No TDS on service tax on payments made/ due to resident payee if service tax component is indicated separately in the agreement/ contract.

Supporting decision about NO TDS on service tax :

In the recent verdict of the Hon’bleRajasthan High Court, the Commissioner of Income Tax (TDS), Jaipur Vs. M/s. Rajasthan UrbanInfrastructure held that if the terms and conditions of the agreementbetween the payer and the payee has already been agreed for, the amount of service tax will be paid separately and not to be included in the fees forprofessional services or technical services, than no TDS isrequired to be made on the service tax component u/s 194J (i.e. under Professional Services).

 

Earlier Announcement

Earlier it was clarified by the departmentvia circular that tax needs to be deducted at source U/S 194I of the Act, on the amount of rent paid or payable without including the amount of service tax.Representations/letters has been filed to CBDT seekingclarification whether such principle can be extended to other provisions of the Act also or not.

 

CBDT has examined the matter afresh and clarified vide Circular No. 1/2014 dated 1312014 as follow : –“TDS under Chapter XVIIB of the Income tax Act, 1961 on service tax component comprised of payments made to residents”that whenever in terms and conditions of the agreement or contract made in between the payer and thepayee, and the service tax amount payable to a resident is indicated separately, than TDS shall be deducted only on the amount paid/ payable without including suchservice tax component which is shown separately.

 

Hence after the amendment, the circular shall apply not only to the section 194(J) but will also be applicable to the other sections such as 194 (C), 194 (D), 194 (G), 194 (H), 194 (I), payment made to Resident all other sections covered under Chapter VII B of the Income Tax Act, 1961.

 

Impact on Industry

This circular has provided a great relief to the society further, it was also seen as a Bold step by the Central Board of Direct Taxes towards to people of the society. As the payers are taxed twice on the same income and therefore by after consideration by the CBDT and considering the judgement of the Rajasthan High Court, the circular has been released by the CBDT.

 

Conclusion

To get the exemption of TDS on service Tax following points are need to be kept in mind by the assesse:

  1. Payment should be made to resident only. That means, if, Payment is being made to the Non-Resident Person than TDS shall be deducted on the amount including the service tax component.
  2. It is to be mentioned in the Contract / Term sheet between both the parties that Service Tax amount shall be indicated separately.

 

Therefore, if the conditions given above are fulfilled than there is no need to deduct the TDS on the Service Tax Component.

 

Literal Interpretation of Circular

On the first part, the same should be applicable on prospectively basis however the courts can interpret otherwise as follow:

 

The circular has come after the judgement of the the Hon’ble High Court in case of Jaipur Vs. Rajasthan Urban Infrastructure (Dated 01-07-2013), which holds that if as per the terms of the agreement between the payer and the payee, the amount of service tax component is to be paid separately and was not included in the fees for technical or professional services, no TDS is required to be made on the service tax component u/s 194J of the Act.

 

Earlier, CBDT vide its Circular No. 4/2008 (dated 28.04.2008) held that TDS deduction under section 194 I of the Income Tax Act would be required to be made on the amount of Rent Paid / Payable without including the Service Tax. However, sooner just after the 2 months CBDT again released its circular (dated 30.06.2008) decided not to extend the scope of circular No. 4/2008 to payment u/s 194 J of the income tax act since it covers any sum paid.

Example for TDS on service tax:

Suppose you receive bill for professional service of Rs. 1,00,000.

Service tax rate is 14%. Tds rate is 10% for professional services.

DescriptionAmount
Services100000
Service tax14000
Total bill114000
TDS rate10%
Amount for the purpose of calculation of TDS100000
TDS10000
Total payment =total bill less TDS114000-10000= 104000

I hope above table clarify doubts about TDS on service tax. However, if you have any question, ask via comment.