TDS on service tax

I ready in discussions here that one has to deduct TDS on the portion of Service Tax also. I also has seen question and answers cicrcular from Income Tax that says TDSdeudction on Service Tax also. Please read following artilce, which opines otherwise


No tax on tax

K. Padmanabhachar, Bangalore


With the advent of service tax, an interesting question has arisen whether tax is deductible at source under the IT Act even in respect of the service tax component of the professional fee/contract amount payable to the service provider/contractor.

Under Section 65 of the Finance Act, 1994, as amended up to 2001, a number of professional services, works contract and so on, attract service tax. The service provider will, in addition to the professional fee, include 5 per cent of the fees, as service tax in the bill, in terms of the obligation cast upon him by Section 68 of the Finance Act. The amount so collected should be credited to the government accountant within the 25th of the month following the month in which it was collected. The service provider has to file returns and any violation of these requirements will meet with penalties.

It is, therefore, clear that the service provider only acts as a collection agent for the Government. The money thus collected is instantly diverted by over-riding title. Therefore, the service-tax component of the moneys received by the service provider is not the income of the service provider.

Most of the taxable services come within the purview of Sections 194C, 194D, 194H, or 194J of the IT Act and the payer has to deduct tax at source while paying the service provider. Such payment will include service tax. It is clear from Section 190 of the IT Act that tax is deductible out of `income'. By now, the concept of income is so clear that receipts such as service tax can hardly be termed as income of the recipient. Where a receipt is not in the nature of income, the question of deduction of tax (by the payer) does not arise. Therefore, it appears that while paying towards taxable services, the payer has to deduct income tax at source only in respect of the net amount after excluding service tax. Section 194J also refers to ``professional fees payable''. Obviously, professional fees will not include service tax.

Though Section 194C requires deduction of tax ``out of sum payable'', it has to be read with Section 190. If the sum comprises a receipt which is patently not income and does not belong to the recipient, such as service tax, such sums should be excluded for the purpose of TDS. Even the ratio laid down by the Supreme Court in the case of Chowringhee Sales Bureau [(1973)87ITR542] that sales tax is a part of the turnover, will not support a view that service tax is part of professional fees as that decision was given in a different context. Service tax law is unambiguous about the status of the moneys collected as it is in the hands of the service provider. So, let there be no TDS on service tax.

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