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Understanding the Difference between TDS and TCS

Ashish M. Shaji

| Updated: Sep 03, 2021 | Category: Taxation

Understanding the Difference between TDS and TCS

Under the concept of income tax, the total income of an assessee for the previous year is taxable in the assessment year. The government’s primary source of income comes from such levy of tax. There are provisions provided in the Act through which one may recover tax on their income in the prior year itself. It can be done through TDS and TCS. In this article, we shall understand the concept of Tax deducted at source and Tax collected at Source as they are not the same.

TDS and TCS- Brief Overview

TCS or Tax collection at source and TDS or Tax deducted at Source refers to obligation that is deducted at the instance of payment or received and deposited to the Income Tax Department. Both of them have certain key differences.

TDS-

TDS or Tax deducted at Source is an indirect way of receiving one’s tax where the revenue is collected directly at the recipient’s income. According to the Income Tax Act 1961, any payment on a particular expense falling under the purview of TDS should be settled after deducting the designated %.

In simple words, TDS means that at the time of making payment, the payer reserved some amount which has to be deposited with the government. In this way, income tax through TDS is levied in advance, and the recipient gets the net amount. Example of TDS applicability includes casual income, salary, payment of fees, payment of brokerage/commission etc.

TCS-

Whenever a particular item is sold in India, some amount is collected as tax by the company at prescribed rates from the buyer or from the payer of such amount. This is called as Tax collected at source or TCS. The seller has to transfer such tax amount collected to the government and also issue a TCS certificate, and the buyer of those goods gets credit. Such items include jewellery, liquor, bullion etc. The TCS computation rate may vary for different items.

Difference between TDS and TCS

The difference between the two and the basis of their difference is discussed in the table made below.

PARAMETERSTDS/TAX DEDUCTED AT SOURCETCS/TAX COLLECTED AT SOURCE  
MeaningAn amount that is deducted from the income of the recipient in the form of tax.An amount that is collected by the company or seller as tax.        
NatureIt is an expense.It is an income.     
Applicability It is imposed when payment is made above a certain limit.It is imposed on sale of a particular item or goods.      
Person responsible for deduction and collectionIt is deducted by the payer.It is collected by the seller or payee.    
OccurrenceTDS is credited to payee’s account or during payment, whichever is earlier, but in case of life insurance premium and during salary payment, it is deducted at the time of making payment.TCS is debited from buyer or during receipt, but when jewellery or bullion is sold, TCS has to be collected when consideration is obtained in cash.    

Let’s know the difference between TDS and TCS through an example.

Suppose X works in a Company, and at the time of paying salary to X, the employer deducts tax at applicable rates. The amount which is deducted from X’s salary is called Tax Deducted at Source.

Alternatively, Z is a trader who trades in a particular goods. Z sells some of his goods to Y. At the time of sale of his goods, Z collects a tax of certain amount. The amount is collected as tax by Z from his customer Y. This form of tax is called Tax collected at Source.

In spite of these differences between the two, there are certain similarities also. Like both TCS and TDS are governed by the Income Tax Act of 1961[1], and both are forms of indirect taxation.

What will happen on failure to deposit TCS or TDS?

In case where an individual fails to collect or deposit tax, then such person will face legal consequences. Such consequences include a penalty equal to the tax that has not been collected or deducted. Moreover, the individual can also face imprisonment along with payment of a fine as prescribed.

Interest can also be charged in case of failure to deposit TCS or TDS. The interest should be paid on monthly tax amount, which will be eligible for deductions. For each month from the date, tax shall be eligible for deductions, interest would be calculated until the date it is deducted finally or paid off.

Conclusion

The government collects both direct and indirect taxes to generate revenue. TDS and TCS are two of the main taxes levied on individuals. TDS is an amount that is deducted from the income of the recipient in the form of tax, whereas TCS is an amount that is collected by the company or seller as tax. A taxpayer should always fulfil their tax obligations within the prescribed time limit. Investment in life insurance etc., can help in reducing tax burden.

Read our article:All about TDS Liability (Section 194N) on Cash Withdrawals

Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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