What is TDS & TCS? Understanding the difference between the two

The Government of India generates revenue for our country through taxes. These taxes are collected as a percentage of the income earned by the people of the country. TDS and TCS are the forms of such taxes where both – TCS and TDS return filing are to be done by the individuals.

TDS refers to “Tax Deducted at Source” while TCS refers to “Tax Collected at Source”. 

As the name suggests, “At source” means at the “Origin of the income”. 

Let us first see the basic differences between TDS and TCS:

TAX DEDUCTED AT SOURCE (TDS)	TAX COLLECTED AT SOURCE (TCS)
Sort of tax which a person deducts at the time of making payment of some amount to another person.	A tax which a seller collects at the time of making sale to a buyer.
Deducted on payments like salary, interest, commission, brokerage, rent, contracts, professional fee, etc.	Collected on sale of specified goods like tendu leaves, timber wood, scrap, minerals, etc.
Can be considered as Expense initially because tax is deducted from the payment of recipient, but ultimately it is to be deposited to the Central Government.	Can be considered as Income initially because it is collected by the seller from the buyer, but ultimately it is to be deposited to the Central Government.
It is deducted when specified payments cross a prescribed limit.	It is deducted when specified goods/items are sold (not used for manufacturing/production)
Person responsible to deduct tax at source: Any person who makes specified payments as per the Income Tax Act, 1961 over and above a certain limit.	Person responsible to collect tax at source: Any person who sells specified goods as per the Income Tax Act, 1961.

Example of TDS

Mr A is a full-time employee of LegalWiz.in Private Limited. He receives a monthly salary. His employer (i.e., LegalWiz.in Private Limited) deducts some amount of tax at slab rates applicable on an Individual, from his monthly salary before paying it to him. The amount so deducted before payment is called Tax Deducted at Source (TDS).

Example of TCS

Mr. A is a trader of Tendu leaves. He sells Tendu leaves to Mr. B. He collects tax @5% on the sale value of tendu leaves. The amount so collected @5% at the time of sale is called Tax Collected at Source (TCS).

What are the responsibilities of Tax Deductor or Tax Collector? 

1. Obtain Tax Deduction Account Number/ Obtain Tax Collection Account Number.

2. Quote the above number in all documents related to TDS/TCS.

3. Deduct tax at source at the applicable rate before payment/ Collect tax at source at an applicable rate at the time of sale.

4. Pay the tax deducted/ collected to the credit of Central Government on or before due dates specified under the Income Tax Act,1961.

5. Furnish periodical TDS/TCS returns and TDS statements on or before due dates specified under the Income Tax Act,1961.

6. Issue TDS/TCS certificates to the payee/buyer, respectively, on or before due dates specified under the Income Tax Act,1961. 

Below is the list of some TDS payments and TCS goods: 

Nature of Payment	TDS Rate
Salary	Normal Slab rate
Winnings from lottery, crossword puzzles, horse races above ₹10,000	30%
Payment to contractor above ₹30,000 for single payment and ₹1,00,000 for aggregate payment	1% for Individual/HUF 2% for any other person
Commission on sale of lottery tickets, commission/brokerage above ₹15,000	5%
Rent for land or building, furniture, plant and machinery above ₹2,40,000	2% for plant and machinery 10% for land/building, furniture
Consideration for purchase of immovable property (other than  agricultural land) above ₹50 lakhs	1%

Type of Goods	TCS Rate
Alcoholic liquor for human consumption	1%
Timber wood under a forest leased or by any other mode	2.5%
Tendu leaves	5%
A forest produce other than Tendu leaves and timber	2.5%
Scrap	1%
Minerals like lignite, coal and iron ore	1%
Purchase of Motor vehicle exceeding ₹10 Lakhs	1%
Parking lot, Toll Plaza and Mining and Quarrying	2%

What if the Tax deductor/ Tax collector fails to deduct/collect tax at source OR after deducting/collecting, fails to pay it to the Central Government? 

Consequences in case of TDS: 

(i) Interest:  

(a) Pay interest @1% on tax amount calculated for every month or part of month from the date tax was deductible to the date it is deducted; 

(b) Pay interest @1.5% on tax amount calculated for every month or part of month from the date tax was deducted to the date it is paid to the Central Government. 

(ii) Penalty: Pay penalty equal to tax not deducted or not paid to the Central Government. 

(iii) Prosecution: Imprisonment for 3 months to 7 years with fine. 

(iii) Disallowance of Expenditure: Expenses (other than salary) on which tax deduction is mandatory are not deducted from income for the purpose of computation of tax, if TDS is not deducted or after deduction, not paid.

Consequences in case of TCS: 

(i) Interest: Pay interest @1% on tax amount calculated for every month or part of month. 

(ii) Penalty: Pay penalty equal to tax not collected or not paid to the Central Government. 

(iii) Prosecution: Imprisonment for 3 months to 7 years with fine. 

An important aspect of TDS/TCS- Tax Credit 

While in TDS, a certain percentage of tax is deducted from the payment made to a person. In TCS, a certain percentage of tax is collected from the buyer of specified goods. So, is there any benefit available to the person whose tax has been deducted or from whom tax has been collected? 

YES, it’s called TDS/TCS Credit. 

Let’s understand it with the help of an example: 

Bharat Pvt. Ltd. pays rent of ₹50,000 per month for it’s office space to the landlord of the property. The total rent amounts to ₹6 lakhs (50,000*12). So, the amount exceeds the limit (₹2,40,000) for non-deduction of TDS. Hence, Bharat Pvt. Ltd. deducts TDS @10%, i.e., ₹5,000 TDS per month and pays ₹45,000 per month to the landlord.

Now, when he file income tax return, the landlord will show the gross amount of ₹6 lakhs as an income and claim TDS of ₹60,000 (already deducted) as credit from the total tax liability. This is TDS credit.

Similarly, Mr. A is a trader of tendu leaves. Mr. Z buys tendu leaves from him for ₹50,000. Mr. Z has to pay ₹52,500 [50,000 + (5%*50,000)] to Mr. A. So, Mr. A has collected ₹2,500 as TCS @5%.

Now, while filing his ITR, Mr. Z will claim the amount of ₹2,500 as credit from the total tax liability. This is TCS credit.

* The above-mentioned TDS/TCS credit is claimed in the return on the basis of TDS/TCS returns filed and the TDS/TCS certificates issued by the deductor/collector.

TCS under GST

With effect from 1^st October 2018 every e-commerce operator need to collect tax on net transaction value where the supplier is supplying goods or services through e-commerce operator and consideration with respect to the supply is to be collected by the said e-commerce operator. TCS is to be collected once supply has been made through the e-commerce operator.

The rate of TCS is 1% (0.5% CGST + 0.5% SGST) OR 1% IGST.