS amount within the prescribed timeline.
• File the GSTR-7 return on or before the 10th of every month.
• Maintain accurate records to avoid discrepancies and interest penalties.

By ensuring timely deductions, payments, and filings, businesses can prevent financial and legal troubles associated with GST TDS non-compliance.

Forms Required For Filing GST TDS Returns

When GST TDS applies, the deductor (recipient who deducts tax) must report the details through specific return forms. These forms capture TDS events, help match supplier records, and support accurate credit reflection.

Key forms include:

• GSTR-7: This is the primary TDS return form under GST. Deductors use it to report details of supplies on which TDS has been deducted, along with corresponding tax and invoice information.
• Form for TDS Certificates: Once a deductor files GSTR-7 and deposits the TDS, a TDS certificate is typically generated on the GST portal. This certificate serves as evidence for suppliers to claim the credit.
• Annual Reconciliation (where applicable): Although not universally required for all TDS deductors, some taxpayers reconcile TDS details annually or in broader returns if notified by GST authorities.

Filing these forms correctly and on time ensures that the TDS is credited accurately to the supplier’s account, and that both deductors and deductees remain compliant under GST regulations.

GST TDS Refund Process

If a GST TDS deduction has been made in excess or wrongly deducted, the deductor or deductee can apply for a GST TDS refund using Form GST RFD-01. The refund is typically processed within 60 days, provided all submitted documents are accurate.

Final Thoughts

Businesses dealing with government entities, PSUs, or notified organizations must ensure proper GST TDS compliance to avoid legal issues and financial setbacks. Timely GST TDS deductions, GST TDS payments, and GST TDS return filing help businesses stay compliant and manage their finances effectively.

By following the GST TDS compliance checklist, businesses can ensure smooth tax operations while contributing to a transparent and efficient taxation system in India. Staying compliant with GST TDS rules and guidelines prevents penalties and promotes a more structured tax regime for businesses and suppliers alike.