Why GST TDS on Gross vs. Net Value is More Than Just a Taxing Issue for Businesses and Government Contractors
As an accountant or an entrepreneur managing a corporation in India, especially one engaged in government contracts, you would have heard about the GST TDS (Tax Deducted at Source) confusion around whether GST should be deducted on gross (inclusive of GST) or net (ex GST) value. While this looks like a trivial issue, the confusion is causing widespread chaos due to differences in accounting records, discrepancies in Income Tax Returns, and a flood of notices from the GST department. Let us break this down with examples from the ground up, understand the reasons behind the chaos, and recommend ways through which the businesses can stay out of the chaos.
What is GST TDS, and Why Should I Care?
As per Section 51 of the CGST Act, 2017, some specified entities such as government departments, public sector undertakings, and local authorities are mandated to deduct GST TDS at 2% (1% for CGST and 1% for SGST, or 2% IGST for interstate supplies) on gross payment of taxable goods or services for contracts that exceed the sum of ₹2.5 lakh (excluding GST). The amount deducted is sent to the government by the 10th of the following month using Form GSTR-7. In return, the supplier is issued a TDS certificate GSTR-7A which can be credited in their GST returns. Simple enough, right? Well, not exactly.
Issues occur when government agencies apply TDS on the total invoice amount which includes GST instead of the net amount which excludes GST. This is a misstep as it creates a mismatch between the supplier’s books, their income tax returns, and the GST portal’s records. Let us illustrate this with an example.
Example: Construction Supplier Example
Let us say you are a construction supplier for the government and your name is Rahul Enterprises. You issued an invoice for a contract amounting to ₹5,00,000 (net value) and GST of 18% (₹90,000), bringing the invoice total to ₹5,90,000. The government department is supposed to deduct TDS of 2% on the net amount of ₹5,00,000 which equals ₹10,000. Thus, the TDS is ₹10,000 (1% CGST + 1% SGST = ₹5,000 each). You should net receive ₹5,80,000 (₹5,90,000 – ₹10,000) and the TDS should be credited to your e-cash ledger which can be claimed in GST returns.
But here is the issue: the government department deducts 2% TDS on the gross value which is ₹5,90,000, yielding a TDS of ₹ (5,900 + 5,900) 11,800. Their payment to you is ₹5,78,200, and they report ₹11,800 TDS against their GSTR-7. Now your accounts indicate a TDS credit of ₹10,000 based on the correct figure, but the GST portal shows ₹11,800. This incongruity causes the GST department to issue a notice requesting you to justify the discrepancy.
Why Are Government Departments Getting It Wrong?
Some government departments have no clarity or training, which leads to confusion. Here are main reasons this issue continues to exist:
Misinterpretation of Rules: A few government departments operate under the incorrect assumption that TDS must be computed based on the total invoiced amount. It is the same as how some Income Tax TDS provisions such as under Section 194J, where TDS is deducted on the gross amount if GST is not separately identified. But as law of GST provides, TDS has to be computed on the value not including GST to avoid tax on tax.
Legacy Practices: Service tax was routinely included in the base amount for TDS under the Income Tax law prior to the adoption of GST. Many government accountants have not fully shifted to the GST-specific rule that tax does not form a part of the value for computing the payment.
Software and Systemic Errors: Some accounting interfaces fail to recognize the exclusion of GST while computing TDS, leading to truncations during deductions. This is more of a phenomenon in smaller, less digitized departments.
Lack of Communication: It is often the case that suppliers identify the discrepancies during the payment/checking phase of GSTR-7A, and by the time they try to address it, the mismatch has already been recorded.
The Domino Effect: Mismatches in Books and ITR
The consequences of overly simplifying the problem of incorrect TDS deductions is that, along with it, a string of other problems arise—
Books of Accounts: Using the incorrect calculation of TDS, suppliers post TDS as 2% of net figures, leading to discrepancies. This diverges with GSTR-7A in a way that the balance is closed through reconciliation. With Rahul Enterprises in mind, the ₹10,000 TDS that the books show is in contradiction with the GST provided ₹11,800 leading to ₹1,800 mismatch.
