TDS TCS Compliances

TDS/TCS Compliances under the Income Tax Act, 1961

Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are two crucial provisions under the Income Tax Act, 1961. Both mechanisms are designed to ensure the timely collection of taxes, thus preventing tax evasion and improving the overall tax compliance system in India.

While TDS is primarily a method of collecting tax at the source of income, TCS applies when certain sellers collect tax on specified goods or services. In below discussion, we will focus on the compliance requirements for TDS and TCS, the relevant provisions under the Income Tax Act, and their significance in the overall tax administration process.

TDS (Tax Deducted at Source) Compliance

What is TDS? TDS is a system where tax is deducted at the source of income, by the person (deductor) making the payment, on behalf of the person receiving the income (deductee). It is applicable to various types of income, such as salary, interest, commission, rent, professional fees, etc. The amount of TDS is deducted based on the provisions laid out in the Income Tax Act, and the deducted amount is deposited with the government.

Key Provisions under Section 192 to Section 206C:

Section 192: TDS on Salary This section mandates that employers deduct tax from employees’ salary according to the applicable income tax slab rates. The deduction is made monthly, and the employer is required to deposit the tax with the government.The employer is required to compute the tax liability of employees and liable to deduct the TDS on monthly basis at the time of payment of salary to the employees.
Section 194A: TDS on Interest under Section 194A applies to interest payments (except interest on certain savings accounts and government securities). Banks, financial institutions, and other entities making interest payments are required to deduct tax when the amount exceeds ₹40,000 (₹50,000 for senior citizens). The general specified limit under this section for deduction of TDS is Rs. 5000/- where the payment of interest is made by any person other than Indian Bank, Cooperative Societies and Post Office. The payer is required to deduct TDS @ 10% under this section.
Section 194C: TDS on Payments to Contractors Section 194C covers TDS on payments made to contractors and sub-contractors. It applies to the payments exceeding ₹30,000 in a single transaction or ₹1,00,000 in aggregate in a financial year. The rates specified under this Section are 1% or 2%, the former rate is applicable if the payee is an Individual or HUF, and the later rate is applicable if the payment is made to any other person.This Section is used very frequently in the business world, thus it is very crucial to study and understand the nature of payments to vendors if it qualifies for TDS deduction under this section or not.
Section 194J: TDS on Professional Fees TDS is deducted at the rate of 10% on professional fees paid to a resident professional (advocates, doctors, engineers, etc.), where the payment exceeds ₹30,000 in a financial year. The Rate of TDS will be 2% if the payment is being made to a call centre, toward the technical services. This section is also applicable on the payment of sitting fees to the directors by a company and the limit of Rs. 30,000/- shall not be applicable for such payments. It implies that TDS @ 10% shall be applicable on payment of sitting fees to directors even if it is below Rs. 30,000/-.

TDS Deduction Process:

1. Identify the Applicability: The first step in TDS compliance is to identify if the payment made is subject to TDS based on the provisions of the Income Tax Act.

2. Deduct the Tax: Once applicable, the deductor must deduct the required percentage of tax at the time of making the payment or crediting the amount to the payee’s account.

3. Deposit of TDS: The deducted TDS must be deposited with the government within the prescribed time limits. The deposit can be made using Challan No. ITNS 281 on the e-filing portal of Income Tax Department, and the payment should be made through designated banks.

4. File TDS Returns: The deductor must file quarterly TDS returns using Form 24Q, Form 26Q, Form 27Q, or Form 27EQ depending on the nature of payment, and submit these returns within the specified due dates.

5. Issue TDS Certificates: After depositing the TDS, the deductor is required to issue a TDS certificate (Form 16/16A) to the deductee, which serves as evidence for the tax deducted.

6. Reconciliation and Filing of Income Tax Returns: The deductee can claim the TDS deducted as a credit while filing their income tax return. Any discrepancy can be reconciled using Form 26AS, a statement that shows the TDS details.

Penalties for Non-Compliance:

Late Payment of TDS: Interest at 1.5% per month is levied on the amount of TDS that is deducted for the payees but delayed in depositing with the government.
Failure to File TDS Returns: A penalty of ₹200 per day can be imposed for failing to file TDS returns on time, subject to a maximum penalty equivalent to the amount of TDS.
Failure to Issue TDS Certificates: If the deductor fails to issue TDS certificates, they may face penalties under the relevant provisions of the Act.

