No TDS on service tax

CA (Tax advisory)

                                                      NO TDS ON SERVICE TAX

With the advent of service tax, an interesting question has arisen whether tax is deductible at source under the IT Act even in respect of the service tax component of the professional fee/contract amount payable to the service provider/contractor.

The issue of TDS on service tax is getting hotter by the day. This issue got fuel with the issuance of a circular by the CBDT. In this circular, board has clarified that tax deduction at source 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. (Cicular No. 4 dated 28-04-2008). Reason given by CBDT in this circular that service provider only acts as a collection agent for the government.

After ths clarification, every body was of the view that the principal enunciated by ths circular is applicable to all the payments made by the assessee and accordingly no TDS is deductible from on the part of service tax whether it is professional's bill or contractor's bill.

But, to settle the issue, CBDT has issued another clarificatin vide circular F no. 275/73/2007IT(B) dated 30-06-2008 can not be extended to the payment made under section 194-J (Fees for professional and technical services). Therefore, TDS is to be deducted on the gross amount inclusive of service tax where the payment is being made u/s 194-J.

From the reading of both the clarifications, the reasons for two stands in two situtations can be discussed as under :

CBDT has given clarification on the matter by issuing circular stating that u/s 194-I TDS is deductible only on the rental income & not on service tax (circular no. 4 dated 28-04-2008) and u/s 194-J TDS is deductible on gross amount i.e. inclusive of service tax. (Dated 30-06-2008). The reason given by CBDT are that provisions of section 194-I requiers deduction of tax at sources on "any income by way of rent", whereas provisions of section 194-J requires deduction of tax at sources on "any sum payable" by way of professional fee, for technical services, royalty & non compete fee.

CBDT states that as 194-I requires deduction on income & service tax does not form part of income, thus TDS is not deductible on TDS. While in case of 194-J CBDT lays stress on "any sum payable" & forgets the part "by way of professional fee, fee for technical services, royalty & non compete fee." Now, Service tax does not form part of professional fee, it is over and above the professional fee which the service provider has to collect from the service recipient & pay to government. Thus it is not part of "any sum payable by way of professional fee".

From the above discussion I conclude that TDS should not be deducted on service tax component. The following reasons for this are as under :

1.      The money collected (by way of service tax) is instantly diverted by over-riding title.

2.      If we read basic charging section of TDS (Section 190), it requires the deduction of tax on income of  the recipient. (service tax is not the income as accepted by the CBDT).

3.      If CBDT accept in their circular that service provider only acts as a collection agency. Then why not for professional service provider is a collecting agency of government for the purposes of section 194-J, they only stress on the wordings of section 194-J, this is not a true law and has to be amended by finance ministry department.

CA Pankaj Galhotra

Email - galhotra.rishaan @

Mob. 9915793-007



U r rite there can be  many more cases of inconsistencies,

But it is not advisable to go into litigation specially on such things which r not harming in real sense to either deductor or deductee


Amir's rite.. about litigation that is.


For Rs. 100, Rs.10.3 will be service tax.

On that service tax, Re.0.103 will be TDS... Which is 0.103% of the amt excluding service tax.

So lets not make a hue and cry... Anyway the assessee will get tax credit which he would have to pay himself otherwise..


But the flawed logic is noteable.. and maybe the court will allow your claim, probably will.


G.K. if you calculate business earning on 100000000 than you can see TDS charges are Rs. 103000. A businessman will not do business for Rs. 100.



CA in Practice

One of the person went into RTI to find an answer to the above issue from the Income Tax Department and he got the answer that TDS should be deducted on Service Tax component also. Attached is the reply he got from the department.

Also there is a circular that TDS on service tax on rent not be deducted. So only for purpose of Section 194I TDS be not deducted on rent.

Attached File : 23 657 tds on downloaded 179 times
CA in Practice

i. e. on the service tax on rent


Originally posted by : Gaurav Singh

G.K. if you calculate business earning on 100000000 than you can see TDS charges are Rs. 103000. A businessman will not do business for Rs. 100.




Dear Gaurav sir,



Like i said the logic is flawed, (anyone could write an article on it) but still we should only consider, that there is an exemption on service tax for TDS on service tax component of rent, by this circular provided by dept..


Perhaps we could appreciate here that if income was Rs.100 crores, you are getting TDS credit for that much, including service tax. When u consider interest u/s 234B and 234C, 0.103% is a very small sum to part with.




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