Circular No. 23/2017

Modification of circular no.1 of 2014 in view of substitution of service tax by goods and services tax GST

What this is

Circular No. 23/2017 was issued by the Central Board of Direct Taxes on 19 July 2017. Its subject is Modification of circular no.1 of 2014 in view of substitution of service tax by goods and services tax GST.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Carries the service tax rule on deduction at source over to goods and services tax. Circular No. 1 of 2014 dated 13 January 2014 had said that where the agreement or contract between payer and payee shows the service tax component separately, tax under Chapter XVII-B is deducted on the amount paid or payable without that component. Since the new regime replaced service tax from 1 July 2017, the Board clarifies that where the component of goods and services tax on services in an amount payable to a resident is indicated separately in the agreement or contract, deduction is made on the amount without that component. For this purpose the tax includes the integrated, central, State and Union territory levies. Any reference to service tax in an agreement or contract entered into before 1 July 2017 is to be read as goods and services tax on services for the period from that date until the agreement or contract expires.

Why it was issued

References were received asking how the goods and services tax component on services, introduced from 1 July 2017 in place of service tax, should be treated for deduction at source; the Board found that the rationale for keeping the tax component out of deduction remained valid and that the earlier circular had to be harmonised with the new regime.

Who it reaches

Payers deducting tax at source on payments to resident service providers
Resident service providers billing tax separately
Parties to contracts entered into before 1 July 2017 that still speak of service tax
Deductors facing short deduction demands on the tax component

The instrument, as the Board published it

The department publishes this one only as a PDF, so the words below were read out of that PDF by machine. That reading can carry its own mistakes — a misread number, a broken line. Check the signed document before you rely on a figure in it.

F. No. 275/59/2012-IT (B)
Government of India
CIRCULAR No. 23 /2017
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North Block, New Delhi
19th July, 2017

Subject: Modification of Circular No.1 of 2014 in view of substitution of Service Tax by Goods and Services Tax (GST).

The Central Board of Direct Taxes (the Board) had earlier issued Circular No. 112014 dated 13.01.2014 clarifying that wherever in terms of the agreement or contract between the payer and the payee, the Service Tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVIl-B of the Incometax Act, 1961 (the Act) on the amount paid or payable without including such Service Tax component.

2. References have been received in the Board seeking clarification as to what treatment would be required to be given to the component of Goods and Services Tax (GST) on services, which has been introduced by the Government with effect from 1st of July, 2017 and into which the erstwhile Service Tax has been subsumed.

3. The matter has been examined. It is noted that the Government has brought in force a new Goods and Services Tax regime with effect from 01.07.2017 replacing, amongst others, the Service Tax which was being charged prior to this date as per the provisions of Finance Act, 1994. Therefore, there is a need to harmonize the contents of Circular No. II 2014 of the Board with the new system for taxation of services under the GST regime.

4. In the light of the fact that even under the new GST regime, the rationale of excluding the tax component from the purview of TDS remains valid, the Board hereby clarifies that "wherever in terms of the agreement or contract between the payer and the payee, the component of 'GST on services' comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVIl-B of the Act on the amount paid or payable without including such 'GST on services' component." GST for these purposes shall include Integrated Goods and Services Tax, Central Goods and Services Tax, State Goods and Services Tax and Union Territory Goods and Services Tax.

5. For the purposes of this Circular, any reference to 'service tax' in an existing agreement or contract which was entered prior to 01.07.2017 shall be treated as 'GST on services' with respect to the period from 01.07.2017 onward till the expiry of such agreement or contract.

6. Hindi version shall follow.

Copy to:

1. Chairman and all Members of CBDT.

Sandeep Singh
Under Secretary to the Government of India
Tele: 23094182
Email: Sandeep.singh68@nic.in

2. All Principal Chief Commissioners and Principal Directors General of Income Tax.

3. Pr. DGIT (Systems) and Pr. DGIT (Admin.).

4. All Joint Secretaries and Commissioners in CBDT.

5. Additional Directors General (TPS-I) and (PR,PP&OL).

6. Commissioner (CPC-TDS).

7. Web Managers of irsofficersonline.gov.in and incometaxindia.gov.in for placing the Circular on the respective portal.

8. Office of Comptroller & Auditor General of India (30 copies).

9. Guard file.

What to watch

Everything turns on the component being indicated separately in the agreement or contract - where the price is a single inclusive figure, the exclusion is not available.
The circular speaks of the tax on services; it does not deal with the tax component on goods.
It applies to an amount payable to a resident, so a payment to a non-resident is outside it.
An old contract need not be redrawn: a reference to service tax in a pre-July 2017 contract is read as the tax on services for the rest of its term.

Where you meet it

On a short deduction demand where the deductor withheld tax only on the value of services and not on the tax charged in the invoice.

What it names

It mentions. Circular No. 1/2014, Circular No. 23/2017

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.