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No tax deduction at source on service tax?
You have been advising that payment to a service provider, which is inclusive of service tax, would require tax deduction at source on the entire amount, inclusive of service tax. In view of the Board’s Circular No. 4 of 2008 dated April 28, 2008, your answer would require revision. The Circular may be publicised for the benefit of readers.
The Central Board of Direct Taxes in Circular No. 4 of 2008 dated April 28, 2008, has responded to a request for clarification as to whether service tax should be included in rent for tax deduction at source under Sec. 194-I in the following words:
“3. Service tax paid by the tenant does not partake of the nature of “income” of the landlord. The landlord only acts as a collecting agency for the Government for collection of service tax.
Therefore, it has been decided that tax deduction at source (TDS) under Sec. 194-I of the Income-tax Act would be required to be made on the amount of rent paid/payable without including the service tax.”
The circular is welcome in that, it is not necessary for a tenant, who makes the payment to the landlord, to deduct tax for the service tax element, where the landlord charges service tax separately.
The Board Circular, however, refers only to Sec. 194-I relating to rent.
The reasoning, however, is that the landlord only acts as collecting agency for Government for collection of service tax. Such an argument should be applicable in every case, where the service provider passes on the service tax to the person availing such service.
By confining clarification to Sec. 194-I, the issue in respect of other payments, especially for payments under Sec. 194H relating to brokerage and commission, and Sec. 194J relating to professional service and the like, has been left delightfully (?) vague.
But the taxpayers will be justified in following the rationale of this Circular for payments other than rent as well.
If the Department has any other understanding, it owes a duty to make its view clear, so as to avoid any litigation in this regard.
S. RAJARATNAM
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