The income tax and the goods & services tax (GST) are the two primary revenue sources for the government. The government has different mechanisms to collect the tax. TDS & TCS are two modes that enable the government to collect tax directly from the source. It helps the government to minimize the scope for tax evasion. Although the two terms appear to be synonymous, the TDS and TCS differences are quite significant.
People often get confused between TDS & TCS. TDS is tax deducted at the source, and TCS is a tax collected at the source. While the former refers to the deduction of tax, the latter points to the collection of tax. Though the objective of the government is the same under the two methods, it is essential for taxpayers to understand the differences between TDS and TCS.
What is Tax Deduction at Source (TDS)?
As per the provisions of the Income Tax Act, any person who makes a payment of a specific nature to another person has to deduct the tax at the source if the amount exceeds a threshold limit. The tax that is deducted must be remitted to the account of the central government before the specified due dates.
E.g. when an employer pays a monthly salary to an employee, the amount is subject to TDS. The tax so deducted by the employer has to be deposited in the account of the central government on or before the due date.
Due to the TDS system, the government is able to collect taxes in advance and also prevent the possibility of any tax evasion. The government need not wait till the end of the financial year for the taxpayers to file returns and then pay taxes. Before understanding the TDS & TCS difference, it is essential to understand the concept of TCS.
What is Tax Collection at Source (TCS)?
TCS refers to the collection of tax at the time of sale by the seller of specified goods from the buyer. The tax collected at source (TCS) is the tax payable to the government by the seller, who collects it from the buyer. But not every sale is subject to TCS, and the list of goods is specified under section 206C.
E.g. the rate of TCS on scrap items is 1%. If Mr P buys scrap worth Rs.1 lakh from Mr S, Mr P has to pay Mr S an amount of Rs.1,01,000 (Rs.1 lakh for the material & 1% or Rs.1,000 as TCS). Mr S has to remit Rs.1,000 to the government.
The buyer is eligible for credit in respect of the TCS at the time of payment of taxes.
Differences between TDS & TCS
Both TDS & TCS are charged at the source of payment. But the TDS & TCS in income tax differ on the following aspects.
- Definition
TDS refers to the tax deduction by an entity when making a payment if it exceeds a specified limit. TCS is the collection of tax by the seller of goods from the buyer at the time of sale.
- Transactions
TDS is applicable on payments such as salaries, interests, dividends, commissions, rent, contractual fees, etc. But TCS is applicable on the sale of goods such as liquor, timber, scrap, minerals, motor vehicles, etc
- Responsibility
Under TDS, the tax is deducted by the person who makes the payment. But under TCS, the tax is collected by the seller of goods. It is another fundamental TDS & TCS difference
- Time of Application
The TDS is applicable when the payment is made or due, whichever is earlier. But TCS is collected by the seller of goods at the time of sale
- Due Dates
TDS must be deposited before the 7th of the following month. TCS is collected in the month in which the goods are supplied and deposited with the government within ten days from the end of that month.
Conclusion
Amid TDS and TCS differences, an important point to note is that both TDS & TCS will not be applicable on the same transaction. So if the buyer deducts TDS on any transaction, then TCS will not be applicable on the same.
The objective of the government behind introducing these two mechanisms is to recover taxes at the origin of income. The differences between TDS & TCS are primarily along the operational aspects.
