Understanding TDS: Does It Include Service Tax from Your Invoice?

I need help understanding how TDS is calculated. Also, I have another question: Does the TDS calculation include the Service Tax amount mentioned in the invoice/bill?

Thanks and regards,
Bijay

TDS Calculation on Gross Amount

TDS is calculated on the gross amount of the bill (excluding service tax).

Example:
- Bill amount: Rs 100
- Service Tax: Rs 12.36
- Total: Rs 112.36

If the rate of TDS is 10%, then you will deduct TDS on Rs 100 @ 10%, i.e., Rs 10. The payment to the vendor shall be Rs (100-10) + 12.36 = Rs 102.36.

I hope the matter is clear now.

Greetings, and thanks for clarifying my doubt. However, when we raise a bill, the amount against services plus service tax makes my total bill. In such cases, some of our clients deduct TDS on this bill amount. That means they include the service tax amount for the deduction. Upon asking, they say, "the TDS will be deducted on the total bill amount." The same is mentioned in the bill, which also includes the service tax amount. How do we justify this? Please tell me if they are correct.

TDS Percentage Deductions Applicability

Also, please explain the TDS percentage deductions applicability.

Thanks and warm regards,
Bijay

Earlier, TDS used to be deducted on the gross amount of the bill (other than rent). But now, CBDT has issued a circular to clarify the issue. Please refer to Circular No. 1, dated 13.01.2014:

"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."

You can refer to the circular to inform your clients in case tax is deducted on the Service Tax part of the invoice.

Thanks & Regards,
Sukhvinder S. Bhatia

So, when entering into an agreement with your vendors, include a clause that Service Tax would be charged separately other than the fees or value agreed.

Thank you for clarifying the doubt with the supporting circular. Could you please explain the percentage deduction part of TDS? Some clients deduct 1%, while others deduct 2%. What is the upper limit of such percentage deductions?

I appreciate your prompt reply, sir.
Regards

If this is about a contract, such as the supply of labor, the rate of TDS would be 1% (if you are not a company) and 2% in the case of a company (Pvt. Ltd. or Ltd.).

If this is about professional or technical services, the rate for all types of payees would be 10%.

Hope this information helps. If you still have any doubts, please let us know.

Thanks & Regards,
Sukhvinder S. Bhatia

Thank you very much for clarifying my doubt. Can I ask a few more questions relating to service tax, etc.? I am interested in knowing more.

Warm regards,
Bijay

You are welcome, Bijay. We all learn from each other by sharing our experiences. You can ask your question without any hesitation; I'll try to answer. If I cannot, there are many learned and expert members who would help.

Thanks & Regards,

Sukhvinder S. Bhatia

TDS Rates for Contracts

TDS rates for contracts are 2% for direct contractors and 1% for subcontractors. There are some other special rates applicable. Please tell us what services you are providing and to whom.

Dear Mr. Banerjee, we provide manpower services on contracts, and we are a proprietary firm. Kindly elaborate on the TDS and service tax rates/applicability in relation to:

1. Contracting with proprietary firms.
2. Contracting with private Ltd & Ltd companies.
3. Residential and co-op societies.
4. Hospitals and educational institutes.
5. Clubs and NGOs.

Recently, I came across a hospital client stating we are exempted from ESIC because it's a hospital. Is it so? How can we extend benefits to our manpower in such a case? Will the hospital be able to provide insurance cover/disability benefits, etc.?

Understanding TDS for Manpower Services

For manpower services, you fall under the contractor category in TDS rules. If you are a direct contractor, they will deduct 2% of the bill amount. If you are a subcontractor, the main contractor is required to deduct 1%.

Proprietary firms with a turnover of less than 40 Lakhs a year (I think now increased to 1 crore) need not deduct TDS from your payments. The current rule is that TDS will be deducted on the gross bill before service tax. Earlier, it was on the total bill amount.

ESIC Coverage and Exemptions

If you are covered under ESIC, and the location where employees are posted is also covered under ESIC, then you need to pay ESIC irrespective of who the principal employer is. So, even if the hospital itself is not covered under ESIC, you still need to pay for your employees. As per the rules, the hospital can get an exemption for you, but it's a very time-consuming process. Furthermore, what happens when an employee is shifted from that location to another location? I do not think it's a good idea to go for the exemption rule.

Hope I have answered your question.

Also, please note that service tax is applicable at a uniform rate of 12.36% on all invoices you raise. However, in the case of customers who are companies, the reverse charge rule applies. Under this rule, the company will pay the service tax directly on your bill, and you need not charge the same. If you already have a service tax number and charge directly, inform the company of the same so they don't pay in addition.