SEPTEMBER 27, 2016

By M G Kodandaram

ONE of the premises that needs to be understood by the Central Tax Officers is the concept of 'Tax Deduction at Source' (TDS) proposed in model GST law. The procedure of TDS is in vogue in several State VAT laws and it is operational in a restricted sense. To ensure that small suppliers are not able to evade taxes in specific areas like works contract, some States do deduct TDS under VAT. There is possibility of this being confused with full or partial reverse charge mechanism (Tax shift) existing in Service tax laws. Therefore, I thought of analysing the implications of this provision in the proposed GST regime.

In the draft Model GST law, as approved by Empowered Committee this June, in the Chapter-IX of CGST/SGST Act, Section 37 stipulates the law regarding TDS in respect of the above Acts. This Section provides for deduction of tax in certain circumstances. Similar provisions are not incorporated in draft IGST Act. Therefore it can be concluded that the application of TDS is limited to only Intra-state sales under SGST/CGST Act.

As against this, the Reverse charge mechanism is shift of levy (Tax shift) from the Service Provider to Service Receiver or Aggregator. Such tax paid by the Service Receiver could be utilized as an Input service credit by him, if eligible under Cenvat Credit Rules, 2004.

The categories of persons who have to follow the TDS procedure are (a) a department or establishment of the Central or State Government, or (b) Local Authority, or (c) Governmental agencies, or (d) such persons or category of persons as may be notified, by the Central or a State Government on the recommendations of the Council. These persons being recipients of 'Goods or Service or both', from supplier are termed as 'Deductor', and the suppliers are called the 'Deductee'. The addition or deletions of categories of persons are to befinalized as per the recommendations of the GST Council and, therefore, it can be assumed that the list has not reached finality. Similarly, the list of taxable goods and/or services are to be notified by the Central or a State Governments on the recommendations of the Council. Therefore, TDS procedure may not be applicable in respect of all taxable supplies. However the TDS is applicable in respect of a contract, pertaining to the specified taxable supplies exceeding Rupees ten lakhs. Further, it is explained that for the purpose of the deduction of tax specified, the value of supply shall be taken as the amount excluding the tax indicated in the invoice.

Now let us examine the rate of deduction required. Under Section 37(1) the rate of tax deduction is stipulated as follows: 'to deduct tax at the rate of one percent from the payment made or credited to the supplier'. The deduction of 1% tax is applicable to both CGST Act and SGST Act. Therefore it can be concluded that rate of deduction is 1% under CGST Act and 1% SGST Act. This could have been expressly provided in the draft enactments. Further, whether it is 1% of the full contract value or tax component of the amount payable (of the contracted value) is not clear from the draft law, which needs to be properly worded. This type of embedded ambiguity will surely start litigation, which does not serve any useful purpose. I will come back to this issue in the later part of this paper.

The amount so deducted has to be deposited by the deductor within ten days after the end of the month in which such deductions are made, in the manner prescribed. If the deductor fails to pay to the credit of the appropriate Government the amount so deducted as tax, in addition to the amount of tax deducted,he is liable to pay interest in accordance with the provisions of Section 36. Later, a certificate containing payment details, value, rate of deduction, amount deducted and other prescribed details needs to be issued by the deductor to the deductee within five days of crediting the amount. Delay or failure in issue of certificate attracts late fee of rupees one hundred per day extending upto Rupees five thousand. Any refund to the deductor or the deductee arising on account of excess or erroneous deduction will be dealt in accordance with the provisions of Section 38. As per Section 27 (5) every registered taxable person required to deduct tax at source shall furnish a return, electronically, in form GSTR-7 and in such manner as may be prescribed, for the month in which such deductions have been made along with the payment of tax so deducted, within ten days after the end of such month. The report of the joint committee on business process for GST on GST Return, as approved by Empowered Committee, released in October 2015 in respect TDS return prescribes that the details of GSTIN of the Supplier along with the invoices against which the Tax has been deducted to be furnished. It further states that, 'this will also contain the details of tax deducted against each major head i.e. CGST, SGST and IGST.' But as already observed above, the TDS provisions are not incorporated in IGST Act and therefore it appears that indicating deductions under IGST head is contrary to the Law proposed.

The TDS deductee shall claim credit, in his cash ledger, of the tax deducted and reflected in the return of the deductor. Recovery of the amount in default under this section shall be made in the manner specified in Section 20. For all these purposes,specific procedures in the form of Rules need to be prescribed. Therefore necessary Rules are awaited for explaining the specific procedure to be followed.

As already mentioned the rate of deduction is not properly worded in the proposed draft. If the intention of the authorities is only to collect 1% of the tax amount involved, the draftlaws may be worded as under:

" Section 37. Tax deduction at source

For CGST Act

Notwithstanding .. Central Government may mandate, (a) …...category of persons as may be notified, by the Central Government on the recommendations of the Council, [hereinafter referred to in this section as "the deductor"], shall deduct an amount at the rate of one percent on the tax component involved in the payment made or credited to the supplier of taxable goods and/or services, notified by the Central on the recommendations of the Council, in respect of all payment made to the supplier[hereinafter referred to in this section as "the deductee"], wherein the total value of supply, under a contract, exceeds rupees ten lakh.

For SGST Act

Notwithstanding .. State Government may mandate, (a) …...category of persons as may be notified, by the State Government on the recommendations of the Council, [hereinafter referred to in this section as "the deductor"], to deduct an amount at the rate of one percent on the tax component involved in the payment made or credited to the supplier of taxable goods and/or services, notified by the State on the recommendations of the Council, in respect of all payment made to the supplier [hereinafter referred to in this section as "the deductee"], wherein the total value of supply, under a contract, exceeds rupees ten lakh.

Explanation. - For the purpose of this section, the total value of supply means the value of supply excluding the GST payable. "

The compliance requirements for the registered person will increase as they have to withhold the tax and fill many forms, but the government will be able to increase its tax collections and plug leakages.The deductors are going to be (a) department or establishment of the Central or State Government, or (b) Local Authority, or (c) Governmental agencies. The timely compliance by these Authorities with the provisions of the law so that the supplier will not suffer is also to be considered before finalizing the TDS Scheme.

(The author is Superintendent of Central Excise and Customs &faculty at National Academy of Customs, Excise and Narcotics (NACEN), Bengaluru.The views expressed are strictly personal.)