Understanding TDS and Service Tax: What Does the Latest CBDT Circular Mean for You?

Clarification on TDS and Service Tax

CBDT, via a circular dated 13.1.2014 (copy attached), has clarified that TDS will not be applicable on service tax if the same has been charged separately in the bill.

Thanks

Suppose a person charges a consultancy fee of Rs. 10,000/- and gives a bill for Rs. 11,236/- (including 12.36% service tax of Rs. 1,236) to his client. The client has to deduct TDS of 10% while making payment. Now the question is on which amount he has to deduct TDS - on Rs. 10,000 or on Rs. 11,236? Logically, TDS should not be applicable on the service tax of Rs. 1,236/- since it goes to the government. Till now, the view taken by the IT Dept. was that TDS should be deducted on the full bill value (including service tax). Now, based on the decision of the Rajasthan High Court, it has been clarified that TDS is not applicable on the service tax amount charged separately in the bill. Earlier, people had to wait for a long time to get a refund due to the higher rate of TDS. Now, its effect will be that a lesser amount will be blocked in TDS. In the above example, TDS was earlier Rs. 1,123.60, which will now be reduced to Rs. 1,000/-.

Regards,

Thank you for the lucid and clear explanation and the illustrative example. As a member who has looked forward to such timely notifications posted by you, it has helped me, and I am sure it would be helpful to others who are not very conversant with tax matters. I would sincerely appreciate it if you include such original write-ups, wherever necessary, in your posts in the future too.

Warm regards.

Thank you, PCA! I have been seeing posts on this matter all day on various sites. However, I was not able to locate the original notification anywhere. You have saved me a lot of trouble 

One clarification that I would like to add here: The above notification specifically says that the agreement between the parties must mention service tax separately. So, the contracts must be reviewed to ensure the IT department does not catch on a technicality during the assessment to create problems.

Appreciate the post. Some relevant information is as follows:

CBDT Circular on TDS and Service Tax

CBDT had issued Circular No. 4/2008 dated 28.04.2008, wherein it was clarified that tax is to be deducted at the source under Section 194-I of the Income-tax Act, 1961, on the amount of rent paid/payable without including the service tax component.

Representations/letters have been received seeking clarification on whether such a principle can be extended to other provisions of the Act as well.

The Board had actually clarified in Letter F.No. 275/73/2007-IT(B), dated 30-6-2008 as follows:

Deduction of Tax at Source on Service Tax

The payments made under Section 194-I differ significantly from payments made under Section 194J in the way that in the case of 194-I, TDS has to be deducted on any income paid as rent. However, in the case of Section 194J, TDS has to be deducted on any sum paid as professional and technical fees. The Board had decided to exclude TDS on the service tax component on rental payment because it was construed that the service tax payment cannot be regarded as income of the landlord. Since Section 194J covers any sum paid, the Board has decided not to extend the scope of Circular No. 4/2008, dated April 28, 2008, to such payment under Section 194J.

In any case, the Board seems to have forgotten this letter. They are reminded of a recent judgment of 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, holding 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.

On re-examination of the matter, in exercise of the powers conferred under Section 119 of the Act, the Board 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 the source under Chapter XVII-B of the Act on the amount paid/payable without including such a service tax component.

(CBDT Circular No. 1/2014 in F. No. 275/59/2012-IT(B), Dated: January 13, 2014).