Difference between GST and TDS

Overview 

Tax Deducted at Source (TDS) and Goods and Services Tax (GST) are two distinct components of the tax system. TDS is an income tax collected at the source of income, ensuring that tax is deducted from payments such as salaries, interest, and rent before they reach the recipient. This mechanism helps prevent tax evasion and allows individuals to receive credit for the deducted amounts when filing their tax returns. In contrast, GST is a consumption tax applied to the sale of goods and services, aimed at creating a unified tax structure by merging various indirect taxes. It is charged at different rates depending on the type of goods or services and allows businesses to claim input tax credits for GST paid on purchases. While TDS focuses on income tax collection at the source, GST is concerned with taxing consumption at various stages of the supply chain.

Read this blog to navigate the key differences between GST and TDS.

What is TDS: Tax Deducted at Source?

Tax Deducted at Source (TDS) is a mechanism used by governments to collect tax at the source of income. Essentially, it means that when a payment is made (like salary, interest, rent, etc.), a certain percentage of that payment is deducted by the payer as tax before it reaches the payee. The deducted amount is then remitted to the government.

For example, if you earn a salary, your employer may deduct TDS from your pay and submit it to the tax authorities on your behalf. This ensures that tax is collected throughout the year rather than in a lump sum at the end of the financial year.

TDS rates vary depending on the type of income and the applicable laws in the jurisdiction. It helps in reducing tax evasion and ensures a steady flow of revenue for the government.

What is GST: Goods and Services Tax?

GST refers to “Goods and Services Tax”. This Act was passed in the parliament on 29th March, 2017 and came into effect in India on 1st July, 2017. This is the single, comprehensive, and indirect tax, which is applicable only to goods and services. The GST is divided into 3 categories which includes CGST, SGST/UTGST and IGST. GST is levied on the supply of goods and services. GST is a destination based tax which is levied on every value addition.

Before the emergence of GST (Goods and Services Tax), there were various types of indirect taxes that needed to be paid at every point of production and distribution of goods. 

Key Differences Between GST and TDS 

Here is the key differences between GST and TDS, which are as follows:

Implications of GST and TDS on Business

GST implications on Business

The implementation of GST (Goods and Services Tax) has several implications for businesses. Here are some of the key impacts:

• Simplified Tax Structure

Unified Tax Rate: GST replaces multiple indirect taxes, simplifying compliance and making tax calculations more straightforward.

Elimination of Cascading Taxes: By allowing input tax credits, GST reduces the tax burden on businesses, promoting fair pricing.

• Input Tax Credit

Credit for Taxes Paid: Businesses can claim credit for the GST paid on inputs, which can significantly reduce the overall tax liability.

Improved Cash Flow: Input tax credits can improve cash flow by reducing the effective tax paid.

• Compliance Requirements

Increased Compliance: Businesses need to maintain detailed records and file GST returns regularly, which can increase administrative burdens.

Technology Adoption: Many businesses have to adopt or upgrade accounting systems to ensure compliance with GST rules.

• Impact on Pricing

Competitive Pricing: With the removal of cascading taxes, businesses can potentially lower prices, enhancing competitiveness.

Transparent Pricing: GST promotes transparency in pricing, as consumers can see the tax breakdown on invoices.

• Market Reach and Expansion

Interstate Trade: GST facilitates smoother interstate trade by eliminating state-level taxes (like octroi) and barriers, encouraging businesses to expand their market reach.

E-commerce Growth: Simplified tax regulations have made it easier for e-commerce companies to operate across states.

TDS Implications on Business 

The implementation of TDS (Tax Deducted at Source) has several implications for businesses. Here are the key impacts:

• Cash Flow Management

Immediate Tax Deduction: TDS is deducted at the time of payment, which can impact a business's cash flow. Companies need to plan their finances accordingly.

Tax Liability Visibility: Businesses can have clearer visibility of their tax liabilities throughout the year.

• Compliance Burden

Record Keeping: Businesses must maintain detailed records of all payments subject to TDS and ensure accurate deductions.

Regular Filings: Companies are required to file TDS returns periodically, which can increase administrative workload.

• Penalty and Interest Risks

Compliance Penalties: Non-compliance with TDS provisions can lead to penalties, interest on late payments, and other legal issues.

TDS Certificates: Businesses must issue TDS certificates to vendors, which, if not managed properly, can lead to disputes or compliance issues. 

• Input Tax Credit Considerations

Tax Credits: Businesses can use TDS as a credit against their income tax liabilities, impacting overall tax planning and cash flow.

Link with GST: While TDS and GST are separate, businesses need to ensure that both tax regimes are correctly accounted for, which can complicate compliance.

Conclusion 

There are two different taxes in the Indian taxation system. One is GST and the other is TDS, which are considered as the main components under the government tax revenue. GST removes the cascading effects of taxes, while TDS considers various types of income when exceeding the threshold limit prescribed in various sections. So it is interesting to learn about the difference between GST and TDS to get more familiarity with the taxation policy of India. Understanding these is crucial for effective financial planning and strategic decision-making.

Frequently Asked Questions 

1) How can I check my TDS credits?

You can check your TDS credits through Form 26AS, which is available on the Income Tax Department’s website.

2) How often do I need to file TDS returns?

TDS returns must typically be filed quarterly, depending on the type of deductor and payments made.

3) What are the different types of payments subject to TDS?

There are numerous payments which are subjected to TDS deductions like salaries, interest, rent, professional fees, brokerage, royalty, commissions etc.

4) Can TDS be deducted on exempt supplies under GST?

No, TDS (Tax Deducted at Source) cannot be deducted on exempt supplies under GST.