Background: Under the Goods and Services Tax (GST), tax deduction at source (TDS) is a mechanism wherein a specific amount is deducted by the recipient of a supply—such as governments, government organizations, and public sector undertakings (PSUs)—at the time of making payment or crediting the supplier. This applies if the total value of such supply under a contract exceeds ₹2,50,000 (excluding taxes).
Implementation
Initially, the GST TDS mechanism was deferred through various notifications but was later implemented starting from October 1, 2018, via Notification No. 50/2018-Central Tax, dated September 13, 2018.
For infrastructure companies executing Engineering, Procurement, and Construction (EPC) contracts, which constitute a continuous supply of services to government entities and PSUs, the GST TDS deduction over time has created significant reconciliation challenges.
Circumstances Where TDS Is Not Required
As per the Standard Operating Procedure (SOP) issued by the GST Council’s Law Committee (dated September 28, 2018), TDS is not required in the following circumstances:
- Where a supplier had issued an invoice for the sale of goods requiring TDS under VAT Law before July 1, 2017, but payment was made after July 1, 2017 ([Section 142(13) GST Act]).
- Where the supplier’s location and place of supply are in different states or union territories compared to the deductor’s registration state.
- Where payments relate to tax invoices issued before October 1, 2018.
- Where an amount was paid as an advance before October 1, 2018, but the tax invoice was issued later. TDS is not deducted for the portion paid in advance.
Critical Issues Leading to GST-TDS Reconciliation Mismatches
Despite these exemptions, infrastructure companies face serious challenges in reconciling GST TDS with their turnover due to multiple mismatches, including:
1.Deduction at payment release stage: Even when work done in RA Bills was certified in the pre-GST regime (before July 1, 2017) or during the initial GST phase (before October 1, 2018), TDS is still deducted, leading to inconsistencies.
2. Incorrect IGST TDS deduction: Even if Infra Companies charge CGST & SGST, but due to failure to obtain a GST TDS registration by Recipient of Services like Government/ Government Organisations in the respective state, IGST TDS is deducted incorrectly.
3. Inclusive contracts cause TDS deduction on gross value: Since EPC contracts are usually inclusive of GST, TDS is deducted on gross value inclusive of GST, rather than the taxable portion.
4. Contracts awarded before July 18, 2022: If an inclusive GST rate of 12% was applicable but work was performed after July 18, 2022, with GST liability at 18%, deductors may continue applying 12% GST when arriving at the taxable value for TDS deduction.
5. Failure to consider reimbursements: Infrastructure companies discharge GST liabilities on reimbursements, but deductors often fail to factor in reimbursements when applying TDS.
6. Adjustments related to withheld money: Retention money, deductions, recovery, withheld amounts and subsequent releases cause mismatches in taxable values, complicating reconciliation.
7. Partial payments create turnover mismatches: TDS is deducted only on partial amounts paid, while Infra Companies report full certified work done value as taxable turnover.
8. Financial Corporation involvement leads to GST rate disputes: Many infrastructure projects are funded by financial corporations, but invoices are raised on state governments. Since the financial corporation releases payments and reports the GST TDS, this has led to GST rate litigation (12% vs. 18%) between January 1, 2022, and July 18, 2022.
A Welcome Step: In response to these challenges, the government has issued Notification No. 09/2025 – Central Tax (dated February 11, 2025), amending Form GSTR-7 to introduce invoice-wise reporting effective April 1, 2025.
However, as per an advisory issued on May 19, 2025, the GST portal is still undergoing development and testing for this functionality. Implementation is expected soon, and users will be informed once the changes go live.
Conclusion: Invoice-wise reporting is expected to bring significant relief to infrastructure companies. With proper alignment of GSTR-7 data, reconciliation with GSTR-1 and GSTR-3B returns will become much more streamlined, reducing discrepancies and minimizing litigation risks.
Author Bio
GST-TDS poses significant reconciliation challenges for infrastructure firms, especially in legacy and inclusive contracts. Misapplication of IGST and deduction on gross values further complicate compliance.