Understanding how to deduct TDS on a GST bill is essential for businesses and organizations that make payments to vendors or service providers. Under Indian tax laws, certain deductors are required to deduct tax at source (TDS) when making payments exceeding specific thresholds. When the invoice includes GST, there are clear rules about how TDS should be calculated. Failing to deduct TDS correctly can lead to compliance issues, penalties, or delays in vendor payments. This guide provides a detailed explanation of how to deduct TDS on GST bills with an example, helping you comply with tax laws smoothly and accurately.
What is TDS on GST?
Overview of TDS under GST Regime
TDS (Tax Deducted at Source) under GST is a mechanism to collect tax at the time of payment to the supplier. It ensures timely collection and remittance of GST to the government. According to Section 51 of the CGST Act, certain entities such as government departments, public sector undertakings, or notified organizations are required to deduct TDS at 2% (1% CGST + 1% SGST or 2% IGST) on payments made to suppliers of taxable goods or services, provided the contract value exceeds ₹2.5 lakh (excluding GST).
Who Is Liable to Deduct TDS?
The following entities must deduct TDS on applicable GST bills:
- Government departments and establishments
- Local authorities
- Agencies or bodies set up by the government
- Public sector undertakings (PSUs)
If these entities make payments to vendors under a contract that meets the threshold limit, they must deduct TDS before releasing the payment.
When Is TDS Applicable on GST Bills?
TDS under GST is applicable only if all the following conditions are met:
- The total value of supply under a contract exceeds ₹2.5 lakh (excluding GST).
- The supplier is registered under GST.
- The supply is made to the deductor (not between two unregistered persons).
- The place of supply and location of supplier/deductor are in the same state (intra-state) or different states (inter-state), depending on the nature of the contract.
TDS is not applicable when the location of the supplier and place of supply are in a different state from the recipient. In such cases, it is not required to deduct TDS under GST.
How to Calculate TDS on GST Bill
Should GST Be Included in TDS Calculation?
No, TDS under GST is calculated on the taxable value of goods or services, not on the total invoice amount including GST. This is a crucial point. You must exclude the GST component from the taxable value when computing the TDS amount.
Applicable TDS Rates
The TDS rate is 2%, which is further divided as:
- 1% CGST and 1% SGST for intra-state supplies
- 2% IGST for inter-state supplies
Example to Understand TDS Deduction
Let’s consider a practical example to illustrate how to deduct TDS on a GST bill.
Invoice Details:
- Supplier: XYZ Pvt Ltd (GST registered)
- Recipient: ABC Govt Department
- Contract Value (excluding GST): ₹3,00,000
- GST @18% (CGST 9% + SGST 9%): ₹54,000
- Total Invoice Amount: ₹3,54,000
Step-by-Step Calculation:
- The total value of supply is ₹3,00,000 which is above the threshold of ₹2,50,000.
- The supplier is GST registered, and the recipient is a government entity, so TDS is applicable.
- TDS is calculated only on ₹3,00,000 (excluding ₹54,000 GST).
- TDS @2% of ₹3,00,000 = ₹6,000
- This ₹6,000 is deducted before making the payment to the supplier.
Payment to Supplier:
Total Invoice Value: ₹3,54,000
TDS Deducted: ₹6,000
Net Payment to Supplier: ₹3,48,000
The deducted amount is then deposited to the government under the supplier’s GSTIN through Form GSTR-7.
How to Deduct and Deposit TDS under GST
Steps for Deduction and Payment
- Verify that TDS is applicable for the transaction.
- Calculate TDS on the taxable value (excluding GST).
- Deduct the applicable TDS before making payment to the supplier.
- Deposit the deducted amount with the government using GST portal.
- File GSTR-7 by the 10th of the following month.
The deductee (supplier) can view the TDS details in their GSTR-2A and claim the TDS amount as credit in their electronic cash ledger.
Documents Required for TDS Deduction
To correctly deduct and deposit TDS, ensure you maintain the following documents:
- Tax invoice issued by the supplier
- Contract or purchase order mentioning the total value
- Vendor’s GSTIN and registration details
- TDS deduction certificate (issued in Form GSTR-7A)
Common Errors to Avoid
- Including GST amount while calculating TDS
- Deducting TDS when value is below ₹2.5 lakh
- Not depositing TDS on time, which may attract penalties
- Incorrect GSTIN while depositing the deducted TDS
Proper understanding and verification are essential to avoid these common mistakes.
Benefits of Correct TDS Deduction
Following the correct method of deducting TDS on GST bills helps in:
- Staying compliant with tax regulations
- Avoiding late fees and penalties
- Ensuring smooth reconciliation of TDS for the supplier
- Improving vendor relations by reducing disputes
Knowing how to deduct TDS on GST bills is a vital responsibility for government departments and notified entities. The key is to identify whether TDS applies, ensure the value threshold is met, and calculate TDS only on the taxable amount excluding GST. By following the example and guidelines provided, deductors can maintain compliance while supporting the proper functioning of the GST ecosystem. Always double-check documentation and file returns accurately to keep your financial operations running smoothly.