Volume 6, Issue 19

28 January 2014

Tax Alert

CBDT starts the new year with a favourable circular – No taxes to be withheld on the service tax component in payments made to Residents

The Central Board of Direct Taxes (CBDT) vide Circular No. 1/2014 dated 13 January 2014 has clarified that tax is not required to be withheld on service tax, provided such service tax is indicated separately in the invoice and also the same is in line with the terms of the agreement/contract between the payer and payee.


Earlier, the CBDT had issued Circular No. 4/2008 dated 28 April 2008, wherein it was clarified that tax is required to be withheld under section 194-I of the Income Tax Act, 1961 (ITA) on the amount of rent paid/payable exclusive of the service tax component. Except rental payments, tax is required to be withheld on all other payments including the service tax component as there was no specific clarification similar to rental payments. In fact, the CBDT had clarified that Circular No. 4/2008 would be applicable only on rental payments due to the peculiar language of section 194-I vis-à-vis the language of other sections dealing with withholding tax provisions. However, very recently the Rajasthan High Court delivered a landmark decision holding that if as per the terms of the agreement between the payer and the payee, the amount of service tax is to be paid separately and was not included in the fees for professional or technical services, no tax is required to be withheld on the service tax component under section 194J of the ITA. Hence, on the premise of the said decision and based on several representations/letters received by the CBDT, it decided to extend the benefit granted vide Circular No. 4/2008 in respect of rental payments to other payments also. Hence, the CBDT has now issued Circular No. 1/2014.

SKP’s Comments

  • From a business perspective, this is a welcome circular wherein the cash flows of taxpayers will improve significantly.
  • As tax has always been withheld on the total amount paid/credited by the payer (including the service tax portion), there has always been a mismatch between the income shown in the Tax credit statement (Form 26AS) and the income offered to tax by the recipient. Hence, this circular will bring in administrative relief in terms of effort and time involved in reconciling the difference. It has also been observed that on many occasions, this difference has led to an unwarranted addition to the taxpayer’s income leading to unnecessary and protracted litigation. This would be avoided now.