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Difference Between TDS and TCS: Simplifying Tax Deductions and Collections


Difference Between TDS and TCS: Simplifying Tax Deductions and Collections

Among the various types of tax mechanisms in place, TDS (Tax Deducted at Source) and TCS (Tax Collected at Source), are the two important concepts that often cause confusion. While the purpose of both are the same, that is, collecting taxes upfront, their applicability and impact are very different.

This article will elaborate on these two tax mechanisms and give an understanding of the difference between TDS and TCS. Also, their definitions, examples for each mechanism, and explain when and why each is used.

 

Table of content

 

What is TDS?


TDS, or Tax Deducted at Source, is a mechanism of collecting the income tax in India which involves deducting tax at the source of income. This mechanism is used by the government to reduce tax evasion by collecting the tax at source rather than at the later stage. Various payment types such as: salaries, interest, rent, commission, and professional fees, and so on are few of the examples where TDS is applicable. 


Thus, the payer while making any of these types of payments have to ensure that the TDS is deducted before making the payment to the payee. The TDS shall then be deposited with the central government within the prescribed time limits. The person or the entity deducting the TDS is known as ‘Deductor’, whereas the person whose TDS is deducted is known as ‘Deductee’.


What is TCS?


TCS, or Tax Collected at Source, is a tax collected by the seller from the buyer while making sales. TCS is applicable on specified goods and services as per the Income Tax Act, 1961. The rate of TCS varies according to the type of goods sold or services rendered. Most common items subject to TDS include: scrap, tendu leaves, timber obtained from a forest lease, minerals such as lignite and coal. Moreover, TCS is also applicable on sale of software, parking lot fees, toll plaza fees, and other types of goods and services.


Difference between TDS and TCS


Following are the differences between TDS and TCS:



Difference between TDS and TCS

TDS Rates for Some Payment


Following table covers the most common type  of payments subject to TDS:


TDS Rates for Some Payment

TCS Rates for Some Commonly Bought Goods


Here is the simplified TCS rate chart with applicability limit as defined under the Income Tax Act:


TCS Rates for Some Commonly Bought Goods


How to Compute TDS: An Example


For TDS calculation, consider an example of professional fees paid by a company to a freelancer towards the services rendered during the F.Y. 2024-2025. 


Scenario: A company hires a freelancer for providing consultancy services and pays INR 50,000 per month.

TDS Rate: The rate of TDS on professional services under Section 194J is 10%


Steps for TDS Calculation:

  1. Determine the payment amount: which is INR 50,000 in this case.

  2. Identify the applicable TDS rate: Under Section 194J the rate of TDS for professional services is 10%

  3. Calculate the TDS amount: 

  4. TDS = Payment Amount X TDS Rate

  5. TDS = INR 50,000 X 10%

  6. TDS = INR 5,000

  7. Net payment to the Freelancer: To find the net payment amount, subtract the TDS amount from the agreed payment amount.

  8. Net Payment = Payment Amount - TDS

  9. Net Payment = INR 50,000 - INR 5,000

  10. Net Payment = INR 45,000


The company will deduct TDS of INR 5,000 on the professional fees and make a payment of INR 45,000 to the freelancer.


How to Compute TCS: An Example


For TCS calculation, consider an example involving sale of scrap materials, which is one of the transactions subject to TCS under the Income Tax.


Scenario: A scrap dealer sells scrap material to a manufacturing company for INR 1,00,000. The applicable rate of TCS is 1% on the sale of scrap.


H3- Steps for TCS Calculation:

  • Sale amount: INR 1,00,000

  • Rate of TCS: 1%

  • TCS amount: Sale amount X Rate of TCS

= INR 1,00,000 X 1%

= INR 1,000


Therefore, the scrap dealer needs to collect a total of INR 1,01,000 from the manufacturing company, which comprises the sale amount and the TCS amount of INR 1,000. The dealer will then deposit the amount of TCS with the government.


TDS and TCS Payment Due Date: F.Y. 2024-2025 (A.Y. 2025-2026)


Typically, TDS payments are due on the 7th of the following month in which the TDS is deducted. For instance, TDS deducted in April 2024 should ideally be paid to the government by May 7, 2024. However, for TDS deducted in March 2025, the due date is extended up to April 30, 2025. This gives the taxpayers a little extra time in the last month of the financial year. It is essential to meet the deadlines to avoid late interest and penalties.


