TDS vs TCS: Comprehensive Guide to Tax Deducted and Tax Collected at Source in India

In India, the tax system follows a “Pay as You Earn” principle, where taxes are deducted or collected at the source of income. These mechanisms are called Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) (TDS VS TCS). Both are designed to ensure that tax is collected efficiently and that it reaches the government promptly.

• TDS (Tax Deducted at Source): Under TDS, a person making specified payments is required to deduct tax at the time of payment and deposit the same with the government.
• TCS (Tax Collected at Source): TCS applies when a seller collects tax at the time of sale of goods or provision of services, typically for specific items or services.

Both mechanisms help in reducing tax evasion, ensuring tax is collected at an early stage, and making the tax system more transparent and efficient.

TDS (Tax Deducted at Source)

TDS is governed under Chapter XVII-B of the Income Tax Act, 1961. The provisions of TDS are contained in Section 190 to Section 204 of the Act.

TDS Provisions

• Section 192: TDS on Salaries
  Employers are required to deduct TDS on salaries paid to their employees. The rate of TDS depends on the individual’s income slab and applicable exemptions. Salary is taxed based on income-tax rates applicable for the financial year.
• Section 194: TDS on Interest (other than interest on securities)
  TDS is applicable on interest payments (except for certain specified conditions), where the payer must deduct tax at the rate prescribed by the government. For example, interest paid on fixed deposits, bonds, etc.
• Section 194C: TDS on Payments to Contractors
  TDS is deducted on payments made to contractors or sub-contractors for carrying out work or providing services, with a specific rate prescribed by the government.
• Section 194I: TDS on Rent
  TDS is applicable to rent paid on land, building, machinery, or furniture. The rate of TDS differs for rent paid for immovable property and machinery/equipment.
• Section 194J: TDS on Professional Fees
  TDS is applicable to payments made to professionals, including legal, technical, and consultancy fees.
• Section 195: TDS on Foreign Payments
  TDS is applicable to any payment made to non-residents, such as payments for royalties, technical services, or interest.
• Section 194-IA: TDS on Transfer of Property
  TDS is applicable to the sale of property. The buyer must deduct tax on the payment made to the seller if the transaction value exceeds a certain threshold.

TDS Taxation and Filing

• Tax Rates: The tax rates for TDS depend on the nature of the payment and the recipient’s status. For example, TDS on salary income is based on income tax slabs, while TDS on certain payments may have a fixed rate.
• Due Dates for Deposit: TDS deducted by the payer is required to be deposited with the government within a specified time frame (usually 7 days from the end of the month in which tax is deducted).
• TDS Returns: After deducting TDS, the payer is required to file quarterly TDS returns (Form 24Q for salaries and other forms for different payments), which include details about the tax deducted and deposited.
• TDS Certificate: The payer must issue a TDS certificate (Form 16 for salaried individuals, Form 16A for other deductions) to the payee, indicating the amount of tax deducted. This certificate is essential for the payee while filing their income tax return.

Case Laws on TDS

1. CIT v. M/s. Vatika Township Pvt. Ltd. (2014): The Supreme Court ruled that if a person does not deduct tax at source as per the provisions of the Act, they will be liable for penalty and interest even if the payee has included the income in their tax return and paid taxes.
2. TDS on Payment for Advertising Services (CIT v. Bharati Airtel Ltd., 2014): The court held that TDS must be deducted at source on payments made for advertising services, regardless of whether the payee is a non-resident or resident, emphasizing the need for proper documentation and compliance.

TCS (Tax Collected at Source)

TCS is governed under Section 206C of the Income Tax Act, 1961. This section mandates that certain persons collecting specified types of income are responsible for collecting tax from the buyer at the time of the transaction.

