TDS and TCS in Practice: Deducting, Collecting and Claiming the Credit

A contractor working for a State department receives 98 per cent of its bill. An online seller receives its settlement less a fraction of a per cent. In both cases the missing money has been paid to the Government in the supplier’s name. It is not lost, but it does not count as tax paid. The supplier still pays its full GST through its own return, and recovers the amount withheld only once the deductor or operator has reported it correctly and the supplier has accepted it on the portal. Most problems in practice come from that hand-off: a deduction on the wrong base, in the wrong State or against the wrong GSTIN, or a supplier that never acts on the entry.

This guide follows the money through three parties: the deductor under section 51, the operator under section 52, and the supplier who claims the credit. Registration is covered in Registering as a Tax Deductor (TDS) and Registering as an E-Commerce Operator Collecting TCS. The returns are covered table by table in TDS and TCS Returns: GSTR-7 and GSTR-8. What follows is the working sequence, and how a wrong deduction is undone.

The deductor: who, and on what contracts

Section 51(1) of the CGST Act applies to Government departments and establishments, local authorities, Governmental agencies, and persons notified in Notification No. 50/2018-Central Tax as amended. The notified persons include bodies with fifty-one per cent or more Government equity or control, Government societies, public sector undertakings and, from 10 October 2024, registered buyers of metal scrap from registered suppliers. CBIC’s Circular No. 76/50/2018-GST clarified the first class. The words “with fifty-one per cent. or more participation by way of equity or control” govern bodies set up by an Act as well as bodies established by a Government. The exclusions for defence, PSU-to-PSU and Government-to-Government supplies are in guide 207.

The deduction is made “from the payment made or credited to the supplier … of taxable goods or services or both, where the total value of such supply, under a contract, exceeds two lakh and fifty thousand rupees”. Three things follow from those words.

• The contract, not the bill. The threshold is tested on the total value of supply under the contract. Once it is crossed, each payment under that contract is liable, even a small one.
• Taxable supplies only. The section speaks of the supplier “of taxable goods or services”. GSTR-7 asks for the deductee’s GSTIN against every entry.
• When. The obligation arises on payment or credit, whichever the deductor makes. The deduction belongs to the month in which it is made.

The rate and the base

Section 51(1) fixes the rate at “one per cent.” of central tax. The State GST Acts add one per cent of State tax, so an intra-State supply bears two per cent in all. For an inter-State supply, the first proviso to section 20 of the IGST Act makes the rate “two per cent.” of integrated tax.

The base excludes the tax. Under the Explanation to section 51(1), “the value of supply shall be taken as the amount excluding the central tax, State tax, Union territory tax, integrated tax and cess indicated in the invoice”. On a bill of Rs 11,80,000 that includes Rs 1,80,000 of GST, the deduction is two per cent of Rs 10,00,000, or Rs 20,000.

The 57th GST Council meeting on 8 October 2026 recommended extending TDS at two per cent to supplies of plastic waste and scrap, electrical and electronic waste and scrap, tyre scrap and used cooking oil between registered persons. That is recommended, not yet notified.

When no deduction is made: the place-of-supply proviso

The proviso to section 51(1) says:

“no deduction shall be made if the location of the supplier and the place of supply is in a State or Union territory which is different from the State or as the case may be, Union territory of registration of the recipient.”

Both the supplier’s location and the place of supply must lie outside the deductor’s State for the proviso to apply. In practice that gives three cases.

Supplier located in	Place of supply in	Deduction
Deductor’s State	Deductor’s State	1 per cent CGST + 1 per cent SGST
Another State	Deductor’s State	2 per cent IGST
Another State	That other State (for example, a hotel stay or works on immovable property there)	None

The place of supply comes from the IGST Act: see Place of Supply. Where the place of supply is in a State where the deductor has no office, rule 12(1A) lets the deductor register there without one. Guide 207 explains this.

What happens when the State is got wrong is shown by L&T PES JV v Assistant Commissioner of State Tax (Telangana HC, 29 November 2024, W.P. Nos. 6271 and 6299 of 2020). A joint venture built an irrigation barrage spanning Telangana and Maharashtra for a Telangana corporation. It was registered in both States and raised separate invoices for the work in each. The corporation deducted two per cent on the whole of every bill and paid all of it to Telangana, leaving a large balance in the joint venture’s Telangana cash ledger. Its refund claims were rejected, and demands were raised in Telangana on the full contract value.

