A common query regarding the deduction of TDS that we get is whether TDS is to be deducted on service tax or not at the time of making a payment. This is something that confuses a lot of people. The short answer to the question is–no, TDS does not apply to service tax.
Let’s take a look at a little longer answer to understand how TDS is to be deducted on a bill when service tax is to be paid. Let’s suppose you employed someone’s services and you have to make a payment of Rs 50,000 for the same. Since the payment is above the threshold limit of Rs 30,000 per bill, TDS needs to be deducted on it. But the service provider has charged 14% service tax and 0.5% Swachh Bharat Cess, so the billed amount has come to Rs 57,250.
In such a case, the bill would be broken down as:
| Service Fee | 50,000 |
| Service Tax | 7,000 |
| Swachh Bharat Cess | 250 |
| Total | 57,250 |
Now, do you deduct TDS on Rs 50,000 or Rs 57,250 before making the payment?
TDS would be applicable only on Rs 50,000. That is, only on the actual income of the service provider. The service tax is tax that the provider will pay to the government. Hence, it is not the provider’s income. And TDS is tax that is deducted at source on income.
Therefore, TDS at the applicable rates would have to be deducted on the basic amount exclusive of the service tax only.
This provision is a new rule that came into effect as per a government circular released on 13 January 2014. Earlier, TDS was to be deducted on the amount inclusive of service tax. But the same was later rectified by the government.