Tax Alert - No Withholding Tax on Goods and Service Tax Component

Background

To address the controversy as to whether withholding tax rate is to be applied on amount payable inclusive of service tax or on income of payee, the Central Board of Direct Taxes (CBDT) had issued Circular No. 1/ 2014 dated January 13, 2014. This Circular provided relaxation from withholding tax obligation on service tax portion included in amount payable to a resident payee, subject to certain conditions. Considering that the service tax regime is now replaced by the Goods and Services Tax (GST) regime with effect from July 1, 2017, the CBDT has harmonized the contents of erstwhile Circular in recent Circular No.23/2017 dated July 19, 2017.

Modification of Circular for new taxation system - GST

Recognising the rationale of excluding tax component from withholding tax obligation, the CBDT Circular clarifies that tax is to be withheld at source under Chapter XVII-B of the Income-tax Act, 1961 on amount without including component of GST on services. This is applicable where:

• the payee is a resident; and
• the amount of GST on services is indicated separately as per terms of agreement/contract between payer and payee.

GST for this purpose shall include Integrated GST, Central GST, State GST and Union Territory GST.

BDO Comments

The recent clarification is welcome and is in line with the intent of the CBDT expressed in erstwhile circular. This measure will essentially reduce the cash outflow of the payers. The circular only covers implications for transactions with resident payee, therefore the question of withholding tax on cross-border transactions where GST is levied by a non-resident are not addressed.