Volume 1, Issue 3

1st August, 2008

Tax Alert
Tax Deduction at Source

The complex issue of TDS has got even more tedious now with the Government issuing a clarification to a trade body recently.


On 28th April, 2008, the CBDT had issued a circular (No. 4/2008) stating that while deducting tax at source from rent payments, the tenant need not deduct tax from the service tax element. Thus, for example, if the monthly rent was Rs. 100,000 and if service tax was added to it, the total payment to be made by the tenant would be Rs. 112,360. In the normal course, the tenant would have deducted tax at source under section 194I from the entire payment of Rs. 112,360. But as clarified in the above mentioned circular, the tenant can now exclude the service tax element from the gross amount and thereby, deduct tax only from Rs. 100,000.

The Issue

The same logic ought to have been applied for payments covered under other sections dealing with TDS. However, since the Circular was very clear about only section 194I, many organizations had made representations to the Government for clarifying that in all cases, the service tax element should be ignored for TDS purposes.

Clarifications sought and CBDT's response

However, on 30th June, 2008, the CBDT has written to the Bombay Chamber of Commerce & Industry in response to a representation made by it to the Government requesting that the Circular issued in the context of Section 194I be also made applicable for TDS from payment of professional fees u/s. 194J.

In the said letter dated 30th June, the CBDT has distinguished the two sections and has justified the stand that in respect of professional fees, tax is required to be deducted even from the service tax element i.e. from the gross amount of payment.

A copy of the said reply by CBDT (Ref.: F.No.275/73/2007- IT (B) dated 30th June 2008) is enclosed herewith for your reference.

In view of the above referred clarification by the CBDT, it is now clear that while deducting tax at source under any section other than 194I (rent), the deductor has to deduct tax from the gross amount of payment including taxes, if any. Thus, any short deductions made by you till date need to be rectified by way of payment of the same after making necessary adjustments in order to avoid disallowance u/s. 40(a)(ia).