What is the difference between TDS and TCS?

Taxes are the main source of revenue for any country’s economy. The government collects two types of taxes: direct tax, which is levied on taxpayers’ income, and indirect tax, which is charged on goods and services. The government also collects other forms of revenue, such as customs duties on imported goods, excise duties on domestically produced goods, and property taxes. Tax Deducted at Source (TDS) and Tax Collection at Source (TCS) are two types of Indirect Taxes imposed by the government.

Read along to find out the TDS and TCS difference and the significance of each for different businesses.

Difference between TDS and TCS

Both TDS and TCS have very different roles in the business sector. There are certain differences between them; read ahead to know how the two are distinguished from each other:

What is TDS?

A business or individual must withhold tax at the source from payments made for the purchase of goods and services, such as rent, consultation fees, legal costs, royalties, technical services, etc., that exceed ₹50 lakhs, according to Section 194Q of the Income Tax Act.

According to the Income Tax Act, the government predetermines the TDS rates. The deductor and deductee are the parties involved in a TDS transaction. TDS is withheld from the payment by the deductor, who is also known as the deductor.

What is TCS?

A tax known as Tax Collected at Source, or TCS, is levied on goods by the seller and is paid by the purchaser at the time of purchase. The goods and services that TCS covers are listed in Section 206C of the Income Tax Act of 1961. TCS has a threshold of ₹50 lakhs for the selling of commodities.

Although both taxes are imposed at the source of the revenue or payment, there are several noteworthy distinctions between TDS and TCS.

Penalties for Non-Compliance

Under Section 271H, the deductor/collector may be fined for failing to submit their TDS/TCS returns on time and accurately. The deductor/collector can be fined a minimum of ₹10,000 and a maximum of ₹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 deduction date to the payment date.

Difference between TDS and TCS – Example

Suppose you are an employee at a company where your salary is ₹20,000. At the time of your salary payment, the company will deduct a prescribed percentage from your salary as a TDS. Let’s say the TDS applicable is 5%. You will, hence, receive ₹19,000, and your tax deducted at the source will be ₹1000.

Suppose you want to purchase timber from a timber trader for ₹50,000. But you will pay him a total amount of ₹52,000 (50,000 + 5% of 50,000). The surplus ₹2,500 is the TCS you will pay the timber trader. While filing your ITR, you can claim a credit of ₹2,500 for the total tax liability. This is known as TCS credit.

What is the Difference Between TDS and TCS in GST?

TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) are mechanisms used in India’s Goods and Services Tax (GST) system to ensure tax compliance and improve tax collection efficiency. Let us take a look to know how the two are distinguished from each other.

Conclusion

Keeping track of all your taxes is essential. If TDS was deducted from your income, you are eligible for a refund if your tax returns are submitted on time. Just think about how much money you would miss out on by failing to file returns for each transaction. If you have collected TCS, it should be your top priority to deposit it with the appropriate authorities to ensure your business’s efficient and legal operation.

You can reduce your taxes as an individual by using other strategies like tax deductions from investments in life insurance, mutual funds, and other tax-avoidance tools. Now that you know the difference between TDS and TDC, understand which suits your business best.

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