TDS Provisions under GST

TDS Provisions under GST

If you supply goods or services to a government department, local authority, or notified PSU, your buyer is required to deduct Tax Deducted at Source (TDS) under Section 51 of the CGST Act 2017 before releasing payment. The rate is 2% of the taxable contract value — split as 1% CGST and 1% SGST for intra-state supplies, or 2% IGST for inter-state supplies. That deducted amount does not disappear: it is credited directly to your electronic cash ledger on the GST portal, ready to offset your next GSTR-3B liability.

Who Is Required to Deduct GST TDS Under Section 51

Section 51 of the CGST Act 2017, read with Rule 66 of the CGST Rules 2017, defines the class of entities that must register as TDS deductors and deduct GST TDS on qualifying payments. The list is exhaustive — if your buyer does not appear here, GST TDS simply does not apply to your supply.

Mandatory deductors:

• Departments and establishments of the Central Government and State Governments
• Local authorities — including municipal corporations, gram panchayats, and cantonment boards
• Governmental agencies and bodies constituted by an Act of Parliament or a State Legislature
• Authorities, boards, or bodies set up by the government where the government holds ≥51% equity or control
• Public Sector Undertakings (PSUs) as notified by CBIC
• Societies established by the Central or State government, or a local authority, under the Societies Registration Act, 1860

Who is not a deductor: Private limited companies, partnership firms, LLPs, and proprietary businesses are not GST TDS deductors — regardless of their turnover or the scale of work. If your buyer is a joint-venture company in which the government holds 49%, it falls outside Section 51 unless CBIC has specifically notified that entity.

Income-tax TDS under Chapter XVII-B of the Income-tax Act 1961 — Sections 194C (works contracts), 194J (professional fees), and 194Q (purchase of goods) — is an entirely separate regime and should not be confused with GST TDS. Both can apply to the same invoice; neither substitutes for the other.

The Threshold and Rate: What Actually Triggers a Deduction

GST TDS is deductible only when the total value of a single contract exceeds ₹2.5 lakh, calculated on the taxable value (i.e., excluding GST).

The threshold is per contract, not per invoice. This is the single most important rule in this regime and the one most often misread. A road repair contract worth ₹12 lakh triggers TDS on every running bill raised under it, even if each individual invoice is for ₹3–5 lakh. Conversely, a one-off purchase order of ₹2.4 lakh does not trigger TDS even if the GST-inclusive invoice crosses ₹2.5 lakh.

Rates in force for FY 2026-27:

• Intra-state supply: 1% CGST + 1% SGST = 2% of taxable value
• Inter-state supply: 2% IGST of taxable value

The deduction is always on taxable value — not on the GST-inclusive invoice total. If your invoice reads ₹4,48,000 (₹4,00,000 taxable + 12% GST), the TDS base is ₹4,00,000. Applying 2% to ₹4,48,000 instead of ₹4,00,000 results in excess deduction and triggers a refund process neither party wants.

Supplies outside the TDS net:

• Supplies wholly exempt from GST
• Supplies by an unregistered person (there is no GSTIN to which the cash ledger credit can be posted)
• Supplies where the place of supply determination creates a mismatch between the applicable rate and the nature of the supply — always verify place of supply before deducting

Deductor Registration on the GST Portal

Every entity required to deduct GST TDS must obtain a separate TDS deductor registration on the GST portal (www.gst.gov.in), distinct from any regular GSTIN it holds for its own outward supplies. A state electricity board that also makes taxable supplies, for example, will hold two GSTINs.

