As per the Draft Determination of Value of Supply Rules, valuation in case of related parties or distinct parties or through an agent, the value of supply of goods or services or both is the open market value, if the same is not available then the value of same or similar quality of goods or services and in case if the same is not available then it can be derived based on cost plus 10%.
As per CGST Act, all taxes, levies, and charges collected from the buyer should be part of the valuation except for the taxes under GST (SGST UTGST & Cess), if buyer and seller are not related parties.
In the current tax regime under VAT we have Tax Deducted at Source, and the same is being continued under GST also. Section 37 of the Model GST Law talks about the Tax Deduction at Source. From the Model GST Law, it is clear that it is not applicable for all transaction and to be recovered by all tax payers.
The tax has to be deducted by a specific set of persons as given in the sub-section 1 of section 37 of the Model GST Law. The list of persons who have to deduct tax will be decided by the State or the Central Government. The list of person as per Model GST Law
(a) a department or establishment of the Central 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 Central or a State Government on the recommendations of the Council,
Now we need to see who all will be included in the last point. It looks like the government wants to deduct tax on contracts gives for execution of roads, dams, power plants etc. This is to ensure that the contractor pays tax on the income and does not escape from the tax net, thereby minimizing revenue leakage.
The tax has to be deducted only in case if the supply of goods or service exceeds Rs 10 Lacs on the list of goods / services notified by the GST Council. The tax base for deduction of tax for TDS under GST is excluding the taxes mentioned on the invoice, this is something different to the valuation for determination of taxes under Section 15. The rate of tax to be deducted is 1%. This is surprising to note that the tax rate has been prescribed in the Act. We need to wait for the final GST Bill and see if the same will be included in the Act or will be announced through notification. If the rate is mentioned in the Act, the Act has to be amended every time government wants to change the tax rate.
The tax so deducted has to be deposited by the deductor by 10th of next month based on the format and other information to be reported. This will be made available only once the GST Council if formed.
The deductor has to issue a certificate to the deductee, the contractor from whom the tax is deducted with the details like the amount of contract, the rate of tax deducted, the amount of tax deducted and the amount of tax deposited by the deductor.
The deductor has to issue a certificate within 5 days from the date on which the amount is credited, a late fee of Rs 100 will be levied per day for delay in issue of a certificate. The amount of late fee will not exceed Rs 5000.
The deductee can take the credit of the tax based on GSTR – 2 filed by the Deductor under Section 27, sub-section 5 of the Model GST Law. The amount will be credited to the electronic cash ledger of the deductee and he can utilize the same for payment of GST taxes.
In case if the deductor fails to deposit the tax to the respective government, he is liable to pay interest on the defaulted amount as per provisions of Section 36 of the Model GST Law.
The deductor can claim for refund as per Section 38 of the Model GST Law provided that the amount is not credited to the electronic cash ledger of the deductee.
The person who has to deduct tax has to obtain registration number by filing of Form GST REG – 07.
GSTR – 7 has to be filed by the deductor on monthly basis using the services of GSP or directly on GSTN servers.
GSTR – 7A is the deduction certificate to be issued on monthly basis to the deductee.
From the provision of this section, it is clear that the government does not want to lose any tax revenue from the small contractors also. One silver lining is that, unlike in tax collected at source there is no matching of records to avail the credit. If the contractor wants to avail in the credit, then he has to be registered with GST. In a way the government is ensuring that there is no revenue leakage from any transactions at any given point of time.