CBDT relaxes withholding on service tax component on payments to residents

This Tax Alert summarizes a recent Circular No. 1/2014 dated 13 January 2014 issued by the Central Board of Direct Taxes (CBDT), the highest administrative body under the Indian Tax Laws (ITL). Circular No. 1/2014 has relaxed withholding requirement on service tax component on all payments to residents where service tax component, comprised in the amount payable to a resident, is indicated separately. Accordingly, withholding shall apply on the amount payable excluding such service tax component. As a corollary, withholding may apply on full amount where the amount payable is inclusive of service tax and is not separately indicated.

Circular No. 1/2014 seeks to settle doubts and controversy on the applicability of withholding on service tax component on all payments to residents. This will be welcomed by the taxpayers.

However, it is important to note that the relaxation from withholding on service tax component applies only where service tax component is indicated separately in the invoice. By implication, the relaxation may not apply where the amount payable is inclusive of service tax without separately indicating the service tax component.

Further, applicability of withholding on indirect tax levy components on payments to non-residents and/or on indirect tax levies other than service tax (like VAT, Excise, Customs duty etc.) on payments to residents remain unaddressed by Circular No. 1/2014 and will be required to be separately evaluated by the taxpayers.