TDS under GST: the 2% rule, who deducts, a bill example and the new scrap rule

TDS under GST is a 2% deduction that government departments, local authorities, PSUs and other notified bodies make from payments to a supplier when the contract is worth more than ₹2.5 lakh, under section 51 of the CGST Act. The 2% is 1% CGST plus 1% SGST within a state, or 2% IGST across states, and it is worked out on the value excluding GST. The deductor deposits it and files GSTR-7 by the 10th of the next month; the supplier gets the amount back in its electronic cash ledger, not as input tax credit.

Since 10 October 2024 the same rule applies to any registered business buying metal scrap from a registered seller, and from 1 November 2026 it extends to used cooking oil, plastic scrap, tyre scrap and e-waste (Notification 07/2026-Central Tax of 27 October 2026). This guide quotes the section and the notifications, walks through a bill with the numbers, and covers registration, GSTR-7, late fees and how the supplier claims the credit. Everything was checked against the Act, the Gazette and the GST portal manuals on 31 October 2026.

What is the TDS of GST?

The TDS of GST is tax deducted at source under section 51 of the CGST Act: a notified buyer deducts 2% from what it pays a supplier for taxable goods or services and deposits it with the government in the supplier’s name. The section’s own words:

GST TDS is a cash-flow mechanism, not an extra tax. The deductee gets the full amount back as a credit in its electronic cash ledger once it accepts the deductor’s GSTR-7 entry, and uses it to pay its own GST. The government gains a trail of every large contract paid by public bodies and, since 2024, by scrap buyers.

Who has to deduct TDS under GST? (GST TDS applicability)

TDS under GST applies to the deductors named in section 51(1)(a) to (c) and to the persons the government has notified under clause (d), when they pay a supplier under a contract worth more than ₹2.5 lakh. The list on 31 October 2026:

Three exclusions matter in practice. Notification 73/2018 removes supplies between deductors (a PSU paying a government department, a municipality paying a state board) from TDS. The proviso to section 51(1) removes supplies where both the supplier’s location and the place of supply are in another state. And the threshold is the contract value, so a ₹3 lakh contract paid in six ₹50,000 bills attracts TDS on every bill, while a ₹2.4 lakh contract paid in one go attracts none.

What is the rule for 2 GST TDS?

The “2% GST TDS” rule is section 51 read with the SGST Act: the CGST Act prescribes 1%, each State GST Act prescribes another 1%, so a supply within a state suffers 2% in two halves, and a supply across states suffers 2% IGST under section 20 of the IGST Act. The rate has not changed since 1 October 2018; what changed is who must deduct. The 2% is calculated on the taxable value in the invoice, before GST, and is deducted when the payment is made or credited, whichever comes first.

Do not confuse it with two other 2% deductions on the same bill. Income-tax TDS under section 194C (section 393 of the Income-tax Act, 2025) is 2% for a company contractor and 1% for an individual, deducted on the same GST-exclusive amount. And TCS under section 52 of the CGST Act, collected by e-commerce operators, is 0.5% since 10 July 2024, not 2%.

How to calculate GST TDS?

To calculate GST TDS, take the taxable value of the payment (the invoice amount minus the CGST, SGST, IGST and cess shown on it), check that the contract it belongs to is worth more than ₹2.5 lakh, and deduct 2%: 1% as CGST and 1% as SGST for a supply within the state, or 2% as IGST for a supply from another state. Steps:

1. Identify the contract value excluding GST. Above ₹2.5 lakh, every payment under it is subject to TDS; at or below it, none is.
2. Check the proviso. If the supplier’s location and the place of supply are both in a state other than yours, deduct nothing.
3. Take the taxable value of this payment. Strip the GST and cess; include only what is paid to the supplier for the taxable supply.
4. Apply 2%, split into CGST and SGST (same state) or as IGST (other state).
5. Deduct income-tax TDS separately on the same GST-exclusive amount, if section 194C, 194J or another section applies.

How to deduct TDS on a GST bill: a worked example

Take a state PWD division paying a company contractor ₹5,00,000 plus 18% GST this month under a ₹20,00,000 road-repair contract, supplier and work both in the same state. The division deducts GST TDS and income-tax TDS on the same bill:

The division deposits ₹10,000 through its GST cash ledger and reports it in GSTR-7 by the 10th of next month, and deposits ₹10,000 with the Income Tax Department by the 7th. The contractor receives ₹5,70,000 in the bank, sees ₹10,000 in “TDS and TCS Credit Received” on the GST portal, accepts it, and uses it against its own output GST. The income-tax TDS shows in its Form 26AS.

Had the invoice been for a ₹2,40,000 contract, no GST TDS would apply, however large the single payment. Had the contractor been in another state doing work in that other state (an IGST invoice with the place of supply outside the division’s state), the proviso would switch GST TDS off too. The GST calculator separates the taxable value from the GST on any invoice.

What is the TDS on GST above 2.5 lakhs?

TDS on GST above 2.5 lakhs is 2% of the taxable value of every payment under a contract whose total value, excluding GST, exceeds ₹2,50,000. The ₹2.5 lakh test is applied to the contract, not to the invoice or the month. Once a contract crosses it, every payment under it attracts TDS, including the first one; a contract that never crosses it attracts none. The Karnataka Commercial Taxes Department’s FAQ puts it this way:

Two edge cases. A contract with a taxable part and an exempt part is tested on the taxable part only. And a contract amended upward past ₹2.5 lakh attracts TDS on payments made after the amendment, not retrospectively on the earlier ones.

How does a deductor register for TDS under GST?