Registration step-by-step:

1. Go to www.gst.gov.in → Services → Registration → New Registration
2. Select taxpayer type: Tax Deductor
3. Fill Form GST REG-07: provide TAN (Tax Deduction Account Number issued by the Income Tax Department), PAN of the deducting entity, authorised signatory details, and the principal place of business
4. On approval, you receive a 15-digit GSTIN — the 13th character will typically be "6" indicating TDS deductor registration
5. Use this TDS GSTIN exclusively for all GSTR-7 filings and challan payments; never mix it with the regular GSTIN

Failure to register and deduct attracts a penalty under Section 122 of the CGST Act: the higher of ₹10,000 or the amount of tax not deducted. On a ₹10 lakh contract, TDS evaded would be ₹20,000, making the minimum penalty ₹20,000 — plus Section 50 interest at 18% per annum on the delayed deposit.

The Monthly Compliance Cycle for Deductors

Once registered, the deductor follows a fixed monthly cycle. Every step feeds the next: a missed deposit means a missed return, which means the supplier's cash ledger is not updated, which means their working capital is blocked.

The complete cycle:

1. Before releasing payment: Verify the supplier's GSTIN on the portal and confirm it is active. Confirm the contract value crosses the ₹2.5 lakh taxable threshold.

1. At time of payment or credit (whichever is earlier): Deduct 2% of the taxable value — 1% CGST + 1% SGST for intra-state, 2% IGST for inter-state. Release the net amount to the supplier.

1. By the 10th of the following month — Deposit the deducted tax: Log in using the TDS GSTIN. Generate a challan under Services → Payments → Create Challan. Select the correct tax head (CGST/SGST or IGST) and pay via NEFT, RTGS, or internet banking. The challan reference number is needed for the return.

1. By the 10th of the following month — File Form GSTR-7: This is the monthly TDS return. It captures the deductee's GSTIN, the contract number, taxable value, and TDS amount. Filing GSTR-7 is what triggers the automatic credit in the supplier's electronic cash ledger — the challan deposit alone does not do this.

1. Within 5 days of depositing the tax — Issue Form GSTR-7A: Once GSTR-7 is filed, the portal auto-generates GSTR-7A. The deductor must ensure the supplier receives it within five days of the tax deposit. In practice, share it via email or the government's correspondence system as soon as it is generated.

Nil GSTR-7: If no TDS-qualifying payment was made in a given month, a nil GSTR-7 is still mandatory if the entity is registered as a TDS deductor. Late filing of a nil return attracts a fee of ₹20 per day (as currently notified) up to a maximum of ₹2,000.

The Supplier's Side: Electronic Cash Ledger and GSTR-7A

When the deductor files GSTR-7, the deducted amount appears automatically in your electronic cash ledger on the GST portal — specifically in the CGST and SGST (or IGST) columns — without any action on your part. This is the single most useful feature of the regime: the government effectively pre-funds part of your GST liability.

As a supplier, here is what you must do each month:

1. Log in to www.gst.gov.in → Services → Ledgers → Electronic Cash Ledger. Check the balance before filing GSTR-3B.

1. Cross-verify the cash ledger balance against the GSTR-7A certificate received from the deductor. They must match. A mismatch almost always means an error in the deductor's GSTR-7 filing (wrong GSTIN, transposed digit, wrong tax head).

1. When filing GSTR-3B, apply the cash ledger balance to discharge your tax liability before making a fresh payment. Do not let the balance accumulate unused — it carries forward indefinitely but earns no interest.

1. If the deductor has deducted TDS but not yet filed GSTR-7, the credit will not appear in your ledger. Raise it with the deductor immediately — their late filing is your working capital problem.

1. If the deductor has filed GSTR-7 with an incorrect amount, they must file an amended GSTR-7. You cannot correct it from your end.

Refund of unused cash ledger balance: If your GST liability is consistently lower than the TDS credits accumulating in the cash ledger, you can apply for a refund under Section 54 of the CGST Act in Form RFD-01. The refund is of the cash ledger balance, not specifically of the TDS — the portal does not distinguish between the two.

