Whether TDS on service tax is deductible or not?

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 (TDS) under sections 194-I of Income Tax Act would be required to be made on the amount of rent paid/payable without including the service tax. [Circular no. 4 dated 28-4-2008]

After this clarification, every body was of the view that the principle enunciated by this 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 clarification vide circular F. NO. 275/73/2007IT(B) dated 30-6-2008. In circular CBDT has clarified that the scope of benefit of Circular no. 4 dated 28-4-2008 can not be extended to the payment made under section 194J (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 194J.

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

Chapter XVII - Part B - Deduction at source

       Section 194J - Sub Section (1) starts as:

        (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—

       xxxxxxx

       Section 194I - the provisions of this section starts as:

       Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall…………

       xxxxxxxxx

 

Section 194J speaks about deduction of tax at source (TDS) on any sum which is paid to the recipient.

But, Section 194I speaks about the deduction of tax at source (TDS) on any income paid as rent.

 

TDS on Professional Fees: include service tax in the gross amount, but TDS on rent excludes service tax. TDS on rent is to be computed without including service tax, whereas TDS on fees for professional or technical services must be deducted on the gross amount inclusive of service tax; this distinction arises from the statutory wording that treats rent as an 'income' and fees as 'any sum' payable.