The government collects taxes from different sources that we may classify as direct and indirect. If we want to do a brief analysis of direct tax vs. indirect tax, the main difference would be the difference between the taxpayers. While earners are responsible for paying direct taxes, consumers are responsible for paying indirect taxes.
The two most critical indirect taxes the Indian government collects are TDS and TCS. TDS and TCS’ full forms are Tax Deducted at Source and Tax Collected at Source, respectively. However, people often misinterpret and use these terms the same way. In this article, we will look into the differences between TCS vs. TDS.
What is a TDS deduction?
TDS is the total amount of tax the taxpayer’s employers or other deductors withhold from them and submit to the Income Tax Department on their behalf.
When a given transaction happens, such as a paycheck, rent, interest, fees for services, etc., a specific amount known as TDS is deducted. People’s age ranges and income levels are considered while determining the TDS rates.
While the one receiving the money or payment needs to pay taxes, the one making the payment takes out taxes at the point of payment. Since taxes are paid when payments are made, it reduces tax avoidance.
An example of TDS would be:
If a business pays ₹25,000 monthly rent to the property holder, it only needs to pay ₹22,500 to the property owner, deducting a 10% TDS. After deducting TDS, the owner receives ₹22,500 and adds ₹25,000 to his gross earnings, claiming credit for the ₹2,500 the company deducted.
What is a TCS deduction?
Sellers impose a tax on items at the point of sale, which they collect from the customer. This tax is known as TCS. The list of products and services subject to TCS is provided under Section 206C of the Income Tax Act of 1961.
When a seller receives consideration from a buyer that exceeds the threshold of ₹50 lakh in a fiscal year, the seller has an obligation to collect tax at source at a rate of 0.1% according to Section 206C(1H).
For example, the buyer pays ₹30 (₹70 + ₹30) for a book costing ₹100. This amount represents TCS that was collected at the point of sale. After that, the money is sent to a particular bank branch authorised to receive payments.
Budget 2023 increased tax collection at source (TCS) from 5% to 20% for overseas remittances made under the LRS (Liberalised Remittance Scheme). This will include going abroad, transferring money overseas, and additional payments, excluding medical and educational expenses.
Understanding the TDS and TCS difference
When a payment is made, both TDS and TCS are charged. The two forms of taxation are similar in many respects, yet they differ in some ways:
TDS is the tax any person or business must withhold from payments made at the source if the amount paid exceeds a specific threshold. Conversely, TCS refers to the tax imposed on the customer at the moment of sale by the seller.
- Covered transactions
While TCS is applied to selling goods like wood, minerals, alcohol, and toll plazas, TDS covers costs like interest, earnings, brokerage costs, commissions, and rent, among other things.
TDS is imposed on purchases of goods if the total is over ₹50 lakh under Section 194Q. TCS is imposed on the sale of goods under Section 206C (1H), provided that the total amount paid is over ₹50 lacs.
- The rates
For taxes deducted on purchases of products or services, or TDS, the deduction rate is 0.1% of the total amount above ₹50 lacs. TCS collects taxes at 0.1% of the selling price above ₹50 lacs for product sales.
- Time of collection or deduction
TCS is collected at the moment of sale by the seller of the product, while TDS is taken out upon payment.
- Individuals in charge
While the person or business selling the goods is responsible for collecting TCS, the person or business paying the seller is responsible for deducting TDS.
- Due dates
The seventh of each month is the deadline for depositing TDS. On the contrary, TCS will be subtracted in the month the supply gets delivered. TCS is credited to the government’s account ten days after the last day of the month.
In summary, TDS and TCS are necessary indirect taxes that help improve compliance and prevent tax evasion. The key distinction is that while the seller collects TCS from the buyer on sales exceeding predetermined thresholds, the payer deducts TDS on purchases above specified limits.
Understanding these specifics helps taxpayers stay compliant and avoid penalties for every citizen.
Yes, TDS and TCS might apply to the same transaction, provided the payment and products are subject to both taxes. If a buyer buys a vehicle valued above ₹10 lakh from a dealer, they must pay 1% TCS, and the dealer must deduct 1% TDS from the broker fee.
No, TCS cannot be adjusted against TDS on salary. TCS is a tax collected by the seller from the buyer and TDS is a tax deducted by the payer from the payee. They are different types of taxes and cannot be set off against each other.
The limit of TCS depends on the type of goods sold by the seller. If the selling value of products like alcohol or metals exceeds ₹50,000 in a financial year, TCS applies. TCS also applies motor cars with a selling value above ₹10 lakh in a single transaction.
TCS 1% is the tax collected at the source at the rate of 1% by the seller from the buyer on certain goods, such as motor vehicles, cash, jewellery, bullion, etc. The seller has to deposit the TCS amount with the government and issue a TCS certificate to the buyer.
There are two types of TDS: TDS under the Income Tax Act and TDS under the GST Act. TDS under the Income Tax Act is deducted on payments such as salary, rent, etc. TDS under the GST Act is deducted on payments made under a business contract by specified persons.