Applicability of TDS

[Guest]

In case where service provider submits certificate of lower deduction under section 197 of income tax Act where AO have mentioned that it is in respect of Income of Assessee, whether TDS is deductible at lower rate on entire payment (including service tax portion) or only in respect of Income comprised in the payment. (The company on safer side deducts TDS on service tax as a practice)

[Guest]

I am of the view that though the exemption is given in respect of 'income', for TDS purpose and from deductor point of view, it should be seen as 'payments made'. Thus lower rate of deduction is applicable on all the payments made, including if any service tax is applicable for TDS. Similarly, if lower rate of deduction is given upto fixed sum, then while calculating the limit also, the entire payment (incl. service tax, if any) is to be taken into account.

[DEV KUMAR KOTHARI]

Service tax element is not in nature of consideration for sale and / or service. It is not 'income'. If service provider collects service tax, he has an obligation to pay the same to the GOI- there is diversion at source. Thus, tax need not be deducted from the element of service tax. Boards circular directing not to deduct tax on element of service tax on rent is correct, the other circular in relation to professional fees etc. is contrary to the provisions. Service tax, in realtion to contractor, brokers, and agents etc. also cannot be called payment to contractor, commission or brokerage etc. paid to agent or broker. Therefore, tax need not be deducted from the element of service tax. In this regard you my refer to articles by me displayed on this website.

AI Summary

TDS on service tax: conflicting views on whether lower deduction certificates apply to the service tax component. Whether a lower-deduction certificate under section 197 applies to the service tax element is contested: one position treats the certificate as applying to payments made so the lower rate or fixed-sum limit covers the entire payment including service tax; the opposing position treats service tax as not income of the payee and therefore outside TDS withholding. Departmental circulars addressing rent exempt the service tax element, while other circulars on fees appear inconsistent, creating compliance uncertainty for deductors.