Government contract: how GST TDS under section 51 works for your company
A government department pays your company less than the invoice. This is how GST TDS under section 51 works, how you claim the credit, and what to check.
CA Harun Raaj
pvtltd.co
Your company supplied goods or services to a government department. The bill was paid. But the amount that reached your bank account is a little less than the invoice. The department says it has deducted "GST TDS".
This is not a mistake and it is not a penalty. It is a mechanism in the GST law. This article explains what it is, when it applies, what the department must do, and what your company must do to get the money back in its own ledger.
What section 51 says, in plain words
Section 51 of the Central Goods and Services Tax Act, 2017 lets the Government mandate certain bodies to deduct tax at source. The word "deduct" means: when they pay you, they keep a part back and deposit it with the Government on your behalf.
The bodies that can be made to deduct are (s.51(1), CGST Act 2017):
- a department or establishment of the Central Government or a State Government;
- a local authority;
- Governmental agencies; and
- such persons or categories of persons as the Government notifies on the recommendation of the GST Council.
The Act calls the one who deducts the "deductor". It calls you, the supplier, the "deductee".
The rate is one per cent. It applies to the payment made or credited to the supplier of taxable goods or services or both. It applies only where the total value of the supply under a contract exceeds ₹2.5 lakh (s.51(1), CGST Act 2017).
Which value counts
The test is the value of the supply under the contract. It is not a single invoice, and it is not the amount of one payment.
The Explanation to s.51(1) says the value of supply is taken as the amount excluding central tax, State tax, Union territory tax, integrated tax and cess shown in the invoice. So take the invoice, remove the GST lines, and look at what is left. The ₹2.5 lakh threshold and the one per cent are both measured on that base.
Two points follow.
First, the threshold is on the contract value. A contract worth more than ₹2.5 lakh in total is covered even if it is paid in small instalments. Read the contract value from the work order, then check the figure against the rule before you argue about a deduction.
Second, only taxable supplies are covered. The section speaks of "taxable goods or services or both". If your supply is exempt, ask the department why it deducted.
When no deduction is made
The proviso to s.51(1) carves out one case. No deduction is made if the location of the supplier and the place of supply is in a State or Union territory different from the State or Union territory of registration of the recipient.
The carve-out needs both limbs. It applies only where the location of the supplier and the place of supply are each in a State or Union territory different from the one where the department (the recipient) is registered. If either the supplier's location or the place of supply is in the department's own State or Union territory, the proviso does not remove the deduction.
This is a point your company should check on every contract. "Place of supply" is a defined term in the Act (s.2(86), CGST Act 2017), and the Act has a separate definition of the location of the supplier of services (s.2(71), CGST Act 2017). If the department deducts when you think it should not, raise it with them in writing, with the invoice and the registration details.
Which departments and agencies are actually mandated is decided by notification. The notification text is not reproduced here. Check the current notification on the GST portal, or ask the department's accounts office, before you rely on a particular body being a deductor.
The clock: what the deductor must do
The deductor has three jobs, and each has a clock.
- Pay the deduction to the Government. The amount deducted must be paid within ten days after the end of the month in which the deduction is made (s.51(2), CGST Act 2017). A deduction made in, say, June must be deposited by the tenth of July.
- File a monthly return. Every registered person required to deduct tax at source under section 51 must electronically furnish a return for every calendar month of the deductions made during the month (s.39(3), CGST Act 2017). The return is FORM GSTR-7, due on or before the tenth day of the month following the calendar month (rule 66(1), Central Goods and Services Tax Rules, 2017).
- Make the certificate available. The certificate of tax deduction is issued in the form and manner prescribed (s.51(3), CGST Act 2017). The rules say it is made available to you on the common portal in FORM GSTR-7A, on the basis of the GSTR-7 the deductor has filed (rule 66(3), CGST Rules 2017).
The proviso to s.39(3) says the deductor must file the return for every calendar month, whether or not any deductions were made in that month.
If the deductor does not deposit the amount, it pays interest in accordance with s.50(1) on top of the tax deducted (s.51(6), CGST Act 2017). That is the deductor's default. Because your credit depends on the deductor's return (s.51(5), CGST Act 2017), a delay on their side can delay your credit.
What your company does: step by step
You are the deductee. Your job is to match, claim and reconcile.
Step 1. Record the deduction in your books. When you receive the payment, split the amount between the contract money received and the one per cent held back. The held back part is not lost. It is a credit in your favour, waiting to be claimed.
