Think of TDS under GST (Section 51) as the GST version of TDS you already know from Income Tax — except here, it's specific government bodies cutting tax before paying their suppliers. If you're a contractor supplying goods or services to a government department, they'll deduct 1% from your payment before crediting it to you. That deducted amount goes to the government, and you get credit for it in your electronic cash ledger.
Who deducts? The deductor is always a government-type entity — Central/State Government departments, local authorities (like a Municipal Corporation), governmental agencies, or any person specifically notified by the Government on the Council's recommendation. Private companies do NOT deduct TDS under GST, even if they're big buyers. Who gets deducted? The deductee — the supplier of taxable goods, services, or both.
When does TDS kick in? Only when the total contract value exceeds ₹2,50,000. And here's the crucial twist examiners love: the 1% is calculated on the value excluding GST (no tax on tax!). So if an invoice is ₹3,00,000 + ₹54,000 GST, TDS is on ₹3,00,000 only. There's one big exception: if the supplier's location and the place of supply are in a different state/UT from where the recipient (deductor) is registered, no TDS is deducted at all. This is because inter-state vs. intra-state gets complicated with IGST, and the law simply excludes such cases.
Key compliance timelines — these are exam favourites: the deductor must deposit the deducted tax within 10 days after the end of the month. They must also issue a TDS certificate to the deductee within 5 days of crediting the amount to the government. Miss that 5-day window? Late fee of ₹100/day, capped at ₹5,000. The deductee then claims this TDS as credit in their electronic cash ledger, based on the deductor's GSTR-7 return. This is asked frequently as a 4-mark question — know the timelines cold.
Example 1 — Basic TDS Calculation
PWD (Public Works Department), Maharashtra, awards a civil works contract to Rajesh & Co. Pvt. Ltd. (also registered in Maharashtra) for ₹4,00,000 (excluding GST). GST @ 18% = ₹72,000. Total invoice value = ₹4,72,000.
Step 1: Check if TDS applies — Contract value > ₹2,50,000? Yes (₹4,00,000 > ₹2,50,000). ✓
Step 2: Check location condition — Supplier (Maharashtra) and place of supply (Maharashtra) = same state as recipient (Maharashtra). TDS applies. ✓
Step 3: Calculate TDS — 1% × ₹4,00,000 (excluding GST) = ₹4,000
Step 4: Payment to Rajesh & Co. = ₹4,72,000 − ₹4,000 = ₹4,68,000
Answer: PWD deducts ₹4,000 as TDS and must deposit it within 10 days of month-end. Rajesh & Co. gets credit of ₹4,000 in their electronic cash ledger.
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Example 2 — No TDS (Inter-State Exception)
Delhi Municipal Corporation (registered in Delhi) awards a security services contract worth ₹5,00,000 to Ms. Iyer Security Services (registered in Tamil Nadu). Place of supply is Delhi.
Step 1: Contract value > ₹2,50,000? Yes. ✓
Step 2: Location check — Supplier is in Tamil Nadu, place of supply is Delhi. These are in different states from the recipient's registration state? Supplier's state ≠ Recipient's state → No TDS applicable.
Answer: No TDS deducted. Full ₹5,00,000 (+ GST) paid to Ms. Iyer. The inter-state exception under the proviso to Section 51(1) applies.
📖 Bare Act text — Section 51, CGST Act 2017
(click to expand)
(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, (hereafter in this section referred to as ―the deductor‖), to deduct tax at the rate of one per cent. from the payment made or credited to the supplier (hereafter in this section referred to as ―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:
Provided that no deduction shall be made if the location of the supplier and the place of supply is in a State or Union territory which is different from the State or as the case may be, Union territory of registration of the recipient.
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.
(2) The amount deducted as tax under this section shall be paid to the Government by the deductor within ten days after the end of the month in which such deduction is made, in such manner as may be prescribed.
(3) The deductor shall furnish to the deductee a certificate mentioning therein the contract value, rate of deduction, amount deducted, amount paid to the Government and such other particulars in such manner as may be prescribed.
(4) If any deductor fails to furnish to the deductee the certificate, after deducting the tax at source, within five days of crediting the amount so deducted to the Government, the deductor shall pay, by way of a late fee, a sum of one hundred rupees per day from the day after the expiry of such five days period until the failure is rectified, subject to a maximum amount of five thousand rupees.
(5) The deductee shall claim credit, in his electronic cash ledger, of the tax deducted and reflected in the return of the deductor furnished under sub-section (3) of section 39, in such manner as may be prescribed.
(6) If any deductor fails to pay to the Government the amount deducted as tax under sub-section (1), he shall pay interest in accordance with the provisions of sub-section (1) of section 50, in addition to the amount of tax deducted.
(7) The determination of the amount in default under this section shall be made in the manner specified in section 73 or section 74.
(8) The refund to the deductor or the deductee arising on account of excess or erroneous deduction shall be dealt with in accordance with the provisions of section 54:
Provided that no refund to the deductor shall be granted, if the amount deducted has been credited to the electronic cash ledger of the deductee.