Content
Introduction
There are numerous factors involved in the Indian tax system, the Income Tax Act of 1961 defines these factors through various terminology. Two of the most common terms used to define certain factors in the tax system are TDS and TCS. However, there are times when people use both terms interchangeably, confusing other taxpayers about the applicability of both terms while paying taxes.
If you are an Indian taxpayer or have increased your salary to come under the tax slab, it is important to understand the difference between TDS and TCS to ensure effective compliance with the income tax law.
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What Is TDS?
The understanding of TDS and TCS includes the basic definition of TDS. Tax deducted at source is an indirect tax that the government levies and collects directly from the taxpayers' income as soon as the taxpayers earn the income. In general, the person, such as the employee, deducts the TDS as defined by the Indian government and, when paying the employee, deposits the amount with the Income Tax authority. As per section 194Q, the Indian government requires the deductor to deduct a certain percentage of tax from the payment made to the deductee and deposit it with the government within a specified time frame. The deductee can claim credit for the TDS deducted while filing their income tax return based on Form 26AS or the TDS certificate issued by the deductor.
TDS applies to payment types such as salaries, interest, rent, professional fees, and other payments as specified by the Income Tax Act. The rate of TDS varies depending on payment and the status of the deductee. TDS ensures regular collection of taxes and reduces the burden on the government. It also helps in preventing tax evasion and encourages timely payment of taxes. Individuals who submit investment and income proofs to their employers to define that they do not fall under any income tax slab are not liable to pay any TDS.
What is TCS?
Having understood the basic definition of TDS, the next step involved in understanding TDS vs TCS is to learn the basic definition of TCS. Tax Collected at Source (TCS) is an indirect tax imposed by the Indian government on sellers selling products to consumers. Here, the seller collects TCS from the buyer at the time of sale of certain specified goods and services. The Indian government requires the seller, who is collecting the TCS, to deposit the collected tax with the government within the specified time frame. The buyer can claim credit for the TCS paid while filing their income tax return.
TCS applies to various goods and services such as alcoholic liquor, tendu leaves, timber obtained under a forest lease, scrap, minerals, etc. The rate of TCS varies depending on the nature of goods and services. The Income Tax Department has listed the items on which TCS is applicable under Section 206C of the Income Tax Act, 1961. However, there is another factor included in understanding TDS and TCS. Deduction of TCS is not liable if the buyer furnishes a declaration in writing to the collector to detail that the buyer will utilise the goods for processing, manufacturing or producing articles or things and not for further trading at a profit.
Example Of TDS and TCS
The difference between TDS and TCS or TDS vs TCS is better understood through an example which will explain in detail the applicability of TDS and TCS. However, as there are numerous receipts and payments on which TDS and TCS are applicable, the example will choose a specific payment for a better understanding.
TDS And TCS: TDS Example: Suppose a company, PQR Limited, purchased an immovable property in the company's name amounting to Rs 80,00,000, which is higher than the permitted threshold limit of Rs 50,00,000 set for TDS. Since Rs 80,00,000 is Rs 30,00,000 above the threshold limit of Rs 50,00,000, the company is liable to deduct 1% from the Rs 50,00,000. The TDS amount here would be Rs 50,000, and the company will deduct it from Rs 50,00,000 and pay Rs 4,95,00,000 to the seller.
Now, the seller of the immovable property will show the earning from selling the property at Rs 50,00,000, from which the buyer has already deducted Rs 50,000 and file the income tax return to seek Rs 50,000 as TDS as tax liability credit.
TDS And TCS: TCS Example: Suppose a person purchases timber wood worth Rs. 10,000 from a seller. The TCS rate on the purchase of timber wood is 2.5%. In this case, the seller would collect TCS from the buyer at the rate of 2.5% of the purchase value, which is Rs. 250 (2.5% of Rs. 10,000). Here, the buyer will have to pay Rs 10,000 + Rs. 250 = Rs. 10,250. The seller would then deposit this TCS amount of Rs. 250 with the government.
Now, the buyer of the timber wood will show Rs 10,250 as the total expense while filing the income tax return to seek Rs 250 as TCS as a tax liability credit.
Comparison of TDS and TCS
Since you may fall under tax liability, learning about TDS and TCS differences is vital. Here is a detailed table for a better understanding of TDS TCS differences:
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Parameters
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TDS
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TCS
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Applicability
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Purchase of goods and services
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Sale of goods and services
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Covered Transactions
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Rent, brokerage, interest, EMIs etc.
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Selling tendu leaves, timber wood, cars, forest products etc.
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Deduction Timing
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When the payment is due or made, whichever earlier
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At the time of the actual sale
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Due Dates
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7th of every month with the returns submitted quarterly
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In the month of receiving supply within 10 days from the month’s end.
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Depositor
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Individual or entity making the payment
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Individuals or entities selling the goods or services
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Forms For Filing
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Form 24Q (in case of salaries), Form 26Q (for others except for salaries), and Form 27Q (for payments to NRIs)
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Form 27EQ
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Effects of Failing To Deposit TDS and TCS
Here are some possible bullet points on the effects of failing to deposit TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) in India:
● Penalties: Failing to deposit TDS and TCS within the prescribed due dates attracts penalties under the Income Tax Act of 1961. The penalty for a late deposit of TDS can range from 1.5% to 1.0% per month, while the penalty for a late deposit of TCS is 1% per month.
● Interest: In addition to penalties, the government may levy interest on late deposits of TDS and TCS. The interest rate is usually 1.5% per month or part of the month for both TDS and TCS.
● Compliance burden: Late deposit of TDS and TCS can lead to an increased compliance burden, as taxpayers may have to file revised TDS/TCS returns and correct the errors made in the original returns.
● Negative Credit Rating: Late TDS and TCS deposits can adversely affect taxpayers' credit rating, especially if it becomes a recurring issue. A negative/lower credit rating can make it difficult for businesses to obtain loans and credit facilities from banks and other financial institutions.
● Legal implications: Non-compliance with TDS and TCS provisions can lead to legal implications, including prosecution under the Income Tax Act of 1961. The prosecution can lead to imprisonment for up to three to seven years and a hefty fine.
Conclusion
Citizens of every country rely on their country’s government to ensure that the country's economy and infrastructure are always in a comfortable position for them to maintain their standard of living. Governments have to ensure they have a high capital amount every year to develop the country and maintain the economic factors most positively. Although the governments have numerous sectors, such as railways, under their control, along with other PSUs, they still need resources for the healthy development of the country. The Indian government collects these funds from the Indian citizens by charging income tax, direct tax and indirect tax.
The citizens pay income tax on all their yearly earnings and pay direct tax to the government directly, while the sellers have to pay indirect tax to the government. Since filing income tax is necessary, understanding TDS and TCS is critical to comply with Indian tax laws. Now that you understand the difference between TDS and TCS, you can file your taxes effectively.
