When it comes to taxation, understanding the concepts can get confusing as India uses both direct tax and indirect tax systems at the same time. Income tax is type of a direct tax, because you pay it directly to the government on the basis of your income. GST is a type of indirect tax, because it gets collected through the supply chain and the final burden falls on the end consumer.
Within GST, there is a specific mechanism called GST TDS, which is different from income-tax TDS.
What is GST TDS and why does it exist?
GST TDS is Tax Deducted at Source under GST. It was introduced to improve compliance and tracking for large-value payments made by notified entities (mainly government bodies and certain government-controlled entities). It ensures that a part of the tax is collected upfront and reflected in the supplier’s GST ledger. Think of it as a “compliance lock.” The supplier still files returns and pays GST as usual, but the TDS creates a verified trail of payments.
The GST TDS rate is 2% in total. For intrastate supplies, it is typically 1% CGST + 1% SGST. For interstate supplies, it is 2% IGST.
TDS is generally required when the value of supply under a contract exceeds ₹2,50,000.
This is why people search for TDS rate in GST so often, because the while rate chart is simple, the question of “when to deduct” may not be known by many.
Is TDS calculated on the GST amount?
No. TDS on GST amount is not the correct approach in GST TDS.
Section 51’s explanation makes it clear that the value of supply for deduction is taken after excluding the GST amounts shown on the invoice (CGST/SGST/IGST/cess).
So, TDS under GST is deducted on the taxable value, not on the invoice total including GST.
Quick example
Particulars
| Amount
|
Taxable value (contract value)
| ₹10,00,000
|
GST @ 18%
| ₹1,80,000
|
Invoice total
| ₹11,80,000
|
GST TDS rate (2% on taxable value)
| ₹20,000
|
This matches the CBIC’s guidance that TDS is computed on the value excluding the tax component shown in the invoice.
Note: No deduction is to be made if the supplier’s location and the place of supply are in a State/UT that is different from the recipient’s State/UT of registration (the recipient is the deductor).
Common mistakes to avoid
- Deducting TDS on GST amount instead of on taxable value.
- Ignoring the ₹2.5 lakh contract threshold and deducting on smaller contracts.
- Missing the “different State” exception and deducting when you should not.
- Treating GST TDS as if it is the same as income-tax TDS.
Once GST TDS is deducted, the deductor has to deposit it and file the required return (commonly done via GSTR-7 workflow). In practice, guidance around GST TDS compliance also highlights timelines like depositing within a defined time window after month-end.
The supplier gets credit of the deducted amount in their GST ledger, which can be used for paying GST liabilities.
Difference Between GST and VAT
The Difference Between GST and VAT matters because many people still apply old VAT-based thinking to GST.
GST is designed as a destination-based tax on consumption. It is levied through the supply chain with credit available for taxes paid at earlier stages, so only value addition is taxed.
VAT was largely state-level and mainly focused on goods, whereas GST unified several indirect taxes under one structure across goods and services.
This is also why TDS under GST is more system-driven and ledger-linked than the way deductions were understood in older indirect tax systems.
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