GST TDS, GSTR-7 and the Gross-Turnover-versus-Taxable-Turnover Puzzle: What Every Contractor, DDO and Tax Officer Must Know
Summary: The article explains the GST Tax Deducted at Source (TDS) mechanism under section 51 of the CGST Act, 2017 and Rule 66 of the CGST Rules, 2017, focusing on mismatches arising from reporting gross invoice values instead of taxable values in FORM GSTR-7. It states that TDS is to be deducted on the value of supply excluding GST and cess, while noting that some deducting offices reportedly compute and report TDS on tax-inclusive invoice values, leading to apparent turnover mismatches during scrutiny. The article discusses the flow of TDS credit through GSTR-7, the requirement for suppliers to accept or reject entries before credit reaches the electronic cash ledger, and the introduction of invoice-wise reporting through Notification No. 09/2025–Central Tax dated 11 February 2025, made operational from the September 2025 tax period following the GSTN advisory dated 26 September 2025. It also outlines suggested practices for Drawing and Disbursing Officers, suppliers and scrutiny officers, and concludes that maintaining separate reporting of gross and taxable values is essential to avoid reconciliation issues and notices arising from incorrect data entry.
A Common GST TDS Mismatch Faced by Contractors
A works contractor from Srinagar spends three years executing running-account bills for a Government Department. Every month, two percent is quietly deducted from his bill before payment reaches his account. He assumes, reasonably, that this deduction is GST already accounted for, and files his returns based on his own invoices. Years later, a scrutiny notice arrives: the department says his declared turnover falls short of the turnover implied by the tax deducted at source against him, and asks him to explain the “shortfall”. The contractor is bewildered — he has paid GST on every rupee he billed. What he does not immediately realise is that the mismatch may have nothing to do with anything he did wrong. It may simply be that the government office deducting his tax entered the wrong number in the wrong column of its own return.
Why This GST TDS Issue Matters
This is not a hypothetical problem. It is one of the most persistent, least understood sources of friction between government deductors, taxpayers and the tax department under the GST TDS mechanism — and it has just acquired a new dimension with a change that took effect from September 2025. This write-up explains how the mechanism is supposed to work, where it goes wrong on the ground, what changed recently, and what each of the three parties involved — the deducting office, the supplier, and the tax officer — needs to do about it.
What TDS under GST actually is:
Government departments do not pay tax the way ordinary businesses do. Instead, when a government office, a local authority, a PSU or certain other notified entities make payments to their suppliers and contractors, the law requires them to hold back a small percentage of the payment and deposit it directly with the tax department, on the supplier’s behalf. This is Tax Deducted at Source, and it is governed by Section 51 of the CGST Act, 2017 (mirrored in the JK GST Act, 2017). The section reads, in relevant part:
“(1) Notwithstanding anything to the contrary contained in this Act, the Government may mandate,— (a) a department or establishment of the Central Government or State Government; or (b) local authority; or (c) Governmental agencies; or (d) such persons or category of persons as may be notified by the Government on the recommendations of the Council, (‘the deductor’), to deduct tax at the rate of one per cent. from the payment made or credited to the supplier (‘the deductee’) of taxable goods or services or both, where the total value of such supply, under a contract, exceeds two lakh and fifty thousand rupees.”
Because this one percent applies separately under the CGST Act and the corresponding SGST Act, an intra-State supply effectively suffers TDS of 2% — 1% CGST plus 1% SGST — while an inter-State supply attracts 2% IGST. The threshold of ₹2.5 lakh applies to the value of the contract, not to each individual bill raised under it, so a running-account contract worth ₹8 lakh remains within TDS even if a particular monthly bill is only ₹40,000.
The one line in the law that decides everything:
Section 51 does not stop at prescribing the rate. It also tells the deductor, in an Explanation to sub-section (1), exactly what figure the one percent (or two percent) is to be applied to:
“Explanation.— For the purpose of deduction of tax specified above, the value of supply shall be taken as the amount excluding the central tax, State tax, Union territory tax, integrated tax and cess indicated in the invoice.”
This single sentence is the crux of nearly every genuine TDS-related dispute seen on the ground. It says, unambiguously, that TDS is to be calculated on the taxable value of the supply — the amount before GST is added — and never on the invoice’s gross, tax-inclusive figure. A ₹10 lakh work bill that carries 18% GST has a Taxable Value of ₹10 lakh and a Total Invoice Value of ₹11.8 lakh; TDS at 2% is ₹20,000, calculated on the ₹10 lakh, not on the ₹11.8 lakh.
In practice, however, many drawing and disbursing offices — particularly those handling works contracts through running-account bills, where the bill format itself is inherited from pre-GST accounting practice — continue to compute the 2% deduction on the gross, tax-inclusive bill amount, and then report figures in FORM GSTR-7 that do not consistently distinguish between the gross value of the bill and its taxable value. When that inflated or inconsistent figure later gets compared against the supplier’s own GSTR-3B, an apparent “shortfall in turnover” shows up — not because the supplier under-reported anything, but because the two figures were never measuring the same thing to begin with.
How the credit is supposed to reach the supplier
The deductor’s obligations don’t end with making the correct deduction. Rule 66 of the CGST Rules, 2017 (mirrored in the JK GST Rules) requires:
“(1) Every registered person required to deduct tax at source under section 51 (deductor) shall furnish a return in FORM GSTR-7 electronically through the common portal… (2) The details furnished by the deductor under sub-rule (1) shall be made available electronically to each of the deductees on the common portal… for claiming the amount of tax deducted in his electronic cash ledger after validation.”
