The Goods and Services Tax (GST) has reshaped India’s indirect taxation by bringing uniformity and reducing tax complexities. To strengthen this system further, mechanisms like Tax Deducted at Source (TDS) were introduced. TDS under GST ensures that tax is collected right at the time of making payments for certain supplies, helping the government curb tax evasion and improving cash flow in the system.
Unlike income tax TDS, which individuals and businesses encounter on salaries, contracts, and professional fees, TDS under GST is restricted to specific entities such as government departments, local authorities, and public sector undertakings. These entities, while making payments to suppliers for taxable supplies, must deduct a small percentage of the invoice value as tax and remit it to the government.Â
In this guide, we’ll dive deep into the rules, applicability, rates, procedures, compliance steps, and practical aspects of TDS under GST.Â
TDS in GST is covered under Section 51 of the CGST Act, 2017. The law mandates that notified entities must deduct tax at source when making payments to suppliers for taxable goods and services.Â
This deduction is a fixed percentage of the taxable value (excluding GST and cess) and is required only when the payment amount under a single contract crosses the threshold limit. Once deducted, the amount must be deposited with the government, and the supplier gets the benefit of the deduction as credit in their electronic cash ledger.
Not everyone falls under the ambit of GST TDS. The law specifically notifies certain categories of entities, typically those linked with the government. These include:
It’s worth noting that not all transactions involving these entities are subject to TDS. For example, supplies between PSUs or certain inter-departmental transactions may be exempt from this provision.
The applicability of TDS depends on the value of the contract and the nature of the transaction. Here are the key triggers:
A TDS rate of 2% is currently applied under GST to the taxable value.Â
This simple rate structure makes it easy for deductors to calculate the exact TDS amount.
To comply with GST TDS provisions, deductors must follow a series of steps from registration to certificate issuance:
Entities required to deduct TDS must obtain a GST registration specifically as a TDS deductor. This can be done using their TAN (Tax Deduction Account Number), even if they do not possess a PAN.
When making payment or crediting the supplier, the deductor must withhold 2% of the taxable value.
Deposits must be made with the government within 10 days after the deduction occurs.
Form GSTR-7 must be filed by the 10th of the following month by every deductor. This return contains details of all TDS deductions for that period.
To issue a TDS Certificate, the deductor must submit Form GSTR-7A to the supplier within five days of depositing the tax. This certificate acts as proof of deduction and enables the supplier to claim credit.
Non-compliance with TDS provisions can result in strict penalties and interest.
Thus, timely deduction, deposit, and reporting are essential to avoid unnecessary costs and litigation.
While the onus of compliance rests on the deductor, suppliers also benefit from GST TDS:
This system ensures that suppliers are not financially burdened by TDS; instead, it acts as an advance deposit toward their tax liability.
The GST TDS mechanism has seen several updates to improve efficiency:
TDS under GST is more than just a compliance requirement; it is a critical tool that strengthens the GST ecosystem. By mandating tax deduction at source, the government ensures steady revenue collection while giving suppliers a transparent way to claim credits.
For businesses and government bodies, timely compliance with TDS provisions not only avoids penalties but also builds confidence in their operations. On the other hand, suppliers benefit through the automatic credit system, making the process hassle-free.
As GST compliance continues to evolve, staying vigilant about updates like mandatory invoice-level reporting in GSTR-7 and compulsory nil returns is essential. A robust understanding and disciplined implementation of GST TDS can help entities achieve smooth compliance while contributing to a transparent taxation environment.