TDS and TCS in GST
TDS and TCS in GST: A Complete Guide
In this post, we’ll cover the basics of TDS and TCS under GST, how they work, and why they’re important for businesses.
Let’s look at each section in detail:
What is TDS under GST?
Tax Deducted at Source (TDS) is a method where tax is collected right when payments are made. Under India’s GST system, TDS is applied in specific cases, like payments for rent, commission, professional fees, and wages. Here, the payer deducts a tax percentage and deposits it directly with the government. The TDS rate varies from 2% to 10%, depending on the payment type. The deducted amount and TDS details must be reported in a TDS return and deposited within a specified time frame.
Impact of TDS under GST on Government Civil Contractors
Every year, the Indian government awards over 10,000 civil contracts across the country, including large contracts for national highways, which often exceed ₹100 crores. Big construction companies typically win these contracts but then pass them on to smaller ones, who may subcontract them further down the chain. However, this multi-layered subcontracting process can encounter tax-related challenges under GST, especially with TDS (Tax Deducted at Source) obligations.
The government now requires TDS to be deducted on such contracts, ensuring that the main contractor and all subcontractors are tax-compliant. Historically, many smaller contractors and labour firms haven’t met tax compliance standards. But under GST, it’s mandatory for even small contractors to register and adhere to tax rules.
For example, if M/s ABC Ltd. secures a government contract for road repair worth ₹10 lakhs and subcontracts it to M/s XYZ Ltd., which then passes it to a smaller firm, M/s DEF & Associates, TDS must be deducted at each level. Previously, M/s DEF & Associates might not have registered for service tax or VAT, but GST now requires registration to claim Input Tax Credit (ITC). This TDS provision under Section 51 of the CGST Act aims to improve tax compliance within unorganised sectors like construction.
Overall, the GST TDS rule supports greater transparency in government contracts and strengthens tax compliance across all levels of the industry.
TDS Rate under GST
Under GST guidelines, TDS is deducted at a rate of 1% on payments made to suppliers of taxable goods and/or services when the total value of such supply exceeds INR 2,50,000 under an individual contract. It should be noted, however, that no tax reduction is necessary when the location of the supplier and site of supply differs from the state where the beneficiary is registered.
What is TCS under GST?
Under India’s Goods and Services Tax (GST) system, Tax Collected at Source (TCS) is collected by certain sellers at the time of sale and submitted to the government. TCS applies only in specific cases, such as selling alcohol, scrap, and minerals.
In these cases, the seller is responsible for collecting a set tax percentage from the buyer and depositing it with the government. The TCS rate varies from 0.1% to 5%, depending on the type of sale. Sellers must submit the collected TCS within a specified timeframe and a return detailing the amount collected and deposited.
Impact of the TCS in GST on e-Commerce Operators
Online platforms like Amazon, Flipkart, and Snapdeal had to adapt their payment processes and finance systems to incorporate GST’s TCS (Tax Collected at Source) provisions. This requires them to be GST-registered in every state where they operate, with ERP systems fully integrated to ensure smooth compliance.
Similarly, sellers on these platforms must also register under GST to sell their products online. Some of their working capital is tied up for these sellers until they file their returns and claim any excess tax paid.
TCS Rate under GST
Any seller or trader who sells products or services online will receive money after deducting 2% TCS.
Benefits of TDS and TCS under GST
TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) under GST offer several benefits to reinforce tax compliance. The government introduced these mechanisms under Sections 51 and 52 of the CGST Act to curb tax evasion.
For suppliers or deductees, any tax deducted via TDS is automatically reflected in their electronic ledger once the deductor files a return. This allows the deductee to claim credit in their cash ledger and use it conveniently for other tax payments.
TDS helps bring unorganised sectors into tax compliance and reduces fraud risks. Similarly, TCS under GST is designed to monitor online sellers, track their transactions, and ensure that taxes are deposited on time, strengthening the overall tax system.
Differences Between TDS and TCS under GST
TDS and TCS under GST are two separate methods of tax collection. The main differences between TDS and TCS are as follows:
TDS (Tax Deducted at Source) | TCS (Tax Collected at Source) |
Deducted at the time of payment | Collected at the time of sale |
Deducted by the person making the payment | Collected by the seller of goods or services |
Applicable on payments like salary, commission, professional fees, rent, etc. | Applicable on the sale of items like alcohol, scrap, minerals, etc. |
We have reached the end of this post. Please leave your questions in the comments area below.
FAQs
1. When are both TDS and TCS applicable?
Ans: When the overall value of a service or the total consideration for delivery exceeds predefined levels, GST applies TDS and TCS. TCS applies to e-commerce operators, but TDS only applies to government entities or designated persons in the supply chain.
2. What is the exemption for TCS under GST?
Ans: TCS is exempt from GST for certain products and services, including petroleum, diesel, and alcoholic beverages. These exemptions, which focus on specific areas where TCS is not applicable, are meant to streamline the tax collection process.
