TDS and TCS are two of the most significant sources of income for the government. And, it’s crucial for businesses to make such on-time tax payments to avoid penalties and staying compliant.

Read as we take a deep dive into the difference between TDS and TCS and their importance for businesses. 

What is TDS?

TDS stands for Tax Deducted (or withheld) at Source. As per Section 194Q, the income tax department mandates any company or individual to deduct tax at the source if the payment exceeds Rs. 50 lakhs for the purchase of goods and services, like rent, consulting, legal fees, royalty, technical services, etc.

The TDS rates are predecided by the government under the Income Tax Act. Click on the button below to find out the TDS rates on different types of goods and services for FY 2021-22.

Check out TDS Rate Chart

In any TDS transaction, the company or individual deducting TDS from the payment is called a deductor, and the company or person receiving the said payment is called the deductee.

What is TCS?

Tax Collected at Source, or TCS, is a tax imposed on goods by the seller, who collects it from the buyer at the time of sale. Section 206C of the Income Tax Act, 1961 specifies the goods and services on which TCS is applicable. The threshold for TCS on the sale of goods is Rs. 50 lakhs.

Although both taxes are levied at the point of origin of income/payment, there are quite a few significant differences between TDS and TCS. Read on to get a clear understanding of  the difference between TDS and TCS.  

Difference between TDS and TCS

TAX DEDUCTED AT SOURCE (TDS)

TAX COLLECTED AT SOURCE (TCS) 

Meaning

TDS is tax deducted at source by any company or individual making a payment if the payment exceeds the thresholds mentioned under respective sections.       TCS is a tax collected by the seller, at the time of sale.

Transactions Covered

TDS is applicable on interest, salaries, brokerage, professional fees, commission, purchase of goods, rent, etc. TCS is applicable on the sale of timber, scrap, minerals, liquor, tendu leaves, forest produce, cars, toll tickets.  

Limits  

Under Section 194Q, TDS is applicable on the purchase of goods, if the amount exceeds Rs. 50 lakhs. Under Section 206C (1H), TCS is applicable on the sale of goods, if the amount exceeds Rs. 50 lakhs.

Rates 

The tax deduction rate (TDS) for the purchase of goods is 0.1% of the sum exceeding Rs. 50 lakhs. The tax collection rate (TCS) for the sale of goods is 0.1% of the sale sum exceeding Rs. 50 lakhs.

Time of Deduction/Collection

TDS is deducted whenever a payment is due or made, whichever is earlier. TCS is collected by the seller at the time of sale.

Person Responsible

TDS is to be deducted by the individual (or company) making the payment.  TCS is to be collected by the individual (or company) selling the specified goods.

Due Dates 

Due date of depositing TDS is 7th of every month while TDS returns have to be submitted quarterly. TCS will be deducted during the month in which the supply is made. It will be deposited within 10 days from the end of the month of supply to the credit of the government.

Filing of Quarterly Statements

There are three different returns to be filed for TDS – Form 24Q (on salaries), Form 26Q (other than salaries), and Form 27Q (payments made to NRIs). There is one quarterly return in Form 27EQ for collection of tax at source (TCS).

Unavailability of PAN

As per sec 206 AA, those who fail to provide Permanent Account Number (PAN)  to the person making the payment will be charged TDS at the following rate, whichever is higher:

·         rate specified in the corresponding provision of the Act;
·         rate of 20%.

Section 206CC requires anyone paying an amount liable to TCS to provide their (PAN) to the person responsible for collecting the tax (hereafter, referred to as the collector); otherwise, the tax will be collected at the following rate, whichever is higher:
twice the rate specified in the corresponding provision of this Act;·         rate of 5%

 

Penalties for Non-Compliance

The deductor/collector can be penalized if they fail to pay TDS on time and file their TDS/TCS return correctly under Section 271H. The deductor/collector can be fined a minimum of Rs. 10,000 and a maximum of Rs. 1,00,000 for filing an incorrect TDS/TCS return. Also, Section 201(1A) of the Income Tax Act mandates an interest of @1.5% per month applicable for non-deduction of TDS from the date on which tax was deductible to the date on which tax is deducted.

In case of late TDS payments, the same interest of 1.5% will apply from the date of deduction to the payment date.

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Difference between TDS and TCS – Example

Say the DFE Group Pvt. Ltd. pays Rs. 40,000 rent per month for their office space. Their annual rent amounts to Rs. 480,000. This amount exceeds the TDS non-deduction limit of Rs. 2,40,000. Therefore, DFE Group Pvt Ltd. will deduct TDS @10%, i.e., Rs. 4000 per month, and pay Rs. 36,000 per month as rental payment.

In their income tax return, the owner of the office space will list Rs. 4.8 lakhs gross income and claim TDS of  Rs. 48,000 (already deducted) as a total tax liability credit, termed as the TDS credit.

Now, let’s consider another example where , Mr Gopalan is a wood trader, and Ms Sapna buys wood from him for ₹50,000. But, Ms Sapna will pay ₹52,500 [50,000 + (5%*50,000)] to Mr Gopalan. The extra Rs. 2500 is collected as TCS by Mr. Gopalan
While filing her ITR, Ms Sapna can claim a credit of Rs. 2500 for total tax liability, which is called TCS credit.

We hope this helped you understand the difference between TDS vs TCS. Subscribe to our weekly newsletter to stay updated about all the recent tax changes & their effect on your business.

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A potterhead finding magic in words | Content Marketer @ RazorpayX

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