Difference between TDS and TCS

The government collects these taxes in direct and indirect forms. Direct taxes are the ones that an individual pays to the government directly from one’s earnings. On the contrary, indirect taxes are the ones that sellers collect from the buyers and then they are responsible for depositing these to the government.

TDS and TCS both are forms of taxes that people pay to the government indirectly. Since people may tend to use the two terms interchangeably, it is important to know the difference between the two. And here’s our take to help you understand the same. 

What is TDS?

TDS stands for Tax Deducted at Source. It is the tax that any individual or company can deduct while making a payment to a service provider or supplier if it exceeds a certain amount. Hence, the revenue collection is done at the source itself. The source here is the point of the recipient’s income. Hence, the term TDS for any service provider or individual or supplier on the earning can be represented as “Pay as you earn and collect when you have earned.”

According to Section 194A of the Income Tax Act, tax is deducted if the total amount of interest during the financial year exceeds a sum of Rs. 5000. But once the interest amount exceeds Rs. 5000, the tax is deducted on the entire amount.

As per section 194Q of the Act, any company or individual is required to deduct the tax while making a payment if the payment exceeds Rs. 50 lacs for the purchase of good(s) and/or service(s).

The services here can be any kind of services like legal fees, technical services, graphic designing, advertising and marketing, promotion, rent, salary, interest, brokerage, commission, etc.

The rate of the tax deduction for TDS is 0.1% of the sum exceeding Rs. 50 lacs. However, it varies for different things. For example, TDS on salaries is applicable as per the slab while on winning a lottery prize above the amount of Rs. 10,000, it is 30%. It is 5% for commission on the amount exceeding Rs. 15,000. The due date for the TDS deposition is the 7th of every month

The two parties in a TDS transaction are the deductor and the deductee. The individual or the company that deducts the tax is called the deductor and the one receiving the payment and from whose earnings, the tax has been deducted is known as the deductee. 

So, the income gets charged in advance and the receiver receives the deducted tax directly from the government. 

What is TCS?

TCS stands for Tax Collected by the Seller. TCS is collected at the time of sale. The seller collects the tax from the buyer which is then paid to the government in the form of Sales Tax. 

The government does not collect taxes on all kinds of sales. The items that fall under the taxable category, i.e., on which the tax is levied are listed in Section 206C of the Income Tax Act, 1961. Examples of such items are parking lots, liquor, minerals, the amount paid at toll plazas, etc. 

As per Section 206C (1H) of the Income Tax Act, TCS is applicable on the sale of goods provided that the amount exceeds Rs. 50 lacs. The rate for TCS collection is also similar to TDS, i.e., 0.1% when the amount of goods sold exceeds Rs. 50 lacs. However, the rates vary for different items. For instance, on the sale of liquor, TCS is 1%, while it is 2.5% is for the sale of timber wood. 

The due date for depositing TCS by the seller to the government is within 10 days from the end of the month to the credit of the government. 

Major differences between TDS and TCS:

  1. Meaning: TDS is the tax that any individual or company can deduct while making a payment to a service provider or supplier if it exceeds a certain amount. Whereas, TCS is the tax collected by the seller from the buyer at the time of sale. 
  2. Transactions covered: TDS covers expenses such as rent, salaries, commissions, brokerage, interest, services, etc. Whereas, TCS covers sales of certain items like timber wood, minerals, payment at toll plazas, liquor, tendu leaves, forest produce (other than timber and tendu leaves), metals (coal, lignite, iron ore), vehicles, etc. 
  3. Time of tax collection: TDS is collected at the time the payment to the recipient is made for good(s) and/or service(s). Whereas, TCS is collected at the time of sale. 
  4. Deductor: In a TDS transaction, the tax is deducted by the company or the individual making the payment for purchased or used goods (s) and/or service(s). On the contrary, TCS is collected by the seller.

Understanding the difference with an example:

TDS:

Any XYZ business pays a monthly rent of Rs. 50,000/– for its office premises. This means the company is paying Rs. 6 lacs per annum towards rent. The TDS non-deduction limit for any business is Rs. 2.4 lacs annually. Since the rent amount exceeds this limit, the business will have to deduct the tax at source, TDS while making the rent payment. The TDS it deducts @ 10% will amount to Rs. 5000/- per month, paying Rs. 45,000/- monthly towards rent. The total TDS deducted for a year is Rs. 60,000 which the beneficiary (owner of the office space) can claim as a TDS credit on his/her annual income tax return. 

TCS:

Consider a business, ABC, dealing in timber and any other business, say, furniture manufacturer, XYZ, purchases wood from ABC for an amount of Rs. 50,000. Now, ABC will be paying XYZ [50,000 + (5%*50,000)] = Rs. 52,200/-. The additional Rs. 2500/- collected at ABC’s end will make ABC responsible for depositing this TCS amount to the government as tax liability. 

Every business and individual needs to fulfil their tax obligations on time to prevent facing legal consequences on failing to do so. The TDS deducted is received by the recipient directly from the government when the income tax return is filed. Similarly, it is important to deposit the TCS collected to the government on time.

Many businesses use Business Financing services offered by Fintechs like Oxyzo Financial Services Pvt Ltd to fulfil their TDS and TCS obligations timely if the amount of tax deducted or collected has been used up to meet the operational costs of the business. 

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