While everyone is more or less aware of the benefits of paying direct taxes on their income regularly, such as getting their tax liability reduced and ease in availing overseas visas, there is a lot of confusion still about indirect tax components, including tax deducted at source (TDS) and tax collected at source (TCS).
TDS and TCS
TDS and TCS are two kinds of direct taxes levied in India that are frequently confused with each other. While both are incurred at the source of the income being generated, there are subtle differences between the two. Read on to learn more.
- Tax deducted at source (TDS) refers to the tax deducted by a person while making a payment to any other person if the amount exceeds a certain level. Tax collected at source (TCS), however, is the tax that sellers collect while making a sale to buyers.
- TDS deductions are usually levied on payments, such as rent, salaries, brokerage, professional fee, commission, etc. However, sales of scrap, timber, mineral wood, etc. attract TCS.
- While TDS is only levied on payments that exceed a certain limit, TCS applies to all sales of goods .
Tax Deducted at Source and Tax Collected at Source: Examples
For a detailed understanding of how tax deducted at source differs from the tax collected at source, examples have been provided below.
For instance, Rahul works at Jain Brothers Limited, which deducts a certain amount as tax on his monthly salary before the amount is credited to him. Tax deducted in this instance is referred to as TDS.
On the other hand, Mr. Solanki trades minerals and makes a sale to Mr. Patel, on which he collects a tax of 1%. The tax collected in this manner by Mr. Solanki is the tax collected at source or TCS.
What Happens When You Fail to Collect or Deposit Tax?
As with all other forms of taxation, legal penalties can be enforced when an individual or organisation fails to collect or deposit the appropriate taxes. Read on below to learn what the penalties could entail.
- A penalty amount equivalent to the taxation amount due could be levied for failure to make the applicable TCS collection or TDS deposit.
- The individual in charge could also face imprisonment ranging from three to seven years along with a fine.
- Regarding failure in TDS deposit, an interest is levied on the applicable amount from the date the tax is eligible to be levied till the date the tax is deducted (1%) or till it is paid to the government (1.5%). For failure to make TCS collection, the interest rate levied stays 1%.
TDS and TCS under GST
The Goods and Services Tax (GST), enforced in July 2017, completely overhauled the Indian taxation system. In October 2018, the scope of the GST was further expanded to include e-commerce businesses under its ambit. As a result, every e-commerce company is now required to levy a certain amount of tax collected at source on the net transaction value of its sales.
For e-commerce businesses, the rate of TCS is applied at 1%, divided equally between CGST and SGST. It could alternatively be calculated as 1% of IGST.
Filing your taxes on time is one of the most important duties for every Indian citizen. It is crucial to keep track of the taxes due and file them on time and accurately. Failure to file taxes can attract heavy penalties and even result in further losses. For instance, the Indian taxation system enables the setting off of tax payments against losses incurred by an individual or business. However, failure to pay taxes on time may result in one losing such privileges.
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