TCS Provisions

• Section 206C(1): TCS on Sale of Goods
  Tax is collected on the sale of specific goods such as alcoholic liquor for human consumption, timber, scrap, and certain other goods. The rate of TCS depends on the type of goods and the buyer’s status.
• Section 206C(1F): TCS on Sale of Motor Vehicles
  Tax is collected at source on the sale of motor vehicles (above a prescribed amount), including cars, buses, and trucks. The rate is 1% for individual buyers and 5% for other types of buyers.
• Section 206C(1H): TCS on Sale of Goods
  A new provision introduced in FY 2020-21 mandates TCS on the sale of goods above ₹50 lakh in a financial year. The rate for this is 0.1% (or 0.075% for the period between October 1, 2020, and March 31, 2021). This applies to sellers whose turnover exceeds ₹10 crore.
• Section 206C(1E): TCS on Overseas Remittances (LRS Scheme)
  A new section was introduced to collect TCS on foreign remittances under the Liberalized Remittance Scheme (LRS). The rate is 5% on amounts above ₹7 lakh per annum for foreign remittances.

TCS Taxation and Filing

• Tax Rate: The tax rate for TCS varies depending on the nature of the goods or services sold. For example, TCS on the sale of scrap is 1%, whereas TCS on the sale of motor vehicles can be as high as 5%.
• Due Dates for Payment: Similar to TDS, the tax collected by the seller needs to be deposited with the government within 7 days of the end of the month in which the collection was made.
• TCS Returns: The seller is required to file quarterly returns detailing the tax collected and deposited.
• TCS Certificate: The seller must issue a TCS certificate (Form 27D) to the buyer, showing the amount of tax collected at the source.

Case Laws on TCS

1. CIT v. M/s. S.K. Puri (2012): The Delhi High Court ruled that even if the buyer is a registered taxpayer under the GST Act, TCS is still applicable on the sale of specified goods under the Income Tax Act.
2. Chandra Prakash Agarwal v. Union of India (2020): The court upheld the provisions under Section 206C(1H), where TCS is collected on the sale of goods, asserting that the provision ensures better tax compliance and increases government revenue.

TDS and TCS play an important role in India’s taxation system by ensuring that tax is collected and paid in a timely manner. TDS focuses on deductions from payments made to individuals or businesses, while TCS ensures that tax is collected at the source of transactions. Both systems are crucial for maintaining compliance and ensuring that the government receives its due tax revenue.

Through the provisions of Sections 192 to 204 (TDS) and Section 206C (TCS) of the Income Tax Act, these systems reduce tax evasion and simplify the tax collection process. The applicable case laws further reinforce the judicial interpretation of these provisions, ensuring tax compliance is robust.

Both individuals and businesses must be vigilant in adhering to these provisions to avoid penalties and interest, and ensure smooth tax filing and reporting.

List of Goods Covered Under TCS (Tax Collected at Source)

Under Section 206C of the Income Tax Act, 1961, TCS (Tax Collected at Source) is applicable to the sale of specific goods and transactions. Here is a list of goods and transactions covered under the TCS provisions:

1. Alcoholic Liquor for Human Consumption (Section 206C(1))

• Goods Covered: Sale of alcoholic liquor for human consumption.
• TCS Rate: 1% of the sale value.

2. Timber or Forest Products (Section 206C(1F))

• Goods Covered: Sale of timber, wood, or other forest products.
• TCS Rate: 2.5% of the sale value.

3. Scrap (Section 206C(1G))

• Goods Covered: Sale of scrap, including metallic scrap and other forms of scrap.
• TCS Rate: 1% of the sale value.

4. Sale of Motor Vehicles (Section 206C(1F))

• Goods Covered: Sale of motor vehicles (cars, buses, trucks, etc.) whose value exceeds ₹10 lakh.
• TCS Rate:
  • 1% of the sale value for individual buyers.
  • 5% for other buyers (e.g., corporate buyers).