TCS (Tax Collected at Source) Compliance

What is TCS? TCS is a mechanism where a seller collects tax from the buyer at the time of sale of goods or services. It is applicable in specific cases outlined in Section 206C of the Income Tax Act. TCS applies to the sale of goods such as scrap, timber, and liquor, as well as some services like the sale of motor vehicles.

Key Provisions under Section 206C:

Section 206C(1): TCS on Sale of Goods TCS applies on the sale of specific goods like alcoholic liquor for human consumption, forest produce, scrap, and certain types of minerals. The seller is required to collect tax at varying rates, usually around 1% to 5%, depending on the type of goods.
Section 206C(1F): TCS on Sale of Motor Vehicles is applicable to the sale of motor vehicles exceeding ₹10 lakh at the rate of 1% on the total consideration.
Section 206C(1E): TCS on Overseas Remittance, this section applies to remittances made outside India for foreign tour packages or other related expenses. A 5% to 20% TCS is collected by the service provider under this section as per the applicable provisions.

TCS Collection Process:

1. Identify the Applicability: The seller must determine whether the sale of goods or services is covered under the provisions of Section 206C, which outlines the applicability of TCS.

2. Collect the Tax: If applicable, the seller collects TCS at the prescribed rate from the buyer at the time of sale or delivery of goods.

3. Deposit of TCS: The collected TCS must be deposited with the government using Form 281 within the prescribed time frame.

4. File TCS Returns: The seller is required to file quarterly TCS returns using Form 27EQ within the due dates. These returns contain information about the amount of tax collected and deposited.

5. Issue TCS Certificates: The seller must issue a TCS certificate to the buyer, which details the amount of TCS collected and deposited.

Penalties for Non-Compliance:

Failure to Collect TCS: If a seller fails to collect TCS, the seller may be liable to pay the amount of TCS as well as interest and penalties under the relevant sections of the Act.
Failure to Deposit TCS: Interest at 1% per month or part of the month is charged for delayed deposit of TCS. However, the rate has been proposed to be made to 1.5% per month or part of the month to make it at par with the rate applicable in case of TDS provisions.
Failure to File TCS Returns: Similar to TDS returns, penalties are levied for late filing of TCS returns. The penalty could be ₹200 per day, subject to a maximum penalty of the amount of TCS due.

TDS and TCS Compliance: Common Challenges and Best Practices Challenges:

1. Complexity of Provisions: Understanding the various sections under TDS and TCS is complex, and errors can result in substantial penalties.

2. Timely Deposits and Filings: Ensuring that TDS and TCS deposits and returns are filed within prescribed timelines is a common challenge.

3. Incorrect Information in Returns: Incorrect details in TDS/TCS returns or mismatched details in Form 26AS can result in long delays in reconciling tax credits.

Best Practices:

1. Timely Compliance: Maintaining a structured system for timely deduction, deposit, and filing can help ensure compliance with the provisions.

2. Consultation with Tax Professionals: Engaging expert tax professionals or consultants can help businesses stay on top of complex TDS/TCS compliance requirements and avoid penalties.

Due Dates for payment of TDS/TCS by deductors/collectors:

TDS Deducted/TCS Collected month	TDS Due Date	TCS Due Date
During April to February	7th of Next Month	7th of Next Month
March	30th April of next FY	7th April of next FY

Note: If TDS deducted under Section 194 IA, 194 IB, or 194 M then it should be deposited within 30 days from the end of the month in which the TDS was deducted along with the return in Form 26QB, 26QC, and 26QD.

Due Dates for filing of TDS/TCS Returs/Statements:

Quarter Ended

TDS Return

TCS Return

30th June

31st July

15th July

30th September

31st October

15th October

31st December

31st January

15th January

31st March

31st May

15th May

Delay in filing of TDS/TCS Statements may result in late fees of INR 200/- per day under section 234E of the Income Tax Act, 1961 for the period of default subject to a maximum of the amount of TDS/TCS involved.
If TDS/TCS return filed after 1 year of prescribed due date then a penalty under Section 271H of the Income Tax Act, 1961 may be levied which may range from Rs. 10,000 to Rs. 1,00,000/-.

TDS and TCS are vital components of the income tax collection mechanism in India. Their proper implementation ensures a more effective and transparent system of tax collection and helps in reducing tax evasion. Adherence to TDS/TCS compliances, along with accurate filing of returns and timely deposit of taxes, is essential to avoid penalties and maintain good standing with the tax authorities. For better guidance and assistance to remain compliant with the TDS/TCS provisions, you may engage with us, our team will be happy to support you.