The High Court held that, under section 12(3) of the IGST Act, the place of supply was in each State in proportion to the work executed there. It held that the deduction on the Maharashtra invoices was “improper”, because the corporation was not registered as a deductor in Maharashtra under section 24(vi). The grounds for rejecting the refund were not “proper and justified”. The Court left the joint venture to approach the adjudicating authority for refund, with proof that the Maharashtra liability had been discharged there. It also noted that the joint venture “remained silent about the deductions … while the project was under execution”.

Deposit, return and certificate

The working cycle for a deductor runs as follows.

1. Record each deduction. CBIC’s Circular No. 65/39/2018-DOR asks deducting offices to keep a register for GSTR-7, by deductee GSTIN, trade name, amount paid and tax under each head. It allows either a challan per bill or deductions held in a suspense head and paid periodically.
2. Deposit by the tenth. Section 51(2) requires payment “within ten days after the end of the month in which such deduction is made”. The deposit is made through a challan into the deductor’s electronic cash ledger. The portal’s GSTR-7 FAQ says TDS “can be discharged through Electronic Cash Ledger only”.
3. File GSTR-7 by the tenth. Rule 66(1) fixes the date. Since 1 November 2024, section 39(3) requires the return for every month, whether or not any deduction was made. From the September 2025 period the portal takes the details invoice by invoice.
4. GSTR-7A follows. Rule 66(3) makes the certificate “available electronically to the deductee on the common portal in FORM GSTR-7A on the basis of the return”. The portal’s FAQ says it is generated once the deductee “accepts the details … and files his return”. It needs no signature. Both sides download it from Services > User Services > View/Download Certificates.

Interest, late fee and penalty for the deductor

• Interest. A deductor that fails to pay the amount deducted owes interest “in accordance with the provisions of sub-section (1) of section 50” (section 51(6)). The rate is eighteen per cent (Notification No. 13/2017-Central Tax). The portal’s FAQ adds that where a rejected entry is amended upwards, “interest will be levied on differential amount”.
• Late fee. For GSTR-7 the fee under section 47 is capped by Notification No. 23/2024-Central Tax, from 1 November 2024. It is Rs 25 a day of central tax, up to Rs 1,000 a return, and is waived entirely for a month in which the central tax deducted is nil. The State tax fee is added on the same terms.
• Determination and penalty. An amount not deducted or not paid over is determined under section 73, 74 or 74A (section 51(7)). Section 122(1)(v) provides a penalty of ten thousand rupees or the tax not deducted, short deducted or not paid, whichever is higher.

The amounts and the three-year bar on late returns are in Late Returns: Late Fee, Interest, the Three-Year Bar and Notices.

The operator: TCS rate, base and GSTR-8

The operator’s obligation is parallel but calculated differently. Section 52(1) applies to every operator “not being an agent” that collects the consideration for other suppliers’ supplies. It collects on “the net value of taxable supplies”: the month’s taxable supplies by registered persons through it, other than section 9(5) services, less supplies returned. The current rates, from 10 July 2024, are:

• Intra-State supplies: 0.25 per cent central tax plus 0.25 per cent State tax (Notification No. 52/2018-Central Tax, as amended by Notification No. 15/2024-Central Tax)
• Inter-State supplies: 0.5 per cent integrated tax (Notification No. 02/2018-Integrated Tax, as amended by Notification No. 01/2024-Integrated Tax)

The operator pays within ten days after the end of the month (section 52(3)). It files FORM GSTR-8 by the same date (section 52(4) and rule 67), seller by seller and, from April 2025, by place of supply. Supplies by sellers enrolled without registration go in GSTR-8 with no tax collected (Notification No. 37/2023-Central Tax). Supplies by composition sellers carry TCS (Notification No. 36/2023-Central Tax).

Where two platforms handle one sale, CBIC’s Circular No. 194/06/2023-GST places the duty on the seller-side operator “who finally releases the payment to the supplier”. Where that operator is itself the supplier, the duty falls on the buyer-side operator. Interest runs under section 50(1) on late payment. Failure to collect, short collection or non-payment attracts penalty under section 122(1)(vi). The seller’s side of e-commerce is in Selling Through E-Commerce Platforms.

The supplier: claiming the credit

Neither section credits the supplier automatically. Sections 51(5) and 52(7) both say the supplier “shall claim credit, in his electronic cash ledger”, of the amount reflected in the return or statement. Rules 66(2) and 67(2) make the details available on the portal “for claiming the amount … in his electronic cash ledger after validation”. Rule 87(9) then credits the amount claimed to the cash ledger.

The validation is the statement the portal calls “TDS and TCS Credit Received”, which its FAQ also names Form GSTR-2X. According to the portal’s manual and FAQ, it works as follows.

