Understanding Tax Deduction and Collection at Source (TDS and TCS) Under India's GST Regime
Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are integral parts of India's Goods and Services Tax framework, implemented in October 2018. TDS involves buyers, particularly government entities, deducting tax on payments for contracts, while TCS is collected by e-commerce operators from sellers on their platforms. These provisions aim to enhance tax compliance, especially in unorganized sectors and the digital economy, by ensuring timely tax remittances and increasing transparency in transactions. Recent updates include changes in TDS applicability for metal scrap and a reduced TCS rate for e-commerce.
Understanding Tax Deduction and Collection at Source (TDS and TCS) Under India's GST Regime
Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are crucial components of the Goods and Services Tax (GST) framework in India, mirroring concepts found in income tax legislation. Both mechanisms became effective under GST on October 1, 2018, and have since become integral for many taxpayers. Whether you operate an e-commerce platform, sell goods or services through one, or are part of a government organization, understanding your TDS and TCS compliance obligations is essential.
TDS involves a tax deduction by the buyer of goods or services, typically government entities, at the point of making payments for business contracts. Conversely, TCS refers to the tax collected by e-commerce operators when a seller facilitates the supply of goods or services via their online platform, and the operator handles the payment collection. This article will delve into the fundamentals of TDS and TCS under GST, including applicable rates, calculation methods, and more.
Latest Updates
- September 2024: Effective October 10, 2024, registered individuals acquiring metal scrap (covered under Chapters 72 to 81 of the Customs Tariff Act, 1975) from other GST-registered persons are mandated to deduct TDS under GST.
- July 10, 2024:
- The Central Board of Indirect Taxes and Customs (CBIC) issued CGST Notification No. 12/2024, dated July 10, 2024, to amend the GSTR-7 return format, allowing for invoice-level reporting. Taxpayers must now provide details such as invoice/document information, the amount paid to the deductee subject to TDS, the TDS amount, transaction value, and IGST/CGST/SGST specifics.
- As of July 10, 2024, the government has decreased 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: Fundamentals and Scope
Entities Obligated to Deduct TDS Under GST
The following entities are responsible for deducting TDS under GST:
- Departments or establishments of the Central Government or State Government;
- Local authorities;
- Governmental agencies;
- Other specified persons or categories of persons as notified by the Government;
- Public sector undertakings;
- Societies established by the Central or any State Government or a Local Authority, and registered under the Societies Registration Act, 1860;
- Authorities, boards, or other bodies constituted by Parliament, a State Legislature, or a government, where the government holds at least 51% equity or control.
Applicable TDS Rate Under GST
The prescribed TDS rate under GST laws is 2% (comprising 1% CGST + 1% SGST for intra-state supplies, or 2% IGST for inter-state supplies) on payments made to suppliers of taxable goods or services.
Threshold for TDS Deduction
TDS becomes applicable if the total value of supply under a single contract surpasses INR 2.5 lakhs.
Deadline for TDS Payment
Deductors must remit the collected TDS by the 10th day of the subsequent month using Form GSTR-7. For instance, if a central government department deducts 2% TDS from a supplier on March 5, 2021, the payment is due by April 10, 2021.
Impact of TDS Under GST on Government Civil Contractors
The Indian government annually awards over 10,000 civil contracts nationwide. Large infrastructure projects, such as national highway construction or repair, often exceed INR 100 crores. These substantial contracts are typically secured by major construction firms, which then sub-contract portions to smaller entities, sometimes leading to further sub-contracting. This multi-tiered structure presented challenges under previous tax regimes, particularly concerning tax compliance, especially for smaller sub-contractors.
The introduction of TDS under GST addresses these issues by requiring the government to deduct tax from contractors. This measure promotes tax compliance not only among primary contractors but also across all sub-contractors in the chain. Historically, many small civil or labor contractors often bypassed tax obligations. Under GST, they are now compelled to register and adhere to tax compliance requirements to claim Input Tax Credit (ITC).
For example, consider M/s ABC Ltd. awarded a INR 10 lakh contract by the government for an 800-meter road repair. M/s ABC Ltd. then sub-contracts the work to M/s XYZ Ltd., which in turn further sub-contracts to a small civil contractor, M/s DEF & Associates. In the pre-GST era, M/s DEF & Associates might not have registered for service tax or VAT. However, under the current GST regime, M/s DEF & Associates must register to avail ITC. Section 51 of the CGST Act, which mandates TDS, aims to ensure tax compliance within unorganized sectors like construction. This TDS provision enhances transparency in government contracts and reinforces overall tax compliance.
TCS in GST for the E-Commerce Sector: Compliance and Rates
Section 52 of the CGST Act governs the implementation of TCS for e-commerce aggregators. These platforms are responsible for deducting and depositing tax at a rate of 0.5% from each transaction. Sellers operating online will receive payments after this 0.5% tax deduction (0.25% CGST + 0.25% SGST for intra-state supplies, or 0.5% IGST for inter-state supplies). This revised rate was confirmed by CGST Notification No. 15/2024 and IGST Notification No. 01/2024, both dated July 10, 2024.
This change significantly increases the compliance and administrative burden for major 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 traders and dealers selling goods or services through e-commerce platforms must register under GST to claim the tax deducted by e-commerce operators, even if their turnover falls below the prescribed threshold turnover limit for GST registration.
Consider Mr. Vinay Dua, a trader selling ready-made apparel on Amazon India. He receives an order totaling INR 10,000, which includes tax and commission. Amazon charges a commission of INR 200, and there is a sales return amounting to INR 1,000. Amazon would then deduct TCS at 0.5% on the net sales value, excluding returns but including commission and GST. So, TCS would be INR 46 (0.5% of INR 9,200).
Impact of TCS in GST on E-Commerce Operators
E-commerce operators, including Amazon, Flipkart, and Snapdeal, needed to modify their online payment systems and financial administration to incorporate TCS under GST. These operators must register under GST in every state where they conduct business. Their Enterprise Resource Planning (ERP) systems require robust integration to seamlessly apply these tax provisions in daily operations.
Furthermore, e-tailers or sellers are mandatorily required to register under GST to operate on such e-commerce platforms. A drawback for these sellers is that their working capital may be temporarily tied up until they file their tax returns and claim the excess taxes paid.
Benefits of TDS and TCS Under GST
Both TDS and TCS mechanisms under GST offer numerous advantages. The government introduced these provisions to enhance oversight and curb tax evasion, with Sections 51 and 52 of the CGST Act detailing their respective stipulations.
From the perspective of a deductee or supplier, the tax deducted automatically reflects in their electronic ledger once the deductor submits their TDS returns. The deductee can then utilize this credit in their electronic cash ledger to offset other tax liabilities at their convenience. TDS primarily helps bring unorganized sectors into tax compliance and reduces instances of fraud. Similarly, TCS under GST regulates online sellers, monitors transactions, and ensures the timely remittance of tax to the government.