Worked Example: A State PWD Works Contract (FY 2026-27)

The parties:

• Deductor: Office of the Executive Engineer, State Public Works Department, Maharashtra. Registered as GST TDS deductor under Form GST REG-07.
• Supplier: M/s Roadline Constructions Pvt. Ltd., GST-registered in Maharashtra (GSTIN: 27AAAAA0000A1Z5).
• Contract: Road resurfacing, Nashik Division. Contract value: ₹12,00,000 excluding GST. GST rate: 12% (composite works contract, HSN 9954). Nature of supply: intra-state.

Running bills and TDS:

TDS breakdown (intra-state):

• CGST TDS: ₹12,000 (1% × ₹12,00,000)
• SGST TDS: ₹12,000 (1% × ₹12,00,000)
• Total GST TDS over the contract: ₹24,000

What Roadline Constructions sees in their electronic cash ledger: Each month, after the PWD deposits the deducted tax and files GSTR-7, the relevant credit posts automatically — ₹8,000 in April, ₹10,000 in May, ₹6,000 in June. Roadline applies this balance to their monthly GSTR-3B rather than drawing from their input tax credit or making fresh deposits.

Late filing scenario: The PWD delays GSTR-7 for April 2026 and files on 14 June 2026 — 35 days beyond the 10 May due date. Late fee at ₹50 per day (as currently notified for non-nil returns) = ₹50 × 35 = ₹1,750, subject to the applicable maximum. More damaging: the ₹8,000 TDS credit does not appear in Roadline's cash ledger until 14 June, forcing them to fund their May and early June GST liabilities from other sources — a direct working capital cost.

Common Pitfalls — and How to Correct Them

1. Contract Splitting to Stay Below ₹2.5 Lakh

A procuring officer splits a ₹5,00,000 repair work into two purchase orders of ₹2,45,000 each — same scope, same supplier, same location — specifically to avoid the TDS obligation. Tax authorities treat this as a colourable device.

Exposure: TDS evaded = ₹5,00,000 × 2% = ₹10,000. Penalty under Section 122(1) = higher of ₹10,000 or ₹10,000 = ₹10,000, plus interest under Section 50 at 18% per annum from the date the TDS was due. If the splitting is intentional and repeated, it can escalate to an adjudication proceeding.

2. Applying TDS on the GST-Inclusive Invoice Value

Deductors sometimes calculate 2% on the total invoice (including GST) rather than on taxable value alone. On a ₹4,48,000 invoice, the difference is ₹8,960 vs ₹8,000 — an excess deduction of ₹960. The supplier's ledger receives too much; correcting it requires an amended GSTR-7 and a refund application.

Fix: Always strip out the GST component before calculating TDS. If the invoice does not separately state GST, back-calculate: taxable value = invoice total ÷ (1 + GST rate).

3. Depositing Tax Without Filing GSTR-7

A challan payment creates a government receipt but does not update the supplier's electronic cash ledger. The GSTR-7 return is the mechanism that posts the credit. Several deductors complete the bank payment and consider the job done — the supplier's ledger remains blank.

Fix: Treat challan deposit and GSTR-7 filing as a single task. Schedule both for the same working day, no later than the 9th of the month to allow for portal delays on the 10th.

4. Supplier Ignores the Cash Ledger

A supplier receiving TDS deductions across three or four government contracts can accumulate ₹40,000–₹60,000 in the cash ledger over a quarter — and never notice it, continuing to pay GSTR-3B liabilities from the electronic credit ledger (ITC) or fresh cash deposits.

Fix: Build a standing item in your monthly compliance checklist: Check electronic cash ledger before computing GSTR-3B payable. Apply cash ledger balance first; supplement with ITC or fresh deposit only for the residual.

5. Not Chasing an Absent GSTR-7A

If the deductor fails to file GSTR-7, the GSTR-7A certificate is never generated. The supplier has no official documentation of the deduction and no cash ledger credit. This is particularly common when the deductor's accounts office and technical wing are not coordinated.

Fix: Within seven days of a payment being received net of TDS, confirm the GSTR-7A exists on the portal (Services → User Services → View/Download Certificates). If it is not there, escalate in writing to the deductor's Pay and Accounts Officer.