5. Sale of Jewelry and Precious Stones (Section 206C(1A))

• Goods Covered: Sale of jewelry (gold, silver, diamonds, and precious stones) where the value exceeds ₹5 lakh.
• TCS Rate: 1% of the sale value.

6. Sale of Minerals like Coal, Iron Ore, and Other Minerals (Section 206C(1D))

• Goods Covered: Sale of minerals such as coal, iron ore, lignite, and other ores.
• TCS Rate: 1% of the sale value.

7. Sale of Kerosene, Aviation Turbine Fuel (ATF), and Other Petroleum Products (Section 206C(1B))

• Goods Covered: Sale of kerosene, aviation turbine fuel (ATF), and other petroleum products.
• TCS Rate: 1% of the sale value.

8. Sale of Goods (General) Above ₹50 Lakh (Section 206C(1H))

• Goods Covered: Sale of any goods other than those specified above. This provision applies to the sale of goods by a seller whose total turnover exceeds ₹10 crore in the preceding financial year.
• TCS Rate:
  • 0.1% of the sale value for aggregate sales exceeding ₹50 lakh in a financial year.

9. Sale of Goods by E-commerce Operators (Section 206C(1H))

• Goods Covered: E-commerce operators are also required to collect TCS on goods sold through their platforms.
• TCS Rate: 1% of the sale value.

10. Sale of Aircraft and Aircraft Parts (Section 206C(1E))

• Goods Covered: Sale of aircraft and parts of aircraft.
• TCS Rate: 5% of the sale value.

11. Sale of Tendu Leaves (Section 206C(1C))

• Goods Covered: Sale of tendu leaves.
• TCS Rate: 5% of the sale value.

12. Sale of Other Specified Goods (Section 206C(1))

Apart from the goods listed above, certain other goods or services may fall under TCS provisions based on notifications issued by the government from time to time. These can include goods like minerals, scrap, etc., depending on the category under which they fall.

Tax Rates for TDS and TCS

The tax rates for Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are determined by the Income Tax Act, 1961, and can vary depending on the nature of the payment or transaction. Below is a breakdown of the key TDS and TCS rates for various categories:

TDS (Tax Deducted at Source) Rates

TDS on Payments to Non-Residents (Section 195)

For payments made to non-residents, the rate of TDS can vary depending on the type of income and whether a Double Taxation Avoidance Agreement (DTAA) exists between India and the country of the non-resident. Common rates are:

• Interest: 20%
• Royalty: 10% (may be reduced depending on the DTAA)
• Technical Fees: 10% (may vary)

TCS (Tax Collected at Source) Rates

Comparison of TDS and TCS (TDS VS TCS)

Both TDS and TCS are mechanisms used by the Income Tax Act to collect tax at the source, but they apply in different circumstances and are governed by different provisions.

Key Differences Between TDS and TCS

1. Who is Responsible for Deduction/Collection:
   • TDS: The payer (deductor) is responsible for deducting tax at source, such as an employer or a bank.
   • TCS: The seller (collector) is responsible for collecting tax at source during a transaction, such as a seller of goods like scrap or motor vehicles.
2. When Tax is Deducted/Collected:
   • TDS: Tax is deducted when the payment is made to the payee. For example, an employer deducts TDS while paying salary.
   • TCS: Tax is collected at the time of the sale or transaction. For example, a seller of goods like timber collects TCS from the buyer during the sale.
3. Purpose:
   • TDS: Primarily aimed at ensuring tax compliance and preventing tax evasion on income.
   • TCS: Ensures tax collection at the source of transactions involving specific goods and services.
4. Impact on the Payee/Buyer:
   • TDS: The deducted amount is credited to the payee’s account and can be claimed while filing the income tax return.
   • TCS: The collected amount is credited to the buyer’s account and can be claimed during tax filing.
5. Documentation:
   • TDS: The deductor must provide the payee with a TDS certificate (Form 16 or 16A).
   • TCS: The seller must issue a TCS certificate (Form 27D) to the buyer.