Understanding Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) within India's GST Framework

Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are crucial components of India's Goods and Services Tax (GST) system, concepts also found in Income Tax law. These provisions were implemented under GST from October 1, 2018, and have since become widely recognized by taxpayers. Understanding TDS and TCS compliance is vital for entities such as e-commerce operators, online sellers, and government departments. TDS involves tax deduction by a buyer, typically government entities, when making payments under a business contract. Conversely, TCS is collected by e-commerce operators when facilitating sales for sellers through their online platforms, with the operator collecting the payment. This article explores the fundamentals of TDS and TCS under GST, including their rates, calculation methods, and various other aspects. We will cover the following key areas:

• TDS under GST: Basics and Applicability
• Impact of TDS under GST on Government Civil Contractors
• TCS in GST for the e-Commerce Sector: Compliance and Rates
• Impact of the TCS in GST on e-Commerce Operators
• Benefits of TDS and TCS under GST

Latest Updates

September 2024 As of October 10, 2024, registered individuals receiving metal scrap (categorized under Chapters 72 to 81 of the Customs Tariff Act, 1975) from other GST-registered entities are mandated to deduct TDS under GST.

July 10, 2024

• The CBIC issued CGST Notification No. 12/2024 on July 10, 2024, to amend the GSTR-7 return format, now allowing for invoice-level reporting. Taxpayers must report invoice/document details, the amount paid to the deductee subject to TDS, the TDS amount, transaction value, and IGST/CGST/SGST specifics.
• Effective July 10, 2024, the government has reduced the TCS rate for e-commerce operators from 1% to 0.5% (comprising 0.25% for CGST and 0.25% for SGST/UTGST, or 0.5% for IGST).

TDS under GST: Basics and Applicability

Who is liable to deduct TDS under GST?

The following entities are responsible for deducting TDS under GST:

• A department or establishment belonging to the Central or State Government.
• Local authorities.
• Governmental agencies.
• Other persons or categories of persons as notified by the Government.
• Public sector undertakings.
• A society established by the Central or any State Government or a Local Authority, provided the society is registered under the Societies Registration Act, 1860.
• An authority, board, or other body constituted by Parliament, a State Legislature, or a government, with at least 51% equity or control held by the government.

What is the rate of TDS to be deducted under GST?

The prescribed TDS rate under GST laws is 2% (1% CGST + 1% SGST for intrastate supplies, or 2% IGST for interstate supplies) on payments made to suppliers of taxable goods or services.

Is there any limit for deducting TDS?

TDS deduction is required if the total value of supply under a single contract surpasses Rs 2.5 lakhs.

What is the time limit for payment of TDS?

Deductors must remit the deducted TDS by the 10th day of the subsequent month using Form GSTR-7. For instance, if the 'X' department of the Central Government deducts 2% TDS from 'Y' on March 5, 2021, the payment is due by April 10, 2021.

Impact of TDS under GST on Government Civil Contractors

The Indian government awards over 10,000 civil contracts annually across the nation, with major projects like national highway construction often exceeding Rs.100 crores. These large contracts are frequently secured by prominent construction firms, then sub-contracted to smaller companies, and further to even smaller civil or labor contractors. This multi-layered structure previously faced complexities under GST, particularly concerning TDS obligations. The government's mandate to deduct TDS from the primary contractor ensures tax compliance throughout the entire contracting chain, including sub-contractors. Historically, many small civil/labor contractors neglected tax compliance. Under GST, these provisions compel them to register and fulfill their tax obligations. For example, if M/s ABC Ltd. receives a Rs.10 lakh contract from the government for road repair and subcontracts it to M/s XYZ Ltd., which then subcontracts to M/s DEF & Associates (a small contractor). In the past, M/s DEF & Associates might not have registered for service tax and VAT. However, under GST, they must register to claim Input Tax Credit (ITC). The inclusion of the TDS provision in GST (Section 51 of the CGST Act) aims to enforce tax compliance within unorganized sectors like the construction industry. The TDS rule promotes transparency in government contract operations and ensures greater tax compliance.

TCS in GST for the e-Commerce Sector: Compliance and Rates

Section 52 of the CGST Act introduced TCS provisions for all e-commerce aggregators under GST. E-commerce aggregators are responsible for deducting and depositing tax at a rate of 0.5% from each transaction. Dealers or traders selling goods or services online will receive payments after this 0.5% tax deduction (0.25% CGST + 0.25% SGST for intrastate, or 0.5% IGST for interstate transactions). This revised rate was announced via CGST Notification No. 15/2024 and IGST Notification No. 01/2024, both dated July 10, 2024. This change has increased compliance and administrative costs for online aggregators such as Flipkart, Snapdeal, and Amazon. They are required to deposit the collected tax by the 10th day of the following month using Form GSTR-8. All online traders and dealers must register under GST to claim the tax deducted by e-commerce operators, even if their turnover falls below the notified threshold limit for GST registration. For instance, if Mr. Vinay Dua, an online seller of clothes on Amazon India, receives an order for Rs.10,000 (including tax and commission), and Amazon charges a Rs.200 commission with a return of Rs.1,000. Amazon would deduct TCS at 0.5% on the net sales value, excluding returns but including commission and GST. Therefore, Amazon would deduct Rs.46 as TCS (0.5% of Rs.9,200).

Impact of the TCS in GST on e-Commerce Operators

Online sellers like Amazon, Flipkart, and Snapdeal had to modify their payment processing and integrate their administrative or finance departments to implement TCS under GST. E-commerce operators are now required to register under GST in every state where they conduct operations. Furthermore, their Enterprise Resource Planning (ERP) systems need robust integration to seamlessly apply these provisions in daily business activities. On the other hand, e-tailers or sellers are mandatorily required to register under GST to operate on these e-commerce platforms. Additionally, the working capital of these sellers can be temporarily blocked until they file their returns and claim the excess taxes paid.

Benefits of TDS and TCS under GST

TDS and TCS under GST offer numerous advantages, primarily introduced by the government to enhance tax compliance and deter tax evasion. Sections 51 and 52 of the CGST Act specifically govern these provisions, respectively. From the perspective of a deductee or supplier, once the deductor files their returns under the TDS system, the deducted tax automatically reflects in their electronic cash ledger. The deductee can then claim this credit in their electronic cash ledger and utilize it for settling other tax liabilities at their convenience. TDS plays a significant role in bringing unorganized sectors into the tax compliance framework and helps prevent fraudulent activities. Similarly, TCS under GST regulates online sellers, monitors transactions, and ensures the timely deposit of tax with the government.