Whether Service Tax should be considered while deducting Income tax at source (TDS) or not ?
Often we have no clarity on the question that while making the payment of rent or professional or technical fees, the deduction of income tax at source (TDS) should be made on which amount? Including service tax or excluding service tax?
Representations/letters have been received from the Central Board of Direct Taxes seeking clarification as to whether TDS provisions under section 194-I and 194-J of the Income-tax Act will be applicable on the gross amount payable (inclusive of service tax) or net amount payable (exclusive of service tax).
Who is liable to deduct TDS on Rent? Any person, other than an individual or a HUF who pays Rent to a resident in India, amounting in aggregate to more than Rs. 180000 in a financial year. However w.e.f. 01/06/2002, individuals and HUF who were covered under section 44AB (a) and (b) in the preceding previous year, are also required to deduct tax at source.
As per the Circular No. 4/2008 dated 28-04-2008 issued by the CBDT, “Service tax paid by the tenant is not a part of the income hence it does not 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 (only from rent and not on amount of service tax charged on rent).
Who is liable to deduct TDS u/s 194J? Any person, other than an individual or a HUF, who pays any sum by way of Professional Fees, Fees for Technical Service, any remuneration or fees or commission paid to a director, which is not in the form of salary, royalty or any sum referred to in clause (va) of section 28 which relates to non-complete payment is liable to deduct TDS u/s 194J.
However, the CBDT have taken a totally different stand on deduction of income tax on payments of Professional or Technical fees. As per the Circular no.275/73/2007-IT (B), dated 30th June 2008, the payments made under section 194-I differ significantly from payments made under section 194J in the way that in the case of 194I, 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 (on the gross amount paid/payable i.e. inclusive of service tax). The CBDT 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 CBDT has decided not to extend the scope of Circular No. 4/2008 dated 28-04-2008, to such payment under section 194J.
The CBDT has preferred to different treatments for similar sections and no clarification is given for the same. Therefore this being a matter of issue, a correct circular is desired to clarify that tax need to be deducted only on amount paid to payee which is on his own account for fees, charges, consideration, rent etc. as the case may be. Charges like such taxes will not be subject to TDS.