A Critical Analysis of having TDS and TCS with GST on them

Hello to all Readers, I am Akshay Parakh a Chartered Accountant and also a member of ICAI. As I am deeply interested in GST Law so I keep myself updated with the latest notifications and changes made in provisions of the laws along with rulings and court cases.

Here is the new issue which is often seen in business houses which requires auditors attention towards them.

A CRITICAL ANALYSIS OF TRANSACTIONS HAVING TDS AND TCS WITH GST ON THEM

In regular business environments when we check out books of accounts, we may ignore TDS and TCS of income tax act with its effects linked with GST and how to make or receive payments form various persons in the business.

It is a bit complicated if we go through circulars of both CBIC and CBDT regarding this area so here is the article giving you utmost clarification regarding the same issue.

Firstly, let's understand TDS and TCS

TDS- means tax deducted at source which means while paying to certain parties for certain transaction as covered under income tax act, we have deducted a certain amount which we have to deposit to the government on behalf of them for which other person gets credit in their tax credit form 26AS.

TCS- means tax collected at source which while receiving payments we collect from our parties on certain transaction which are defined under income tax act 1961 which we will deposit to the government and same will be credited in their tax credit form 26AS.

What we often ignore while checking our books of accounts is the impact of TDS/TCS under income Tax Act with Goods and Services Tax for that I am discussing the same in the following three subsets-

A. Impact of TDS and TCS on GST valuation.
B. Calculations of TDS and TCS amount under income tax act 1961.
C. Accounting entries in books of accounts.

A. Impact of TDS and TCS in GST valuations

As per section 15(2)(a) of CGST act 2017, it says any taxes, duties, cesses, fees and charges levied under any other law for the time being in force other than this act (CGST, SGST, UTGST) value shall include the same if charged separately. Further, there is circular of CBIC no. 76/50/2018 dated 31-12-2018 as amended via corrigendum no.20/16/04/2018 dated 7-3-2019 which clarifies as TCS is not tax on goods but an interim levy thus value should not include the same.

It could be interpreted as whatever payments you made on which TDS which is to be deducted shall be included in the basic amount on which GST will be levied but for TCS to be collected the amount on which GST will charge shall exclude TCS on the same.

Now, what does it implies? - It simply means, that as TDS is deducted of the supplier but GST will be paid by recipient thus TDS should be included while calculating GST payable by the recipient as GST is borne by recipient otherwise, he will get the benefit of deduction of supplier's tax (TDS).

Further in case of TCS supplier collects TCS and GST both from recipient thus to avoid double taxation TCS for calculating GST is excluded thus GST is charged on amount excluding GST as clarified in the circular.

Example: -If we are making payment to labour services to labour contractor then we have to deduct TDS under section 194C of Income tax act-

Payment for services-250000
TDS on same -1%/2%- 2500
GST will be levied on the amount of 250000, not 247500
GST - 45000(250000*18%)
Example 2- GST with TCS under the Income Tax Act
Sale of goods-1000000
GST on same - exclusive of TCS = 180000
TCS to be calculated on 1180000@ say 1%=11800/-

B. Calculations of TDS and TCS under income tax act with payments having GST component

Let's further discuss this scenario in Two subsets B1 &B2: -

B1-There is doubt in the mind of a lot of people that whether TDS is to be deducted to amount including with GST or not?

Same has been clarified by CBDT via circular no 23/2017 that if GST on services has been indicated separately in the invoice then no tax would be deducted on GST component.

It will be interpreted as, if your payments have nature of service then TDS will be deducted on basic amount i.e. WithoutGST but if your payments have nature of goods then it is not covered under this circular so we might have to deduct TDS on whole amount Inclusive of GST.

It suffices the logic as GST payable by the recipient of services which is deposited by the supplier of service thus why supplier's tax (TDS) should be deducted on the amount which is not borne by him i.e., GST component on the same.

Example: - Let's continue our above example where we are paying for labour services to labour contractor Rs.250000 excluding GST

Now Tds to be deducted on 250000 which we had taken in the above example also which comes to 2500 if Tds rate is 1% or 2% as the case may be. Which comes as 2500.

B2. Now, what about TCS collections? Will it be collected on amount including GST or not?

We have to collect TCS on amount including GST as circular above by CBDT is only for a tax deduction.

Further, there is a FAQ issued by CBDT for section 206c(1h) which says any sale returns or discount or indirect taxes should not be adjusted for TCS by going for this interpretation TCS is to be charged on Amount inclusive of GST.

In my opinion, we should collect TCS on basic amount only as it creates double taxation and hampers working capital of business also. It can be explained as follows: -

Basic amt-250000
GST on the same- 45000
TCS on the same@1% on basic +GST component=2950/-
TCS on the same if applied only on basic component=2500/-

Difference of Rs 450 is due to double taxation which consumes basic as well as GST hampering Rs.450 as working capital also.

Now a days there is new section 206C(1h) under Income tax Act which says to collect TCS on sale of goods if value in FY exceeds 50 lacs now while collecting you have to check that you are collecting TCS on Amount inclusive of GST.

Example- sale of x goods to buyer Mr. A for Rs.150000.

Now if your threshold as per section is crossed then You have to collect TCS as follows: -

Basic amount -150000
GST- 27000
Total- 177000
TCS on above u/s 206C(1h)-177000*.075%=132.75

C. Now let's discuss the accounting entries which you should check for above -

(a) when making payments to labour contractors- (Referexample Used in Tds)

Labour services a/c… Dr 250000
GST a/c… Dr 45000
To Bank account Cr 292500
To TDS payable Cr 2500

(b) when collecting TCS for sale of goods- (Refer example used in TCS)

Bank a/c … Dr177132.75
To Trade receivable/sales a/c Cr 150000.00
To TCS collection a/c Cr 132.75
To GST payable a/c Cr 27000.00

SUMMARY FOR THE ARTICLE

I hope you have understood the Provisions which are Inter linked under GST and Income tax Act 1961.