TDS Under GST — When & How to Deduct TDS on GST Invoices
What is TDS Under GST?
Tax Deducted at Source (TDS) under the GST regime (governed by Section 51 of the CGST Act) is a mechanism intended to track high-value transactions and prevent tax evasion. When a specified entity makes a payment to a supplier for taxable goods or services, they are required to deduct a small percentage of the payment as tax and deposit it directly with the government.
The supplier can later claim this deducted amount as a credit in their electronic cash ledger and use it to offset their overall GST liabilities.
Crucial Distinction: Do not confuse TDS under GST with TDS under the Income Tax Act (like Section 194J for professional fees). It is entirely possible that a single invoice to a government department suffers deductions under both the Income Tax Act and the GST Act.
Who Must Deduct TDS Under GST?
Unlike Income Tax TDS, which applies to a wide range of corporate entities, GST TDS is highly specific. The mandate to deduct TDS under GST applies only to:
- Departments or establishments of the Central Government or State Government.
- Local authorities (Municipal Corporations, Panchayats).
- Government agencies.
- An authority or a board set up by an Act of Parliament or a State Legislature (with 51%+ government equity).
- Societies established by the Central or State Government or a Local Authority.
- Public Sector Undertakings (PSUs).
Note: Private limited companies, LLPs, and sole proprietors generally DO NOT deduct TDS under GST when paying their vendors.
Applicability and Rate of TDS
| Condition / Detail | Rule |
|---|---|
| Threshold Limit | Total value of supply under a single contract must exceed ₹2.5 Lakhs. |
| Value Calculation | The ₹2.5L limit excludes the CGST, SGST, or IGST applied on the invoice. |
| TDS Rate | 2% total (1% CGST + 1% SGST for intra-state; 2% IGST for inter-state). |
| Exemption | No TDS if the location of the supplier and place of supply are in a state different from the deductor's registration state. |
How to Show TDS on a GST Invoice
As a supplier, you issue your standard tax invoice with the full value and full GST amounts. The buyer (the government entity) is responsible for calculating and deducting the TDS before paying you.
However, for clarity and to prevent payment disputes, it is best practice to add a note or a deduction line on your invoice indicating the expected TDS.
Example Calculation:
- Taxable Value of Supply: ₹3,00,000
- CGST (9%): ₹27,000
- SGST (9%): ₹27,000
- Invoice Total: ₹3,54,000
- Expected TDS (2% of ₹3,00,000): -₹6,000
- Net Payment to be Received: ₹3,48,000
Return Filing and Claiming TDS
- The deductor (the government entity) files form GSTR-7 by the 10th of the following month and issues a TDS certificate to the supplier (Form GSTR-7A).
- The deducted amount is automatically reflected in the supplier's TDS and TCS Credit Received table on the GST portal.
- The supplier accepts this data, and the amount is credited to their Electronic Cash Ledger.
- The supplier can use this cash balance to pay their outward tax liabilities or claim a refund.
Frequently Asked Questions
What is TDS under GST?
TDS under GST is a mechanism where specified entities (mostly government bodies) must deduct 2% tax from the payment made to a supplier if the contract value exceeds ₹2.5 Lakhs.
Who is liable to deduct TDS under GST?
According to Section 51 of the CGST Act, TDS must be deducted by Central/State Government departments, local authorities, governmental agencies, and PSUs. Private businesses generally do not deduct TDS under GST.
What is the rate of TDS under GST?
The rate is 2%. For intra-state supplies, this is 1% CGST + 1% SGST. For inter-state supplies, it is 2% IGST.
How does the supplier claim the deducted TDS?
The deductor files a GSTR-7 return, after which the deducted amount automatically reflects in the electronic cash ledger of the supplier on the GST portal. It can be used to pay GST liabilities.