The TDS Proviso: When No Deduction Is Required

TDS Proviso explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

The proviso to section 51(1) is the most-missed line in GST TDS. It has nothing to do with amounts or with who the deductor is — it turns entirely on geography, and it exists because of a plumbing problem in the ledgers.

Proviso to section 51(1): "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." The Handbook explains why: the supply would be intra-State in the supplier's State, so central and State tax of State B would be deducted while the supplier's cash ledger sits in State A — "transfer of TDS… to the cash ledger of the supplier… would be difficult. Therefore, in such cases, TDS would not be deducted."

The four-row table

Row 1 — everything in one State: intra-State supply, 1% + 1%, and "It would be possible for the supplier (i.e., the deductee) to take credit of TDS in his electronic cash ledger." The Handbook's example: supplier and place of supply in Delhi, recipient registered in Delhi.

Row 2 — the proviso case: supplier and place of supply in one State, recipient registered elsewhere. No deduction.

Rows 3 and 4 — the place of supply is outside the supplier's State, so integrated tax is levied and 2% IGST is deducted. The Handbook's example: supplier in Chandigarh, place of supply Delhi, recipient registered in Delhi — inter-State, 2% IGST.

Row 4 is worth noticing. Deduction is required even where the recipient is in a third State, because the supply is still inter-State and IGST TDS can reach the supplier's ledger.

The two worked examples

Both turn on the place of supply, which is why this proviso cannot be applied without first fixing that.

Example 1 — Kerala House. "Mr A, a registered person of Delhi, provides interior decoration of 'Kerala House' located in Delhi. Service contract is entered into with the Government of Kerala (registered only in Kerala)."

Section 12(3) of the IGST Act provides that the place of supply of services directly in relation to immovable property, including services provided by interior decorators, is where the property is located. "Accordingly, the place of supply… shall be Delhi. Since the location of the supplier Mr A and the place of supply is Delhi, and the State of registration of the recipient i.e. Government of Kerala is Kerala, no tax is liable to be deducted."

Example 2 — the catering contract. "ABC Caterers, a registered supplier of Kerala, provided catering services in Kochi, Kerala to the Government of Andhra Pradesh for its annual training camp. Value of said services was ₹4,50,000."

Section 12(4) of the IGST Act puts the place of supply of restaurant and catering services where the services are actually performed. "Thereby… the location of supplier and place of supply are in the same State, i.e., Kerala, and location of recipient is in Andhra Pradesh, and hence, Andhra Pradesh Government is not required to deduct TDS although the total value of supply under the contract is more than ₹2,50,000."

Both examples share a shape that recurs constantly in government contracting: a State body procuring work performed in another State — guest houses, bhavans, camps, exhibitions, training events. In every such case the proviso is likely to apply.

The other ten situations with no deduction

The Handbook lists them, and they are worth reading as a checklist:

1. Total taxable value under a contract does not exceed ₹2,50,000.
2. Multiple contracts, each not exceeding ₹2,50,000 — even if their combined value does.
3. A common contract for taxable and exempt supplies where the taxable value does not exceed ₹2,50,000.
4. Goods or services exempt under GST — the Handbook lists entries 40 (insurance fully funded), 72 (training funded 75% or more), 66A (affiliation of Government schools), 3 (pure services), 3A (composite supply with goods ≤25%), 3B (five services to a Governmental Authority), 11A (fair price shops), 22(a) (vehicles on hire to an STU) and 22(aa) (electric vehicles on hire to a local authority) as examples; goods exempt under Notification No. 2/2017-CT(R) as amended; and goods on which GST is not leviable — "petrol, diesel, petroleum crude, natural gas, aviation turbine fuel (ATF) and alcoholic liquor for human consumption."
5. The proviso case described above.
6. All activities or transactions specified in Schedule III, irrespective of the value.
7. Where the payment relates to a tax invoice issued before 01.10.2018.
8. Where an amount was paid in advance before 01.10.2018 and the invoice was issued on or after that date — to the extent of the advance.
9. Where tax is payable on reverse charge by the recipient, i.e. the deductor itself.
10. Where the payment is made to an unregistered supplier.

Items 9 and 10 are the two most often overlooked. A deductor paying reverse charge on a supply does not also deduct TDS on it. And TDS has no application to an unregistered supplier at all — there is no GSTIN for the credit to reach.

Item 4 carries a wider caution. Two CBIC clarifications the Handbook records limit the exemptions in that list: CBIC FAQ question 26 — "supplies of motor vehicles to Government Departments other than the STUs are taxable"; and Circular No. 164/20/2021-GST — entry 22 covers vehicles rented or given on hire to STUs or local authorities "irrespective of whether such vehicles are run on routes, timings as decided by the or Local Authorities."

The order in which to test

Because the proviso depends on the place of supply, the sequence matters:

1. Is the supply taxable? If exempt, non-supply or Schedule III — stop.
2. Is the supplier registered? If not — stop.
3. Does the contract's taxable value exceed ₹2,50,000, excluding GST? If not — stop.
4. Is the deductor paying reverse charge on it? If yes — stop.
5. Determine the place of supply under sections 10 to 13 of the IGST Act.
6. Compare supplier's location, place of supply and recipient's State of registration against the four-row table.
7. Deduct 1% + 1% or 2% IGST accordingly.

Step 5 cannot be skipped, and it is the step a payments team is least equipped to perform — which is why the proviso is missed so often in practice.

Key takeaways

• The proviso to section 51(1) switches TDS off where supplier and place of supply are in one State and the recipient is registered in another.
• The reason is mechanical — State B's CGST/SGST TDS cannot reach a cash ledger in State A.
• Rows 3 and 4: where the place of supply is outside the supplier's State, 2% IGST is deducted, even if the recipient is in a third State.
• Kerala House (section 12(3), immovable property) and the Kochi catering camp (section 12(4), performance) both fall in the proviso.
• Ten further situations carry no deduction, including reverse charge supplies, unregistered suppliers, Schedule III items at any value and non-GST goods such as petrol, diesel and liquor.
• Multiple contracts are not aggregated, and exempt value is excluded from the threshold.
• Determine the place of supply before deciding on deduction — it is step 5, not an afterthought.

Read next

• Section 51: Who Must Deduct TDS, and the ₹2.5 Lakh Threshold
• GSTR-7A and How the Deductee Claims the TDS
• Exemptions on Supplies Made to Government, Entry by Entry

Disclaimer: Positions stated as on 5 September 2026, based on section 51 of the CGST Act, 2017, sections 12(3) and 12(4) of the IGST Act, 2017, Notification No. 12/2017-Central Tax (Rate), Notification No. 2/2017-Central Tax (Rate) as superseded by Notification No. 10/2025-Central Tax (Rate), the CBIC FAQ series on Government services and Circular No. 164/20/2021-GST, as reproduced in the ICAI Handbook on Government Supplies under GST (Including TDS Provisions), updated to 15 April 2026.