1. Where. Services > Returns > TDS and TCS credit received. The supplier selects the year and month and chooses PREPARE ONLINE.
2. Four tiles. These are TDS Credit Received, Amendments to TDS Credit Received, TCS Credit Received and Amendments to TCS Credit Received. From the September 2025 period, TDS rows show the invoice number, date and value. TCS rows have shown the place of supply since April 2025.
3. Act on every row. Each row is accepted or rejected. A rejection needs a remark chosen from the drop-down list, and an “Others (Specify)” remark is limited to 100 characters. “Filing is not permitted without action on all rows”. Rows cannot be edited or added.
4. Generate summary. From the September 2025 period the supplier clicks GENERATE SUMMARY. The TDS tiles update only after that step.
5. File. After the preview, the supplier proceeds to file, selects the authorised signatory and files with DSC or EVC. An ARN is issued.
6. Credit. Accepted amounts reach the electronic cash ledger “only after filing”.

The FAQ adds rules on timing. There is “no due date or late fee” for the statement. It is filed once per period and cannot be revised. Filing is not sequential, so a later month can be filed when an earlier one has not been. Once any row in a month has been actioned, however, the next month cannot be filed until that month is. An accepted row “cannot be changed”.

The credit is cash, not input tax credit. Under section 49(3) it pays tax, interest, penalty, fees or other amounts. The portal’s FAQ says it can be “claimed as refund”, and that a composition taxpayer may use it for CMP-08. The ledger is explained in The Three Electronic Ledgers, and refund of a cash ledger balance in Refund of Excess Balance in the Cash Ledger.

What the supplier needs ready

• The deductor’s or operator’s statement of amounts withheld, from payment advices or settlement reports. Each line is compared with the row on the portal.
• The supplier’s own invoices, to check the GSTIN, the invoice number and value, and the base excluding tax.
• The place of supply of each invoice, to check the tax head and the State.
• Earlier rejections, which come back in the amendment tiles once the deductor or operator has corrected them.

Correcting a wrong deduction or collection

The route depends on who has acted.

• Before the supplier acts. The deductor or operator can amend its own entry in Table 4 of its next GSTR-7 or GSTR-8, under the “Uploaded by” tab. The FAQ says the earlier row is then frozen, and only the amended row is open for action.
• After a rejection. A rejected row goes to the “Rejected” tab of Table 4 in the deductor’s or operator’s return for the next period. They amend it, and the revised row returns to the supplier’s amendment tile. Under the FAQ, “multiple amendments” are allowed “until it is finally accepted”.
• After acceptance. An accepted row “becomes locked and cannot be amended or reversed”. Any correction then has to be made by refund.
• Time limit. Corrections in GSTR-7 are barred after 30 November following the end of the financial year under section 39(9). For GSTR-8 the bar is the same date or the date of the annual statement, if earlier, under section 52(6). The general rules are in Correcting Mistakes in Returns.
• Refund. Section 51(8) sends refunds “arising on account of excess or erroneous deduction” to section 54. It adds: “no refund to the deductor shall be granted, if the amount deducted has been credited to the electronic cash ledger of the deductee”. Once the supplier has accepted the amount, the money is in its cash ledger. The supplier then uses it or claims a refund of the balance through RFD-01 under rule 89. Until then, the excess can be returned to the deductor.

Rejecting a row affects both parties. The supplier gives up the credit until the row is corrected, and the deductor may owe interest on any upward revision. Section 52(8) to (11) also matches the operator’s figures with the seller’s GSTR-1. Where the operator reports more than the seller and the difference is not reconciled, the excess is added to the seller’s output tax with interest.

The procedure in summary

1. Deductor: confirm that the contract’s taxable value exceeds Rs 2,50,000 and that the proviso does not exclude the supply. Fix the tax head from the supplier’s location and the place of supply.
2. Deduct two per cent of the value excluding tax at the time of payment or credit. Deposit it in the cash ledger and file GSTR-7 by the tenth of the next month, including nil months.
3. Operator: collect 0.5 per cent of net taxable value, or 0.25 plus 0.25 per cent on intra-State supplies. Leave out section 9(5) services and enrolled sellers, pay the amount and file GSTR-8 by the tenth.
4. Supplier: each month, open “TDS and TCS Credit Received”, check every row against its invoices and settlements, and accept or reject each one with a remark. Then generate the summary and file with DSC or EVC.
5. Use the credited cash for tax, interest or penalty, or claim a refund of the balance.
6. Correct errors through Table 4 of GSTR-7 or GSTR-8 before 30 November after the year ends. Once an amount is accepted, correct it only through a refund under section 54.

This guide closes the group on sectors and special cases. The group opens with Reverse Charge for Businesses, the other mechanism that moves the duty to pay away from the supplier.