A deductor registers for TDS under GST separately from any normal GSTIN, by filing Form GST REG-07 on the portal, and receives a TDS registration certificate in Form GST REG-06. Section 24(vi) makes this registration compulsory regardless of turnover. The GST portal’s own FAQ lists the preconditions:

• Who signs: a DDO or an authorised signatory; government offices commonly register on the TAN.
• Timeline: the officer processes the application within 3 working days of first receipt, or within 7 working days after a reply to a query. Track it with the ARN; the GST ARN status guide decodes the number.
• Scrap and waste buyers: a trader already registered as a normal taxpayer still needs the separate TDS registration before deducting. Buyers of the four new categories must have it in place for payments from 1 November 2026.
• Cancellation: when the person stops being a deductor, the officer cancels the TDS registration in Form GST REG-08.

How is GST TDS deposited and reported? (GSTR-7 and GSTR-7A)

GST TDS is deposited and reported through Form GSTR-7, filed on the portal by the 10th of the month after the deduction, and the portal then generates the certificate, Form GSTR-7A, for each supplier. The timeline under section 51 and the rules:

Since the Finance Act, 2020 (in force 1 January 2021) the certificate is whatever the rules prescribe, and the old ₹100-a-day late fee for a late certificate in section 51(4) is gone: GSTR-7A is system-generated from the GSTR-7, so there is nothing for the deductor to issue by hand. The deductor downloads it from Services → User Services → View/Download Certificates; the deductee can download the same certificate.

What goes wrong, and what it costs:

How does the supplier claim GST TDS credit?

The supplier claims GST TDS credit by accepting the deductor’s entry in the “TDS and TCS Credit Received” statement on the GST portal (Services → Returns), after which the amount is credited to its electronic cash ledger, under section 51(5). It is not input tax credit and does not go through GSTR-3B’s ITC table; it sits in the cash ledger like a tax payment and can be used for output tax, interest or fees, or refunded under section 54. The portal’s manual:

1. Open Services → Returns → TDS and TCS credit received, choose the financial year and month, and click Search.
2. Click Prepare Online. The rows auto-populated from every deductor’s GSTR-7 appear; accept the correct ones and reject the wrong ones. The statement cannot be filed until every row has an action.
3. Click Generate Summary (from the September 2025 period this replaces the old Proceed to File button), preview, and file with DSC or EVC.
4. Check the electronic cash ledger: the accepted amount appears under the CGST, SGST or IGST head in which it was deducted.

A rejected row goes back to the deductor to amend in its next GSTR-7. If the deductor never files GSTR-7, nothing appears, so chase the deductor rather than the portal: the credit depends on its return, not on the deduction.

What changes from 1 November 2026?

From 1 November 2026, any registered person buying used cooking oil, plastic scrap, tyre scrap, metal scrap or electrical and electronic waste from another registered person must deduct 2% GST TDS when the contract exceeds ₹2.5 lakh. Notification 07/2026-Central Tax, dated 27 October 2026, substitutes clause (d) of the 2018 notification; it follows the 57th GST Council meeting and copies the metal-scrap model of October 2024 to four more waste streams. The Gazette text:

Two companion notifications of the same date close the gaps. Notification 06/2026-Central Tax (G.S.R. 934(E)) withdraws the registration exemption of Notification 5/2017 for suppliers of these five goods, so a scrap or used-oil seller whose supplies are taxed under reverse charge must now register once it crosses the threshold. Notification 04/2026-Central Tax (Rate) (G.S.R. 927(E)) puts supplies of the same goods by an unregistered person to a registered person under reverse charge, so the buyer pays the GST itself in that case instead of deducting TDS. In short: registered seller, deduct 2% TDS; unregistered seller, pay the GST under reverse charge.

What a buyer in these trades should do before 1 November 2026: obtain the separate TDS registration (REG-07), list every supplier contract above ₹2.5 lakh, set the accounting system to deduct 2% on the taxable value of payments made on or after that date, and diarise GSTR-7 for the 10th. Payments for October supplies made in November are caught, because section 51 works on the payment or credit date.

Is income-tax TDS also deducted on a GST bill?

Yes. Income-tax TDS under sections 194C, 194J and the rest (section 393 of the Income-tax Act, 2025 from tax year 2026-27) is deducted on the same bill, separately from GST TDS, and CBDT Circular 23/2017 says it is calculated on the amount excluding GST when the GST is shown separately on the invoice. So a government department paying a contractor deducts both: 2% GST TDS to the GST account and 1% or 2% income-tax TDS to the Income Tax Department, each on the GST-exclusive value, as the worked example shows. The TDS rate chart has every income-tax section and rate, and the TDS payment guide the deposit steps.

The phrase “TDS on GST” is used for both, which causes most of the confusion. GST TDS is a GST-law deduction credited to the supplier’s GST cash ledger; income-tax TDS is an income-tax deduction credited to the supplier’s Form 26AS. One does not reduce the other.

TDS vs TCS under GST: what is the difference?

TDS under GST is deducted by a notified buyer under section 51; TCS under GST is collected by an e-commerce operator under section 52 from the sellers on its platform. Both end up in the supplier’s electronic cash ledger through the same “TDS and TCS Credit Received” statement, but the rates, returns and thresholds differ:

Marketplace sellers meet TCS, not TDS; the Amazon and Flipkart sellers’ guide covers it. Freelancers billing a government department or PSU meet GST TDS once a contract crosses ₹2.5 lakh, on top of the income-tax TDS described in the freelancing guide.

GST में TDS क्या है?

Common questions