Similarly, the due dates for TCS for the F.Y. 2024-2025 follow a similar pattern as that of the TDS. Entities collecting TCS should deposit the collected tax by the 7th of the following month in which the TCS is collected. This ensures that the tax collected from the buyers at the point of sale has been promptly transferred to the government.


Failure to Deduct TDS or Collect TCS


Failure to deduct TDS or collect TCS can result in severe penal consequences and may also affect the status of the taxpayer.


  • Interest: When the payer fails to deduct TDS or collect TCS, interest is charged at 1% per month or part thereof, from the date on which the tax was deductible/collectible to the date on which the tax is actually deducted/collected.

  • Penalty: A penalty equivalent to the amount of TDS not deducted or TCS not collected can also be levied.

  • Disallowance of expenses: The payment for which the TDS was not deducted is disallowed and cannot be claimed as a deduction under the Income Tax Act.

  • Prosecution: Failure to collect or deposit TCS may lead to prosecution, which might result in an imprisonment for a term ranging from 3 months to 7 years, along with fine.


Failure to Deposit TDS or TCS


Failure to deposit TDS or collect TCS with the government after deduction or collection of the same have the following implications under the Income Tax Act:


  • Interest: If the TDS/TCS is not deposited with the government on time, interest at the rate of 1.5% per month or part of the month will be levied on the amount of such tax deducted/collected until the date of actual payment.

  • Penalty: A penalty equivalent to the amount of TDS not deducted or TCS not collected can also be levied.

  • Prosecution for serious offenses: In extreme cases of non-compliance, the deductor or collector may also face prosecution. This could lead to an imprisonment from 3 months to 7 years along with a fine.


TDS and TCS under GST


The introduction of GST (Goods and Services Tax) in India resulted in significant changes to the tax collection mechanisms, including TDS and TCS. The below table provides an overview of TDS and TCS under GST:


TDS and TCS under GST


Most Asked Questions


Q1. What is the basic difference between TDS and TCS?

TDS represents the tax deducted at the source of payments like salary, rent, interest, commission, etc. Whereas, TCS is the tax collected at source from the buyer at the time of sale.


Q2. Who is responsible for deducting TDS and collecting TCS?

The TDS is deducted and deposited by the payer or the employer while making the payment. While, the seller or the dealer is responsible for collecting the TCS from the buyer at the time of sale.


Q3. Are TDS and TCS applicable to types of transactions?

TDS applies to specific payments such as salaries, interest, professional fees, and so on. Whereas, TCS is applicable mainly in case of sale of goods, like scrap, minerals, and in e-commerce transactions.


Q4. Can the amount deducted as TDS or collected as TCS be refunded?

Yes. If the tax has been deducted or collected in excess, the extra amount can be claimed as refund while filing the income tax return.


Q5. What is the impact of TDS and TCS on the income tax return (ITR)?

The amounts deducted as TDS and collected as TCS are reflected in Form 26AS. These can be set off against the tax payable while filing the ITR.


Q6. What are the consequences of not deducting TDS or not collecting TCS?

Failure to deduct or collect TDS/TCS can lead to interest, penalties and prosecution in severe cases.


Q7. What is Section 206 in the context of TDS or TCS?

Section 206 pertains to the collection and recovery of taxes, outlining the responsibility and procedures involved in deducting TDS or collecting TCS. Moreover, it provides the duties, compliance requirements, and penalties for non-compliance.


Q8. Can I adjust the TDS deducted against the TCS collected in my transactions?

No. The TDS deducted cannot be adjusted against the TCS collected. They are treated separately in tax filings and calculations. 


Q9. How to verify the TDS deducted and TCS collected on my behalf?

Through Form 26AS the amount deducted as TDS or collected as TCS can be verified. Form 26AS is accessible on the e-filing portal of the Income Tax.


Q10. Is it necessary to obtain a separate registration for TDS and TCS under GST?

Yes. Entities who are required to deduct TDS or collect TCS under GST must obtain separate registration apart from the regular registration under GST.



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