Step 2. Wait for the deductor's GSTR-7. The rules say the details filed by the deductor are made available to you on the common portal after the filing of GSTR-7, for claiming the amount of tax deducted in your electronic cash ledger after validation (rule 66(2), CGST Rules 2017).
Step 3. Claim the credit in your electronic cash ledger. The Act says the deductee shall claim the credit, in his electronic cash ledger, of the tax deducted and reflected in the return of the deductor furnished under s.39(3), in the manner prescribed (s.51(5), CGST Act 2017). Note the words. The credit goes to the electronic cash ledger, not the electronic credit ledger. That is a cash balance, in FORM GST PMT-05 (rule 87(1), CGST Rules 2017). You can use it to pay tax, interest, penalty, fee or any other amount.
Step 4. Download the GSTR-7A certificate. Keep it with the contract file. If the department's deduction does not appear, the certificate will not appear either.
Step 5. Reconcile every month. Match three things: the payment you received, the deduction shown in the department's statement, and the credit that landed in your cash ledger. A common cause of a mismatch is that the deductor has not yet filed GSTR-7 for the month.
If your company has to deduct
Your company may also be on the other side. If you are a body mandated to deduct, or a notified category, the rules for the deductor above apply to you.
You must register for the purpose. A person required to deduct tax under section 51 applies electronically in FORM GST REG-07 on the common portal (rule 12(1), CGST Rules 2017). The proper officer may grant registration and issue a certificate in FORM GST REG-06 within three working days of the application (rule 12(2), CGST Rules 2017).
If you are applying to deduct tax in a State or Union territory where you have no physical presence, you mention that State in Part A of the application, and the State where your principal place of business is in Part B (rule 12(1A), CGST Rules 2017).
What not to do
- Do not ignore the deduction in your accounts. If it sits in the department's name and not in your books, your cash ledger and your receivables will never reconcile.
- Do not assume the credit is automatic. The Act gives you a right to claim it, once it is reflected in the deductor's return (s.51(5), CGST Act 2017). Check the portal; do not wait for it to show up.
- Do not assume a refund route. A refund of an excess or wrong deduction goes through s.54 (s.51(8), CGST Act 2017). The proviso says no refund is granted to the deductor if the amount deducted has already been credited to the deductee's electronic cash ledger. And a claim for refund must be made before the expiry of two years from the relevant date (s.54(1), CGST Act 2017).
- Do not rely on an old late-fee rule. Sub-section (4) of s.51, which used to carry a per-day late fee for a deductor who did not give the certificate on time, was omitted with effect from 1 January 2021 (Finance Act, 2020). Do not quote it today.
- Do not guess the notification. The list of mandated persons is by notification. If you do not know whether a body is mandated, check.
What to do now
Have a CA review your facts before you act or file.
Frequently asked questions
Is GST TDS an extra tax on my company?
No. It is a part of your payment held back and deposited with the Government. Section 51(5), CGST Act 2017 gives you credit for it in your electronic cash ledger, once the deductor's return reflects it.
The contract is for less than ₹2.5 lakh. Can the department still deduct?
The section applies where the total value of the supply under a contract exceeds ₹2.5 lakh (s.51(1), CGST Act 2017). If the contract value is at or below that figure, the section does not apply on its words. Ask the department for the basis of the deduction.
Do I need to be registered under GST?
The deductee in s.51 is the supplier of taxable goods or services. Whether your company is liable to register is a separate test under s.22 and s.24, CGST Act 2017 (s.22 makes a supplier liable to register above the threshold it sets; s.24 lists categories that must register regardless). Check that before you assume anything about credits.
The department deducted but I cannot see the credit. What now?
First check whether the department has filed GSTR-7 for that month. The credit depends on it (s.51(5), CGST Act 2017; rule 66(2), CGST Rules 2017). Then write to the department's accounts office with your GSTIN, invoice number and payment date, and ask them to file or correct.
Does the department owe anything if it deposits late?
Yes. If the deductor fails to pay the amount to the Government, it pays interest in accordance with s.50(1), CGST Act 2017, in addition to the tax deducted (s.51(6)). The rate is set by notification under s.50(1) (the section caps it at eighteen per cent). Check the current notified rate before you compute a figure.
What if the department deducted too much?
An excess or erroneous deduction is dealt with under s.54 (s.51(8), CGST Act 2017). The proviso bars a refund to the deductor if the amount has already been credited to your electronic cash ledger. Raise it with the department and a CA before you file.
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See Also
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