TDS & TCS in India

Why in news?
=>Notwithstanding that the GST return compliance is yet to cross the 70% mark, even after more than a year’s existence of the GST, the Centre has notified October 1, 2018, as the date from which the tax deducted at source (TDS) and the tax collected at source (TCS) provisions would be effective.
=>TDS would be applicable on the payments received for supplies made to Central or state government departments, local authorities, governmental agencies, an authority or a board or any other body, either set up by an act of Parliament or a state legislature or established by any government, with 51% or more participation by way of equity or control, to carry out any function; a society established by the Central government or the state government or a local authority under the Societies Registration Act, 1860, and public sector undertakings (PSUs).
=>The threshold limit for the applicability of TDS provisions is 2.5 lakh.

What’s the issue?
=>TCS would be applicable mostly in case of e-commerce players. Hence, not all GST registrants would be affected by this. While the Centre expects that this will enhance the GST revenues, it will certainly add a huge burden on businesses as far as GST compliance and financial reconciliation are concerned.
=>With this, India has managed to achieve the dubious distinction of having both TDS and TCS provisions in the GST law.

What was the case before GST?
=>In the erstwhile VAT laws, prevalent in the states before the implementation of GST, the TDS mechanism was present in many states in relation to work contracts where the person awarding the work contract was obliged to deduct tax from the payments made to the work contractor.
=>Such a person then had to deposit the tax into the government treasury and issue a certificate to that effect to the work contractor. The work contractor then used to carry out a reconciliation and paid the balance amount into the government treasury.
=>This was a very cumbersome process and trade and industry breathed a huge sigh of relief when GST got implemented as TDS and TCS mechanisms were kept in abeyance, rightly so.

Global mechanism:
=>Globally (India included), TDS and TCS mechanisms are used in the administration of direct taxes.

 
Tax Deducted at Source (TDS):
=>As a concept, TDS is the tax which is deducted before the payment of money by a person to another person.
=>For example, company ‘A’, while paying rent for an office space to the landlord, is obliged to deduct tax (TDS) at the prescribed rate and pay the balance to the landlord. Let us assume that a rent of 50,000 is payable and the prescribed rate of TDS is 10%.
=>Then, the company will pay 45,000 to the landlord and deposit 5,000 into the government treasury. The landlord can claim credit of the tax so deposited by the company while settling his/her tax liability for the taxable period.

Tax Collected at Source (TCS):
=>On the other hand, TCS is a tax which is collected from the buyer by the seller at the time of supply of certain goods/services.
=>For example, a seller sells scrap to the buyer and the seller collects some percent on the sale invoice amount and deposits it with the government in the form of tax.

Purpose:
=>Thus, TDS and TCS are tools available with the revenue authorities to secure some part of the revenue upfront without waiting for the taxpayer to file his/her return. Issuance of TDS / TCS certificates becomes a compliance requirement.

What’s the issue?
=>All this is fine till it is done for direct taxes, such as the income tax. However, when it comes to indirect taxes such as the GST, it makes little sense to have this kind of mechanism in the GST law.
=>With indirect tax being a pass-through tax, the buyer of the goods/services is the person bearing the incidence of tax, if he is the final consumer. If not, then he/she simply passes on the incidence to the next person in the value chain.
=>With the TDS provisions made effective, government departments will be obligated to have one more GST compliance check in place which will result in an increased GST compliance burden.
=>In fact, many of the government departments/agencies in India may not even be registered for GST purposes. These would be burdened with GST compliance whereby they would be obligated to pay the GST and issue TDS certificates. In most cases, this would be done manually.

Issue with TCS:
=>Coming to TCS, mandating TCS for a select group of taxpayers, such as e-commerce players, is not the best idea. The sellers supplying their goods/services through the e-commerce players are responsible to collect the applicable GST from the buyers and pay the collected amount into the government treasury.
=>The e-commerce platform is just a medium available for buyers and sellers to transact, which is a service provided by the e-commerce players. The e-commerce players have been mandated to collect tax at source (one percent of the sales price).
=>In fact, the e-commerce players may not even have a one percent margin in the supply involved, and recovering the same from the seller/service provider may prove to be more challenging than paying the tax. The case gets even more complicated in case of goods returned/subject to approval, as also rejection of services.

Way Forward:
=>Rather than continuing towards simplification of the existing GST law, the government has moved in the opposite direction in notifying TDS/TCS applicability.
=>In the short run, there would certainly be an impact on the payments processed by government departments as also on the transactions using e-commerce platforms. It would be interesting to see how much differential revenue gets collected from the TDS/TCS mechanism.

Pic courtesy:Key Differences