Erroneous Deductions and the Refund Route

If TDS was deducted incorrectly — on a contract below the ₹2.5 lakh threshold, on an exempt supply, or at the wrong rate — the deductor must initiate the refund under Section 54 of the CGST Act within two years from the date of deduction. The supplier cannot apply directly. This asymmetry is the regime's most significant friction point.

To recover an erroneous deduction:

1. The supplier informs the deductor in writing with supporting documents (contract value, invoice copies, GST exemption basis as applicable)
2. The deductor files a refund application in Form RFD-01 on the GST portal using their TDS GSTIN
3. The refund, once approved, is credited to the deductor — who must then pass it on to the supplier through a contractual settlement

Prevention is far cheaper than refund:

• Verify contract threshold at every purchase order stage, not just at invoice time
• Confirm place of supply before choosing between CGST/SGST and IGST rates
• Validate the supplier's GSTIN status on the portal before deducting — TDS on a cancelled GSTIN creates a credit that cannot be utilised

How GST TDS and Income-Tax TDS Interact on the Same Invoice

Government and PSU buyers typically deduct both GST TDS (Section 51, CGST Act) and income-tax TDS (Section 194C for works contracts, Section 194J for professional services, etc.) on the same payment. Both deductions are independent and both certificates must be tracked separately.

Comparison at a glance:

Combined deduction on a works contract running bill:

• Invoice: ₹4,00,000 taxable + 12% GST = ₹4,48,000
• GST TDS @ 2% on ₹4,00,000 = ₹8,000 → electronic cash ledger
• IT TDS @ 2% under Section 194C on ₹4,00,000 = ₹8,000 → Form 26AS
• Net received in bank: ₹4,48,000 − ₹8,000 − ₹8,000 = ₹4,32,000

Both credits are real and both are recoverable — but through different portals, different mechanisms, and at different times. A firm that reconciles only one of the two is either overpaying tax or unknowingly accumulating unused credits.

Reconciliation checklist for suppliers:

1. Monthly: verify GSTR-7A against electronic cash ledger; apply balance in GSTR-3B
2. Quarterly: verify Form 16A against Form 26AS and AIS (www.incometax.gov.in)
3. Never apply a GST TDS credit toward income-tax liability or vice versa — they are separate accounts in separate systems
4. If Form 16A is missing, raise a request through the TRACES portal (www.tdscpc.gov.in)
5. Maintain two reconciliation sheets — one for GST TDS, one for IT TDS — for every government or PSU customer

Key Takeaways

• Section 51 applies exclusively to government departments, local bodies, and CBIC-notified PSUs — private buyers, however large, have no GST TDS obligation.
• The ₹2.5 lakh threshold is per contract, not per invoice — a long-running rate contract triggers TDS on every running bill once the aggregate contract value crosses the threshold.
• TDS rate is 2% of taxable value — never of the GST-inclusive invoice total; intra-state splits 1%+1% (CGST+SGST), inter-state applies 2% IGST.
• Deductors must register via Form GST REG-07, deposit tax, and file GSTR-7 by the 10th of every month, then issue GSTR-7A to the supplier within five days of deposit — missing any of these steps blocks the supplier's cash ledger credit.
• Suppliers: check your electronic cash ledger before every GSTR-3B filing — TDS credits post there automatically once GSTR-7 is filed, and unused balances represent an interest-free pre-funded liability you are leaving on the table.
• Contract splitting to avoid the ₹2.5 lakh threshold attracts penalties under Section 122 — minimum ₹10,000 or the evaded tax, whichever is higher, plus 18% interest.
• Erroneous deductions can only be refunded through the deductor under a two-year limitation — get the deduction right at source rather than relying on the refund mechanism.
• GST TDS and income-tax TDS are wholly independent regimes — both can apply to the same invoice, both generate separate certificates (GSTR-7A and Form 16A), and both must be reconciled against separate government portals every period.