Income Tax Returns: When filing ITR, suppliers depend on Form 26AS (Income Tax TDS) and GSTR-7A (GST TDS) to assert credits. If a supplier’s books show a GST TDS that is stream-lined, during reconciliation, it raises the possibility of additional scrutiny whilst claiming credits. Besides, the excess TDS credit claimed triggers a defective return notice.
GST Notices: The GST portal’s automated systems flag mismatches between the supplier’s GSTR-3B (where they claim TDS credit) and the deductor’s GSTR-7. This results in notices demanding explanations or payment of the differential tax, even though the error lies with the deductor. In 2024, many businesses reported receiving such notices, especially after the CBIC’s updated GSTR-7 format (introduced July 10, 2024), which requires invoice-level reporting, making mismatches more visible.
Another Example: A Freelance Consultant’s Struggle
Let us consider Priya Sharma, a freelance IT consultant working with a central government agency. She issues an invoice for ₹3,00,000 (net value) plus 18% GST (₹54,000), totalling ₹3,54,000. The agency incorrectly deducts 2% TDS on ₹3,54,000, which is ₹7,080, instead of ₹6,000 (2% of ₹3,00,000). Priya records ₹6,000 as TDS in her books, but the agency’s GSTR-7 shows ₹7,080. When Priya files her GSTR-3B, she claims ₹6,000, leading to a mismatch. The GST department issues a notice, and Priya spends weeks coordinating with the agency to correct the error, delaying her cash flow, and increasing compliance costs.
How to Fix This Mess
The good news? There are ways to address this issue, though it requires proactive steps from both suppliers and deductors:
1.Clear Invoicing: Suppliers should clearly segregate the taxable value and GST component in their invoices. The CBDT’s Circular No. 23/2017 clarifies that no TDS (under Income Tax or GST) should be deducted on the GST component if it’s separately shown. This reduces the chance of miscalculation.
2. Verify GSTR-7A: Regularly check the GSTR-7A certificate on the GST portal to ensure the TDS amount matches your records. If there is a discrepancy, contact the deductor immediately to file a revised GSTR-7.
3. Communicate with Deductors: Before issuing invoices, confirm with the government department that they will deduct TDS on the net value. A simple email or contract clause can prevent errors.
4. Reconcile Regularly: Cross-check your books with GSTR-7A and Form 26AS to catch mismatches early.
5. Respond to Notices Promptly: If you receive a GST notice, provide evidence (e.g., invoices, GSTR-7A, and your books) to explain the mismatch. Request the deductor to revise their GSTR-7 if the error is on their end.
6. Claim Refunds: If excess TDS is deducted and deposited, suppliers can claim a refund, provided the amount has not been credited to their electronic cash ledger. However, deductors cannot claim refunds for amounts already credited to the supplier’s ledger.
The Bigger Picture: Why This Needs Urgent Attention!
The GST TDS issue is not just a clerical error—it is a systemic problem affecting thousands of suppliers, especially small businesses, and freelancers. The constant notices from the GST department increase compliance costs, stress, and delays in cash flow. The CBIC’s recent updates (July 2024) mandating invoice-level reporting in GSTR-7 have made these mismatches more visible, leading to a surge in notices.
Moreover, this issue highlights the need for better training for government accountants and more robust GST portal validations to flag incorrect TDS calculations before they are filed. Until then, suppliers must stay vigilant to avoid getting caught in this compliance trap.
Conclusion
The GST TDS deduction on gross vs. net value is a classic case of a small mistake causing big problems. By understanding the rules, maintaining clear invoices, and reconciling regularly, businesses can minimize discrepancies and avoid those dreaded GST notices.
Have you faced GST TDS mismatches? Share your story in the comments below, and let us discuss how you tackled it!
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