Difference Between TDS And TCS

When dealing with the complexities of tax regulations in India, two commonly encountered terms are Tax Deducted at Source (TDS) and Tax Collected at Source (TCS). At the same time, both mechanisms help the government collect taxes; they operate differently and apply to distinct situations.

Understanding the differences between TDS and TCS is crucial for businesses and individuals alike to ensure compliance with tax laws and optimise financial planning. This blog will delve into the key distinctions between TDS and TCS, shedding light on their unique roles in India's taxation system.

What is TDS?

TDS stands for Tax Deducted at Source. It is a method used by the government to collect tax as the source of income. Essentially, TDS is deducted from various payments such as salaries, interest, rent, commission, and professional fees at the time of making these payments.

The deducted amount is then remitted to the government. This method makes sure that the government always gets money. It makes it easier to pay a big sum tax at the end of the financial year.

Example: If you earn a salary of ₹50,000 per month and the applicable TDS rate is 10%, your employer will deduct ₹5,000 as TDS and pay you the remaining ₹45,000. The ₹5,000 deducted will be deposited with the government as tax on your behalf.

What is TCS?

TCS stands for Tax Collected at Source. It is a mechanism used by the government to collect tax at the source of income generation. Under this system, a seller is required to charge tax to buyers of certain things at the time of sale or services. The collected tax is then remitted to the government. This ensures that tax is collected in advance and helps in reducing tax evasion.

Example: If you purchase a car worth ₹10,00,000 and the applicable TCS rate is 1%, the seller will collect ₹10,000 as TCS from you at the time of sale. The seller will then deposit this ₹10,000 with the government as tax on your behalf.

Difference Between TDS and TCS in GST

Tax taken out at the source (TDS) and tax collected at the source (TCS) in GST are mechanisms implemented by the government to collect tax at the very source of income. Both aim to curb tax evasion and ensure timely payment of taxes, but they operate differently and apply to distinct scenarios. Below are the differences between TDS and TCS in GST:

TDS Under GST

Tax Deducted at Source (TDS) under GST is a system where the recipient of goods or services deducts a portion of tax while making payments to the supplier. This deducted tax is then deposited with the government.

Key Pointers

1. TDS under GST is applicable only if the total value of supply under a contract exceeds ₹2.5 lakhs.
   
2. The deductor must issue a TDS certificate to the supplier within five days of crediting the amount to the government.
   
3. Failure to deduct TDS or deposit it with the government can result in fines and interest charges.
   
4. The deductor must file GSTR-7 to report the TDS deducted. The due date for filing GSTR-7 is the 10th of the following month.

TCS Under GST

TCS, which is part of GST, is the tax that online stores receive from the amount received on behalf of suppliers who sell goods or services through their online platforms. This applies to e-commerce operators who collect payments from customers on behalf of sellers or providers.

Key Pointers

• Those who manage and operate e-commerce platforms are responsible for collecting TCS. Certain services provided by unregistered suppliers, such as hotel accommodation, passenger transportation (radio taxi, motor cab, or motorcycle), and housekeeping services (plumbing, carpentry, etc.), are exempt from TCS.
  
• TCS is collected by e-commerce operators when they make payments to vendors. This payment is the amount collected on behalf of the vendors for the supplies made through the online platform.
  
• The TCS rate is 0.5% for intra-state supplies (0.25% under CGST and 0.25% under SGST) and 0.5% for inter-state supplies under the IGST Act. Previously, the rate was 1% (0.5% under CGST and 0.5% under SGST) for intra-state supplies and 1% under the IGST Act for inter-state supplies.
  
• E-commerce operators liable to collect TCS must register under GST, with no threshold limit exemption. Sellers supplying goods through e-commerce platforms must also register under GST, with a few exceptions.

Example: If M/s. XYZ stores (a proprietorship) sell garments through Flipkart. As an e-commerce operator, Flipkart will deduct TCS before paying the amount collected on behalf of XYZ.

TDS Vs TCS in GST

TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) are two distinct mechanisms under GST. TDS is deducted by the buyer when making payments for goods or services under a business contract if the total contract value exceeds ₹2.5 lakh. This ensures tax compliance and is deducted at a rate of 2% (1% CGST + 1% SGST or 2% IGST).

On the other hand, TCS is collected by e-commerce operators when a seller supplies goods or services through their platform, and the operator collects the payment. TCS is gathered during the sale and subsequently deposited with the government.

What Happens if You Fail to Deposit TDS or TCS?

Failing to deposit TDS or TCS can result in significant consequences. The deductor or collector is required to pay interest on the unpaid amount, usually 1.5% per month for TDS and 1% for TCS.

Additionally, penalties may be imposed, potentially equal to the amount of tax not collected or deducted.  Legal actions, including fines and imprisonment ranging from three to seven years, may also be enforced. Therefore, timely compliance is crucial to avoid these repercussions.

The Key Takeaway

Understanding the difference between TDS and TCS is important for people and companies to make sure compliance with tax laws. While TDS ensures that tax is collected at the source of income, TCS ensures tax is collected at the time of sale of certain goods.

Both are essential for the smooth functioning of the tax system, promoting transparency and accountability. By being aware of these provisions, taxpayers can better handle their money and avoid any possible penalties, contributing to the overall efficiency of the tax regime.

If you want to know about the latest happening in the financial markets, then check out Choice blogs today.

FAQs

Q1. Who is Eligible For TDS?

Employers, banks, contractors, and other entities making specified payments like salary, rent, or interest must deduct TDS if the payment exceeds the prescribed limit.

Q2. How is TDS Calculated?

TDS is calculated based on the type of payment and applicable tax rates. For salary it’s calculated using the average income tax rate, which is determined by dividing the total income tax payable by the estimated total income for the financial year.

Q3. What is The TDS on Salary?

TDS on salary is deducted according to the income tax slab rates applicable to the employee’s estimated annual income. Employers must deduct TDS monthly and deposit it with the government.

Q4. Who Needs to Pay TDS?

The person or entity making the payment, such as employers, banks, and contractors, is responsible for deducting TDS from the payment amount and depositing it with the government.

Q5. Is TDS Refundable?

Yes, suppose the TDS deducted exceeds your actual tax liability. In that case, you can claim a refund by filing an income tax return. The Income Tax Department will refund the excess amount.