Major Differences Between TDS and TCS Explained

  • Author :
  • TATA AIG Team
  • Published on :
  • 03/01/2024

The TDS TCS full form, also known as Tax Deducted at Source and Tax Collected at Source, are the crucial components of the Indian taxation system, designed to ensure smooth and efficient collection of taxes.

Both mechanisms entail deducting or collecting a percentage of tax at the point of collection, reducing the likelihood of tax evasion. TDS is primarily associated with income tax, whereas TCS is associated with indirect taxes.

In this blog, we will deconstruct TDS and TCS meaning, highlighting their definitions, examples, and key differences.

What is TDS?

Tax Deducted at Source (TDS) is a tax collection method in which the payer deducts a specified percentage of tax when making payments to the payee. The deducted amount is then remitted to the government on the payee's behalf.

TDS is applied to a variety of payments, including salaries, interest, rent, professional fees, and dividends, ensuring that the government receives its required tax revenue upfront.

What is TCS?

Tax Collected at Source (TCS) is a tax collection method in which the seller collects a percentage of the buyer's tax at the time of sale. TCS is typically associated with the sale of goods and services, and it charges on the total invoice value.

The tax is then collected and deposited with the government. TCS is used in situations such as the sale of scrap, minerals, and certain other goods or services.

Examples of TDS and TCS

Let us understand TDS and TCS through examples.

TDS Example

Suppose company A pays a professional fee of $100,000 to a consultant and the applicable TDS rate is 10%. The company A will deduct $10,000 as TDS from the payment and remit $100,000 to the consultant, with the remaining $10,000 deposited with the government on behalf of the consultant.

Particulars  Amount (in ₹)
Professional Fee 1,00,000
TDS (10%)  10000
Net Payment to Consultant  90000

TCS Example

Consider a Company B selling minerals to Company C for $5,000,000. If the applicable TCS rate is 1%, Company B will collect $5,000 from Company C as TCS and deposit it with the government.

Particulars Amount (in ₹)
Sale of Minerals  5,00,000
TCS (1%)  5000
Net Payment to Company C 4,95,000

Difference Between TDS and TCS

Now let us explore the major TDS TCS difference.

Criteria  TDS  TCS
Applicability  Applied to various types of payments like salary, interest, rent, professional fees and dividends.  Primarily applied to the sale of specific goods and services 
Point of Deduction/Collection Deducted by the payer at the time of making payment to the payee. Collected by the seller at the time of sale from the buyer.
Nature of Transaction Deals with Income Tax  Associated with indirect taxes.
Responsible Party Deducted by the payer who makes the payment. Collected by the seller at the time of sale.
Rates Rates vary based on the nature of the transaction and the payee’s status. Rates are fixed and specified for particular goods and services.
Legal Provision Governed by Section 192 to 195 of the Income Tax Act Governed by Section 206C of the Income Tax Act.

Effects of Failing to Deposit TDS or TCS

  • Failure to collect or deposit tax could result in a number of legal consequences.

  • A fine equivalent to the tax that was either not withheld or not collected is also included.

  • The offender faces a three-to seven-year prison sentence in addition to the fine imposed.

  • In the event that neither the TDS nor the TCS are deposited, interest may also be charged.

  • The monthly tax amount that is eligible for a deduction must be paid interest on.

  • Monthly interest is calculated at 1% or 1.5% for each month that remains deductible from the tax.

  • The 1% interest rate that is applied to TCS computations never changes.

TDS vs TCS Under GST

In certain situations, TDS and TCS in income tax are applicable under India's Goods and Services Tax (GST) regime. An outline of TDS and TCS in GST is provided below:

TDS under GST;- Certain local governments, government departments, and taxpayer categories are subject to TDS under GST. When paying suppliers who are registered under GST, they have to take out a certain percentage of the invoice value.

Key Points About TDS Under GST

  • TDS is typically 2% (1% for Central GST and 1% for State/Union Territory GST).

  • TDS is deducted when you make a payment or credit the supplier's account, whichever comes first.

  • The deductor must file a TDS return detailing the deducted tax and the vendor.

  • The deducted TDS amount is credited to the supplier's electronic cash ledger, and the supplier can use it to offset their GST liability.

  • TCS Under GST:- E-commerce businesses that enable the supply of goods or services via their platforms are subject to TCS under GST. When they collect or receive payment from the buyers, they must withhold a certain amount from the transaction value as tax.

Key points about TCS Under GST

  • 1% for intrastate goods supplies and 0.5% for interstate goods supplies are just two examples of how the TCS rate varies depending on the type of supplies.

  • When the e-commerce operator receives payment from the customer, TCS is gathered.

  • The e-commerce operator must file a TCS return detailing the tax collected and the purchaser..

  • The collected TCS amount is credited to the buyer's electronic cash ledger, and the buyer can use it to pay their GST liability.

Conclusion

TDS acts as a deterrent to tax evasion by ensuring systematic tax deduction at the source and promoting financial transparency. meanwhile , TCS plays an important role in regulating the sale of specific goods, acting an eye over transactions that falls under its jurisdiction

The distinctions between TDS and TCS are critical for businesses and individuals to effectively navigate the complex landscape of tax compliance. It is critical to follow the specific rules and timelines established by tax authorities in order to avoid penalties and legal consequences.

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FAQS

What if TDS and TCS both are applicable?

TDS and TCS may be applicable in some cases. The deductor or collector must follow the provisions of the Income Tax Act and fulfil their obligations for both TDS and TCS.

Who pays TDS and TCS?

TDS is paid by the payer or deductor at the time of making specified payments, whereas TCS is collected from the buyer by the seller or collector at the time of sale. In these tax collection mechanisms, both parties play distinct roles.

Is TDS and TCS refundable?

TDS is refundable if the amount deducted exceeds the payee's actual tax liability and the payee requests a refund. TCS is not refundable because it is a tax collected at the point of sale and remitted to the government on the buyer's behalf.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

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