In everyday terms: the DDO files GSTR-7 every month, declaring which suppliers it paid, the taxable value of each payment, and the CGST/SGST or IGST deducted. This flows automatically into a table called “TDS and TCS credit received” that every registered supplier can see when they log into the portal — the same table visible in the department’s own TDS-and-TCS dashboard, which lists, for each deductor, the tax period, invoice details, the taxable value declared, and the tax deducted. The supplier must actively accept these entries before the deducted amount lands in their electronic cash ledger as usable credit; an entry can also be rejected if it is wrong. Once accepted, this becomes real money in the supplier’s cash ledger, available to discharge output tax liability — which is exactly why getting the underlying taxable-value figure right matters so much. Accept a wrongly inflated figure without checking it, and a supplier may unknowingly be certifying, on the departmental record, a turnover figure that does not match their own books.
What changed from September 2025?
Until recently, GSTR-7 permitted deductors to report TDS in summary form — one lump figure per supplier per month, with no breakup by invoice. This made it almost impossible for either the supplier or the department to independently verify which specific bill a given deduction related to, or whether the taxable value used for that deduction matched the actual net-of-tax value on that specific invoice.
This changed with Notification No. 09/2025–Central Tax, dated 11th February 2025, which amended the format of FORM GSTR-7 to enable invoice-wise capture of TDS details. The functionality itself went live only later: GSTN’s advisory dated 26th September 2025 announced that invoice-wise reporting in GSTR-7 had been made operational on the portal, and that from the September 2025 tax period onwards, every deductor is required to report, against each invoice on which tax has been deducted, the invoice number, date, taxable value, and the amount of CGST/SGST or IGST deducted — replacing the earlier practice of a single consolidated figure. The first return under the new format was due by 10th October 2025, and every GSTR-7 filed since carries this invoice-level detail, exactly as now visible on the department’s own TDS-and-TCS Credit Received screens.
This is a welcome move. Invoice-wise reporting gives both the supplier and the tax officer, for the first time, a granular trail: instead of one number for the whole month, there is now a specific invoice number, a specific date, and a specific taxable value against which a specific tax figure was deducted. In principle, this makes it far easier to catch an error at the point it occurs, rather than only after months of accumulated mismatch trigger a scrutiny notice.
Why invoice-wise detail alone does not solve the problem:
Here is the caveat that this piece exists to underline. Invoice-wise reporting only helps if the figure being entered against each invoice is the correct figure. If a deducting office continues to key in the gross, tax-inclusive bill value into the “taxable value” column — the very practice the Explanation to Section 51(1) was written to prevent — then invoice-wise reporting simply reproduces the same error at a finer level of detail. Instead of one wrong lump-sum figure a month, the supplier and the department now see twelve or fifteen wrong figures a month, each individually inflated, each capable of generating its own reconciliation dispute.
What each party on the ground should do:
For Drawing and Disbursing Officers (DDOs): The “value” column in your GSTR-7 filing should carry the gross bill amount, and the “taxable value” column must carry only the amount net of CGST/SGST/IGST — never the same figure repeated in both columns. If your accounting system generates a running-account bill inclusive of tax, work out the taxable value separately before filing, rather than letting the portal or your data-entry operator carry forward the gross figure by default. Getting this right at the point of filing avoids years of downstream reconciliation trouble for your suppliers.
For suppliers and contractors (deductees): Do not accept TDS entries in the “TDS and TCS credit received” table mechanically. Check the taxable value shown against each invoice against your own bill; if a DDO has entered the gross, tax-inclusive value instead of the net taxable value, reject the entry and take it up with the DDO for correction before it becomes part of your accepted record. Keep your own invoice-wise ledger of running-account bills so that, invoice for invoice, you can demonstrate the correct net-of-tax figure if a query ever arises.
For scrutiny and assessing officers: Before treating a difference between TDS-implied turnover and GSTR-3B-declared turnover as a “shortfall” warranting action under Section 61 (scrutiny) or Sections 73/74A (Show Cause Notice), examine whether the deductor’s GSTR-7 has reported the gross bill value as taxable value. Where multiple government departments of the same type show a pattern of this data-entry practice across several suppliers, the more prudent course is to call for a reconciliation from the DDO before drawing an adverse inference against the supplier. A mismatch rooted in how a third party filled a government form is a very different thing from suppression of turnover by the taxpayer, and the two should not be treated alike.
The bottom line
Section 51 is by design, a fairly simple provision: deduct a small percentage, deposit it promptly, and credit it to the right supplier against the right invoice — on the value net of tax, and no other figure. Rule 66 and the GSTR-7/GSTR-7A machinery exist to make that credit visible and verifiable. The move to invoice-wise reporting from September 2025 is a genuine improvement in transparency. But none of this replaces the basic discipline, at the point of data entry, of keeping gross turnover and taxable turnover in their separate columns. Until that discipline is uniformly followed by every deducting office, contractors across Jammu and Kashmir will continue to receive notices for shortfalls— and the surest protection available to them, in the meantime, is to read every TDS credit entry before accepting it, not after.
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The author Aijaz Hussain Malik (JKAS) is a State Taxes Officer with the Excise and Taxation Department, Jammu and Kashmir. Views expressed are personal and intended for general awareness; readers facing a specific notice or dispute should seek formal advice or clarification from the jurisdictional tax authority. The author can be reached at Circleckashmir@gmail.com
