In the realm of corporate governance, meeting compliance requirements is not just a legal obligation but a crucial step towards fostering transparency and maintaining the trust of stakeholders. One such compliance that holds significant importance is the Tax Deduction at Source (TDS) under GST. This mechanism, which ensures that taxes are collected at the source of income, plays a pivotal role in maintaining financial transparency. It also ensures that the government receives its due taxes promptly. This blog will delve into the concept of TDS under GST, its applicability, the filing process, and the consequences of non-compliance, providing you with a comprehensive guide to this essential aspect of tax compliance.
What is TDS under GST?
Tax Deduction at Source (TDS) under GST is a mechanism where tax is deducted at the source, i.e., at the time of making a payment to the supplier. This system, mandated by Section 51 of the CGST Act, 2017, requires certain deductors to deduct tax when making payments to suppliers of taxable goods or services. TDS not only helps maintain transparency but also ensures that the government receives its due taxes promptly, thereby contributing to the nation’s development.
Applicability of TDS under GST
TDS under GST is applicable to specific categories of deductors, including:
- Departments or establishments of the Central or State Government.
- Local authorities.
- Government agencies.
- Authorities or bodies with more than 51% government participation.
- Societies established by the government.
- Public sector undertakings.
These entities must deduct TDS at the rate of 2% (1% CGST and 1% SGST/UTGST) for intra-state supplies and 2% IGST for inter-state supplies if the total value of taxable supply under a contract exceeds Rs. 2.5 lakh.
When is TDS Not Required under GST?
TDS is not required in the following situations:
- The total value of taxable supply under a contract is less than or equal to Rs. 2.5 lakh.
- The supply is exempted under GST.
- An unregistered supplier makes the supply.
- The payment is made to a supplier who is liable to pay tax under reverse charge.
Filing Process for TDS under GST
To comply with TDS requirements under GST, deductors must follow these steps:
- Registration: Deductors need to register on the GST portal and obtain a GSTIN for TDS.
- Deduction: Deduct TDS at the prescribed rate while making payments to suppliers.
- Payment: Deposit the deducted TDS to the government account within ten days after the end of the month in which the deduction is made.
- Return Filing: File a TDS return in Form GSTR-7 within ten days after the end of the month in which the deduction is made.
- TDS Certificate: Issue a TDS certificate in Form GSTR-7A to the supplier within five days of crediting the TDS to the government.
Benefits of TDS to Deductee
With the deduction of tax and submission of return in FORM GSTR 7, the amount deducted would be available in FORM GSTR 2A/4A of the registered deductee, and the same would be credited to his electronic cash ledger. The deductee would be able to utilize this amount to discharge his tax liabilities, thereby benefiting from the TDS process.
Consequences of Non-Compliance
Failure to comply with TDS requirements under GST can lead to severe penalties and consequences, including:
Monetary Penalties:
- Late Fees: Companies that miss the deadline for filing Form GSTR-7 are subject to late fees. These fees increase based on the duration of the delay. The late fee structure is as follows:
- Up to 30 days: Twice the normal fee.
- 30 to 60 days: Four times the normal fee.
- 60 to 90 days: Six times the normal fee.
- 90 to 180 days: Ten times the normal fee.
- Beyond 180 days: Twelve times the normal fee.
- Daily Fines: Besides the late fees, companies may incur daily fines for each day the filing is delayed beyond the due date.
Legal Consequences:
- Prosecution: Directors and officers of the company can face prosecution for non-compliance with the filing requirements. This can result in criminal charges being filed against them.
- Disqualification of Directors: Persistent failure to file necessary forms, including GSTR-7, can disqualify the company’s directors from holding directorships in other companies.
Impact on Corporate Governance:
- Compliance Rating: Non-compliance with statutory filings can adversely affect the company’s compliance rating, impacting its reputation and trustworthiness in the eyes of regulatory authorities, investors, and stakeholders.
- Regulatory Scrutiny: Failure to comply with filing requirements can attract increased scrutiny from regulatory authorities, leading to potential investigations and audits.
Operational and Financial Implications:
- Restriction on Borrowings: Non-compliance can restrict the company’s ability to raise funds from financial institutions, as they often require proof of compliance with statutory requirements.
- Reputation Damage: Delays or failure to file can damage the company’s reputation, making it difficult to attract investment and business opportunities.
Additional Benefits for the Deductee Related to TDS under GST
Availability of Tax Credit:
TDS Credit: The amount deducted as TDS is credited to the deductee’s electronic cash ledger. The deductee can use this credit to pay their GST liability, which helps in maintaining liquidity and managing cash flow. It also provides a record of the amount deducted, which can be used for reconciliation and accounting purposes, enhancing compliance and record-keeping. Improved Compliance and Record-Keeping:
- TDS Certificate: The deductor is required to issue a TDS certificate in Form GSTR-7A to the deductee. This certificate provides a record of the amount deducted, which can be used for reconciliation and accounting purposes.
Transparency and Trust:
- Regulatory Confidence: Regular TDS deductions and filings enhance the trust of regulatory authorities in the deductee’s financial practices. This can lead to smoother interactions with tax authorities and fewer audits.
Detailed Filing Process for TDS under GST
Registration Requirements:
- Who Needs to Register: Entities required to deduct TDS under GST include departments or establishments of the Central or State Government, local authorities, government agencies, and certain notified bodies. These entities must register as TDS deductors on the GST portal.
- Process for Registration:
- Access the GST Portal: Visit the official GST portal
- Select New Registration: Under the “Services” tab, go to “Registration” and select “New Registration.”
- Choose Tax Deductor: In the registration form, select “Tax Deductor” and provide details such as TAN, legal name, and contact information.
- Submit Documents: Upload required documents, such as proof of address and identification of the authorized signatory.
- Verification: Complete the verification process using OTP sent to the registered email and mobile number.
- Receive GSTIN: Upon successful verification, a GSTIN (Goods and Services Tax Identification Number) will be issued for the TDS deductor.
Filing TDS Returns:
- Form GSTR-7: Deductors must file TDS returns using Form GSTR-7. This form captures details of the TDS deducted and deposited.
- Submission Timeline: Form GSTR-7 must be filed by the 10th of the month following the month in which the deduction was made.
- Contents of Form GSTR-7:
- Details of Deductor: Name, GSTIN, and contact information of the deductor.
- Details of Deductee: Name, GSTIN, and details of the transactions for which TDS was deducted.
- Amount Deducted and Deposited: Information about the amount of TDS deducted and deposited with the government.
- TDS Certificate (Form GSTR-7A): Once the return is filed, the deductor must issue a TDS certificate in Form GSTR-7A to the deductee within five days of crediting the TDS to the government. This certificate provides a detailed record of the TDS deduction.
Payment of TDS:
- Challan Generation: Generate a challan on the GST portal for the payment of TDS.
- Modes of Payment: The payment can be made through various modes, including net banking, debit/credit cards, NEFT/RTGS, or over-the-counter (OTC) mode (cash/cheque/DD).
- Deadline for Payment: The deducted TDS must be deposited with the government within ten days after the end of the month in which the deduction was made.
By following these detailed steps for registration, deduction, payment, and return filing, businesses can ensure compliance with TDS requirements under GST and avoid the penalties and consequences of non-compliance.
Conclusion
Understanding and complying with TDS requirements under GST is not just a legal obligation but also a crucial step towards maintaining financial transparency and avoiding legal and economic repercussions. By ensuring timely and accurate TDS filing, businesses can play a significant role in contributing to a more robust and trustworthy business environment.