TREATMENT OF SERVICE TAX
TREATMENT OF SERVICE TAX Vis-a-vis TDS
    TREATMENT OF SERVICE TAX Vis-a-vis TDS

    TREATMENT OF SERVICE TAX Vis-a-vis TDS As per Indian tax laws, at the time of making any payment, the receiver of the service is required to do two things:
    1. Pay service tax on the services
    2. Deduct TDS on the payment made
    Section 190 of the Income Tax act states that "Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction 2[ or collection] at source or by advance payment, as the case may be, in accordance with the provisions of this Chapter" .
    In simple words TDS is one of the modes of collection of taxes, by which a certain percentage of amounts are deducted by a person at the time of making/crediting certain specific nature of payment to the other person and deducted amount is remitted to the Government account. It facilitates sharing of responsibility of tax collection between the deductor and the tax administration. It ensures regular inflow of cash resources to the Government. It acts as a powerful instrument to prevent tax evasion. The limits for amount on which tax may be deducted as well as the rates for deduction of such tax have been specified from time to time.

    Whether TDS on Service tax is to be deducted
    Often the deductor has no clarity on the whether the deduction of income tax at source (TDS) should be made on amount including service tax or excluding service tax. In other words should TDS be deducted on the service tax or not? Let us examine the various issues involved and relevant cases in this regard.

    What was the practice earlier?
    Earlier TDS on service Tax was to be deducted on the amount inclusive of the service tax for all payments except rent. On 28-04-2008 CBDT had issued a circular no. 04/2008 in response to representations/letters received by the Board seeking clarification as to whether TDS provisions under section 194-I of the Income-tax Act will be applicable on the gross rental amount payable (inclusive of service tax) or net rental amount payable (exclusive of service tax) .This circular had excluded the component of service tax from the deduction of tax at source as far as rent was concerned. The aforesaid circular further clarifies that service tax paid by the tenant doesn't partake the nature of "income" of the landlord. The landlord only acts as a collecting agency for Government for collection of service tax. Therefore it has been decided 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

    Earlier rule in respect of payments other than rent
    As far as deduction of tax on payments of professional-technical fee was concerned, the stand taken by CBDT was completely different. As per its circular no F.No. 275/73/2007-IT(B), dated 30-6-2008, CBDT stated that "the payments made under section 194-I differ significantly from payment made under section 194J in the way that in the case of 194-I TDS has to be deducted on any income paid as rent. However, in the case of section 194J TDS has to be deducted on any sum paid as professional and technical fees. The Board had decided to exclude TDS on service tax component on rental payment because it was construed that service tax payment cannot be regarded as income of the landlord. Since section 194J covers any sum paid, therefore the board has decided not to extend the scope of Circular No. 4/2008, dated April 28, 2008 to such payment under section 194J"hat

    Circular dated 13-01-2014
    The CBDT has recently issued a Circular No. 01/2014 dated 13.01.2014 regarding deduction of TDS under chapter XVII-B of the Income Tax Act, 1961. In exercise of the powers conferred under section 119 of the Act, the Board has decided that wherever in terms of the agreement/contract between the payer and the payee, the service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component.

    TDS on Service tax- The new Rule
    Logically speaking, TDS is to be deducted from the income of the recipient. Service tax is a tax levied on provision of services. It is not an income of the service provider as the service provider has to deposit the amount of service tax collected from the service receiver, with the government. TDS, as discussed earlier being an amount deducted from the income, ideally should not be deducted on the service tax component but should be deducted on the amount exclusive of service tax. As clarified by the above circular, TDS is to be deducted on the amount exclusive of service tax if the service tax amount is disclosed separately in the invoice. As per Rule 4A of the Service Tax Rules, service tax should be mentioned separately on the invoice. However in case the service tax amount is not disclosed separately in the invoice, TDS shall have to be deducted on the total amount inclusive of service tax if we go by the clarification made in the circular In the above mentioned circular, attention was also been drawn to the judgment of the Honorable Rajasthan High Court dated 01.07.2013, in the case of CIT(TDS) Jaipur vs. Rajasthan Urban Infrastructure (Income-tax Appeal No.235, 222, 238 and 239/2011), holding that if as per the terms of the agreement between the payer and the payee, the amount of service tax is to be paid separately and was not included in the fees for professional services or technical services, no TDS is required to be made on the service tax component u/s 194J of the Act.

    Conclusion
    These are some of the rare occasions where the department has accepted the view of the Judiciary. The CBDT circular mentioned above was in response to the aforementioned judgment of the Rajasthan High Court. This is a welcome move of the CBDT. However it seems that this circular is not retrospective, so for periods prior to January 2014, TDS will have to be deducted on the Service Tax amount.