Tax on Retention Money, When?

This query is : Resolved 

02 July 2010

An Awarder make part payment to the Contractor after deducting retention money @5%. The retention money will be paid to the contractor when the contract work is fully completed.
Here my question is,when the Awarder has to deduct tax on retention money, at the time of deducting the retention money or at the time of payment of retention money when the contract is completed?

Here "Tax" means Income Tax, VAT, Service Tax etc.

Please reply

Thanking You

Shyam Lal Naik (Expert)
02 July 2010

Amount is credited. 95% is released. 5% retained against performance guarantee/security.

Since the full amount is credited, Incmoe Tax TDS shall be deducted at the time of retention.

There is no provision of TDS in Service tax. The contractor can deferred the amount of Service tax to the extent of 5% till security is released, since service tax arises on receipt basis.

Can't answer on VAT TDS.

CMA Ramesh Krishnan (Expert)
03 July 2010

Retention is mutual arrangement of both parties as per the contract term Sale is booked once the bill is accepted and VAT need to be deducted on the credit and pay , retention payment is the one of the payment term it will not affect Tax purpose.

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