The Goods and Services Tax (GST) introduced the concept of Tax Deducted at Source (TDS) to strengthen tax compliance in India. Many business owners and professionals often ask: What is the purpose of TDS deduction in GST?
Simply put, the main aim of TDS under GST is to ensure that tax is collected at the time of payment itself, so that the government gets revenue in advance, and chances of tax evasion are reduced.
Why TDS Deduction is Important in GST
TDS deduction in GST serves several purposes that benefit both the government and taxpayers. The key objectives are:
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Preventing tax evasion – By deducting tax directly from the source, the government ensures that the supplier cannot avoid paying GST.
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Improving compliance – Deductors must file GSTR-7, and the deducted amount reflects in the supplier’s cash ledger, making compliance easier.
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Ensuring timely revenue collection – Instead of waiting for suppliers to pay tax later, the government receives part of the tax immediately.
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Promoting transparency – Since TDS deduction is linked with contracts above ₹2.5 lakh, large-value transactions become traceable.
Entities Required to Deduct TDS in GST
Not everyone can deduct TDS under GST. It applies only to specific entities such as:
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Government departments and ministries
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Local authorities
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Public sector undertakings (PSUs)
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Notified organizations under GST law
These entities deduct 2% TDS (1% CGST + 1% SGST or 2% IGST) when making payments to suppliers under eligible contracts.
Example of Purpose of TDS Deduction in GST
Let’s take a practical case:
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A government department hires a contractor for civil works worth ₹10 lakh.
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The department deducts TDS @ 2% = ₹20,000 at the time of payment.
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The contractor receives ₹9,80,000, while ₹20,000 is deposited with the government.
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Later, the contractor can claim this deducted amount as credit in their GST cash ledger.
👉 This ensures that the government gets its tax portion on time and the contractor remains compliant.
Key Benefits of TDS Deduction in GST
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Provides early collection of tax for the government.
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Reduces the scope of fake invoicing or tax fraud.
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Builds a transparent link between deductor and supplier.
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Helps suppliers claim deducted tax through cash ledger adjustments.
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Makes the GST system more efficient and reliable.
Conclusion
The purpose of TDS deduction in GST is to create a transparent and efficient tax system where revenue is collected in advance, compliance is simplified, and tax evasion is reduced. Businesses dealing with government bodies or PSUs should carefully comply with GST TDS rules to avoid penalties and ensure smooth operations.
👉 Need expert help with GST TDS compliance? Book a free consultation with our tax experts today.