TDS not to be Deducted on Service Tax Component shown Separately

CBDT clarifies TDS on Service Tax Amount

Whether to deduct TDS on Service Tax Amount? This question had always put

deductor in difficulty. The question always comes that whether TDS is to be

deducted on the entire amount of the invoice i.e. including service tax or only on

the payment made towards services i.e. excluding service tax.

Since there was no clarification on this, deductor, to be in safer side tends to

deduct TDS on the entire invoice amount including service tax except in the case

of rent under section 194I.

Circular No. 4/2008 : CBDT had earlier issued a Circular No. 4/2008 dated

28.04.2008 clarifying that TDS is to be deducted under section 194I of the

Income-tax Act, 1961 on the amount of rent paid/payable without including the

service tax amount.

Representations/letters have been received by CBDT seeking clarification

whether such principle can be extended to other provisions of the Act also.

Verdict on the same question was given by the Rajasthan High Court dated

01.07.2013, in the case of CIT(TDS) Jaipur vs Rajasthan Urban

Infrastructure – 2013-TIOL-663-HC-RAJ-IT. Court held that if as per the terms

of the agreement between the payer and the payee, the amount of service tax is

to be paid separately and was not included in the fees for professional

services or technical services, no TDS is required to be made on the service tax

component u/s 194J of the Act.

Circular 01/2014 : Following the above judgment, CBDT vice Circular 01/2014

dated 13.01.2014 has decided that wherever in terms of the agreement/

contract between the payer and the payee, the service tax component

comprised in the amount payable to a resident is indicated separately, tax shall

be deducted at source on the amount paid/payable without including such

service tax amount.

TDS on Service Tax under New Rule Two points have to be complied to escape from deducting TDS on

service Tax:

1. Applicable only to resident deductee; and

2. Service Tax is to be Shown Separately in the Invoice.

Let's see how this new rule works:

Service Tax shown separately Service Tax not shown Separately

Value of Services: 40,00,000

Service Tax @ 12.36%: 4,94,400

Total Invoice Amount: 44,94,400

TDS @ 10% 4,00,000

(Only on Value of Services)

Value of Services: 44,94,400

Total Invoice Amount: 44,94,400

(Including Service Tax)

TDS @ 10% 4,49,440

(On Value of Services + Service Tax

Amount)

Before this Circular even if you have shown service tax separately, TDS is to be

deducted as per case 2 except under section 194I.