What Is The Difference Between TDS and TCS?

Income tax is one of the most important financial planning aspects. You need to keep a check of your incomes, your investments and strategically plan to buy life insurance, a term plan, or any other tax-saving investment to save tax.

Income tax is not the only source of taxes for the government. It also collects indirect taxes such as TDS, TCS, and GST from us, by levying them on goods, services, and transactions. In the case of direct taxes, payments are made by the ones earning the money. In case of indirect taxes, it becomes the responsibility of the seller to deposit the tax with the government.

Two indirect taxes frequently confused with one another are TDS and TCS. Let us find out what they are.

TDS and TCS

Tax Deducted at Source and Tax Collected at Source are both incurred at the source of income.

• TDS is the tax which is deducted on a payment made by a company to an individual, in case the amount exceeds a certain limit. TCS is the tax which is collected by sellers while selling something to buyers.
• TDS deduction is applicable on payments such as salaries, rent, professional fee, brokerage, commission, etc. TCS deduction is applicable on sales of goods like timber, scrap, mineral wood, and so on.
• TDS is applicable only on payments that exceed a certain amount. TCS is applicable on sales of specific goods which don’t include production or manufacturing material.

Tax Deducted at Source and Tax Collected at Source- examples

Let’s say Mr.X works at a company. His company deducts a tax on monthly salary at the applicable rate before they make him the final payout. The amount that is deducted in this manner is TDS.

Now, Mr.Y is a mineral wood trader. He sells some mineral wood to Mr.Z. While making the sale, Mr.Y collects 5 percent tax; this sum collected by Mr.Y from the customer is called TCS.

Rates:

In October 2018, a new rule came into force. As per this rule, an operator of an e-commerce market has to collect a tax on net transaction amount from suppliers who provide them with goods. The rate for this Tax Collected at Source is 1%.

What happens when you fail to collect or deposit tax?

There are legal consequences for failing to collect or deposit tax. This could include

• A penalty amount equal to the tax which is not deducted or collected
• Imprisonment of three to seven years plus fine
• An interest on the monthly tax amount eligible for deduction. This interest applies for each month from the day when the tax becomes eligible for deduction to the day when it is deducted (at the rate of 1 percent) or when it is paid to the government (at the rate of 1.5%). In case of the TCS, the interest rate remains 1%.

TDS and TCS under GST

This applies to e-commerce businesses. Every e-commerce company has to collect some tax on the net transaction value of their sales. This rule came into force in October 2018.

The rate for TCS in this situation would be 1% (0.5% CGST + 0.5% SGST). Alternatively, it could also be 1% of IGST.

Conclusion

It is crucial to keep track of all your taxes. If TDS has been deducted from your income, you can get refunds provided you file returns on time. Imagine the amount of money you would lose with each transaction simply for not filing returns. If you have collected TCS, it should be your priority to deposit the collected TCS with the authorities and ensure smooth and lawful functioning of your trade. As a personal entity, you can also save taxes through other means such as tax deduction via life insurance, mutual funds, and other tax-saving instruments.

Also Read - Form 15G & 15H

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