TDS, GST TDS and Labour Cess on a Government Contract

Several deductions come off every running bill. Some are creditable against your own liability and are therefore a timing cost. Some are a real cost that never comes back. Pricing that treats them alike loses money on every bill, quietly.

What comes off a running bill

Typically:

• Income tax TDS, deducted at the applicable rate on the payment
• GST TDS, where the deductor is required to deduct, on the taxable value
• Labour cess, where the work attracts it under the building and other construction workers legislation
• Retention or security deposit. See retention money
• Recovery of mobilisation advance, in instalments
• Liquidated damages, where assessed

The contract states which apply. Read that clause when pricing, not when the first bill is short.

The distinction that matters

Creditable deductions reduce your cash now and are set off against a liability later. Income tax TDS is credited against your income tax liability; GST TDS is credited in your electronic cash ledger. These are a timing cost: you finance the amount from deduction until set-off.

Non-creditable deductions are a real cost. Labour cess, where it applies, is a cost of doing the work, not a prepayment of something you owe.

Two consequences for pricing:

1. Non-creditable deductions must be in the rate, as a cost line.
2. Creditable deductions must be in the cash flow, as financed working capital, even though they are not a cost.

Claiming the credits

Credits are only worth what you actually claim, and claiming requires reconciliation.

Income tax TDS. Check that the deductor has filed and that the credit appears against your PAN in the tax credit statement. A deduction made but not deposited or not correctly reported does not produce a credit, and the time to catch that is within the quarter, not at assessment.

GST TDS. Deductions appear for acceptance in your GST portal. They have to be accepted for the credit to reach your cash ledger. Unaccepted credits sit unused, which is a pure administrative loss.

The routine: reconcile deductions against credits each quarter, per contract. A single spreadsheet with bill number, gross, each deduction, and whether the credit has appeared.

Reconciling against the bill

A second reconciliation, in the other direction: check each bill's deductions against what the contract provides for.

Errors occur. A deduction at the wrong rate, a retention deduction beyond the contract ceiling, a recovery of mobilisation advance that has already been fully recovered. These are correctable if raised promptly and quoting the contract clause, and effectively uncorrectable years later.

Where GST itself sits

Whether the contract price is inclusive or exclusive of GST is set by the tender. Read it before pricing, because getting it wrong is a large error on a large contract.

Where the price is inclusive, GST comes out of your quoted rate. Where exclusive, it is added. The difference is the whole tax rate on the whole contract value, which is not a rounding item.

Where a tender's BOQ format and its GST clause appear inconsistent, that is a pre-bid question, not something to interpret.

Input tax credit

Your GST liability on the contract is reduced by input tax credit on your purchases, which makes supplier compliance a commercial matter and not only an accounting one. A supplier who does not file leaves you carrying the tax.

For a contractor with thin margins, systematically buying from non-compliant suppliers to save a little on price is a false economy.

Pricing summary

In the build-up:

• Labour cess and any other non-creditable deduction: a cost line
• Income tax TDS and GST TDS: financed working capital, costed at your cost of capital over the expected time to set-off
• GST: as the contract provides, inclusive or exclusive, at the correct rate

See how to price a government tender and running account bills.

This is general information about how deductions work, not tax advice; specific positions turn on your own facts. See the disclaimer.