The terms TDS and TCS are components of the Income Tax Act. They are acronyms for a tax deduction and collection at source, respectively. It is from 1 October 2018 that TCS and TDS have been in effect under GST.
TDS is the tax deducted when a buyer of goods or services, such as the government, makes payments under a business contract. TCS, on the other hand, is When a seller supplies goods or services through its website, and the electronic commerce operator collects the payment for that supply, and the electronic commerce operator collects tax.
If any organization or individual falls under one of these categories mentioned below, then they are liable to pay TDS
TDS is levied at 2% (1% CGST+1% SGST or 2% IGST) on payments made to the seller of taxable goods or services under the GST laws.
The person or entity would be required to withhold TDS if the total supply value under a contract exceeds Rs 2.5 lakhs.
The deductor has until the 10th of the month to submit TDS in form GSTR-7.
Every year, the Indian government awards more than 10,000 civil contracts nationwide. Contracts for constructing/repairing national highways typically exceed Rs.100 crores. A large construction obtaining an agreement that is then subcontracted to smaller firms and then subcontracted to another small firm is a loophole that suffers under GST’s TDS liability.
The government would be required to deduct TDS from the contractor, ensuring tax compliance by the contractor and all other subcontractors. Many small civil/labour contractors currently do not comply with tax laws. Under GST, they must register and comply with tax obligations.
For example, M/s QPR Ltd. got a contract for repair work on a 1000-meter road from the government for Rs 40 lakhs. The company outsources work to M/s ABC Ltd., which outsources it to a minor civil or labour contractor, M/s TUV & Associates.
M/s TUV & Associates would not have had to register for service tax or VAT under the previous regime, but he would now have to register for GST to claim the ITC credit. Including the TDS provision in GST (Section 51 of the CGST Act) is intended to ensure tax compliance by unorganized sectors such as the construction industry.
The TDS rule will aid in achieving transparency in government contract operations and tax compliance.
Section 52 of the CGST law was added to require all e-commerce aggregators to include TCS in GST. The GST law holds e-commerce aggregators accountable for deducting and depositing 1% tax from each transaction.
Any dealer or trader selling goods or services online would be paid after a 1% tax deduction (0.5% CGST+ 0.5% SGST or 1% IGST).
It is noteworthy that it has increased the compliance and administration costs for online marketplaces such as Flipkart, Snapdeal, and Amazon, among others. By the 10th of the following month, they must deposit the tax that was withheld in form GSTR-8.
All traders or dealers selling goods or services online must register under GST to recoup the tax deducted by e-commerce operators, even if their annual revenue is below the threshold turnover threshold announced for GST registration.
Online retailers like Amazon, Flipkart, and Snapdeal had to modify their online payment systems and administrative or financial departments to implement TCS in GST.
Each state where they conduct business requires them to register for GST. To implement these provisions in regular business operations, ERP systems must be well-integrated.
However, E-tailers or sellers must register for GST to use such e-commerce platforms. Additionally, until these suppliers who work with e-commerce operators file their returns and make claims for overpaid taxes, their working capital will be frozen.
TDS and TCS under GST provide numerous advantages. The government implemented TDS and TCS under GST to strengthen tax evasion regulation. TDS and TCS provisions under GST are covered in Sections 51 and 52 of the CGST Act.
The electronic ledger of the deductee or supplier will automatically reflect the deduction once the deductor files their returns using the TDS system. In his electronic cash ledger, the deductee can claim credit for the subtracted tax and use it as needed to pay other taxes.
TDS significantly aids in bringing unorganized sectors into compliance with tax provisions and preventing fraud.
Similar to how TCS regulates online retailers in GST, it also keeps track of transactions and ensures that taxes are paid to the government on time.