How is GST TDS Rate Different from Normal TDS Under Income Tax?

TDS becomes a sensitive issue for Indian businesses in many aspects, including money management. Many small and medium businesses have to concern themselves with a double set of TDS, income tax. 

They continuously sound similar, but they are different in their application, calculation, and reporting. It becomes necessary to comprehend the GST TDS rate and how it varies from the normal TDS under the Income Tax Act to avoid elegantly devastating intricacies and hard ships. With the assistance of digital tools and GST invoicing, businesses can run more comfortably and in compliance.

Understanding the Concept of TDS

Before exploring the differences, it is crucial to understand what TDS actually is. Tax Deducted at Source (TDS) refers to the system where the payee, that is, the person paying the payment (anticipated recipient) has some amount of money deducted before they can receive the money. This assures taxation right at the place of transaction itself.

What Is TDS Under Income Tax?

Under the Income Tax Act, TDS is applicable for payments for salaries, any professional fees, rent, contracts, etc. For instance, if a company pays a contractor ₹1,00,000, it may deduct 1% or two percent [depending on the rules in effect], and pay this to the Income Tax Department. This then goes to the contractor, and the amount that is subtracted goes into the tax payable account.

Key points:

• Makes arrangements for the collection of taxes all year round.

• Rate of deductions depend on the type of remuneration.

• Can be applied to individuals and businesses.

What Is GST TDS Rate and Why It Matters?

GST TDS is not like tax TDS. It was imposed with the intention to ensure proper collection of tax under GST regime. Further, certain government departments, local authorities and notified entities have also been made responsible for paying CGST or SGST at a rate of 2% (1% CGST + 1% SGST or 2% IGST) at the time of payment to suppliers.

Example: If the government department thinks of purchasing the goods of an amount of Rs. 10 lakh, then the government can deposit GST TDS at a rate of 2% (Rs. 20,000) and the rest they can pay of Rs. 9,80,000. The value deducted is paid to the Government and updated with the Help of accounting software also in the supplier’s GST account. This system is used to track the GST payments and ensure that they are paid accurately and preventing tax evasion. Retailer that has to deal with contractors.

Key Differences Between GST TDS and Income Tax TDS

Applicability

• Purpose of Payment TDS: TDS is applicable on income of salary, rent, interest, commission, contractor fees, etc. 
• GST TDS – It is the requirement when certain entities (which are primarily government departments or PSUs) purchase good or services above a limit.

Rates

• New Proposals: Income tax TDS to varying broad ranges of 1% to 10% or higher depending on the mode of payment.
• GST TDS : Fixed @ 2% (1%CGST+1%SGST or 2%IGST)

Purpose

• Income Tax TDS: Ensures advance collection of income tax.
• GST TDS: Ensures proper collection and flow of GST credits.

Compliance process

• Income Tax TDS: Deductor files quarterly TDS returns in Form 24Q, 26Q, etc.
• GST TDS: Deductor files GST TDS return in Form GSTR-7 on a monthly basis.

Impact on businesses

• Income Tax TDS: Impacts cash flow and advance tax liability.
• GST TDS: Impacts working capital but also helps suppliers claim tax credit easily.

Real-Life Examples for Indian Businesses

• Payment to a contractor for renovation of your retail store is subject to TDS for income tax purposes (paid at 2% of the value of the contract) But if retailer is not a governmental organization, GST TDS is not applicable.

• Now if a vendor supplies computers to a government office of the state government for say an amount of Rs 50 lakh, it will have to bear GST deduction by 2%. At the same time, if the same supplier pays consultancy fees to a consultant then income tax TDS will apply.

• Freelancers in a digital marketing company get paid for their work, from which income tax TDS is paid. But when it provides services to a PSU then the PSU pays GST TDS on the invoice value.

These examples demonstrate the need for clarity of understanding Businesses must understand these two systems clearly.

Compliance Challenges Faced by Businesses

• Confusion as there are different rates and filing processes

• Interest and other penalties could arise for a late filing of returns.

Many businesses confuse GST TDS rate with the infringement of tax on the source by attributing errors to the confusion of GST TDS with income tax TDS.

Role of Technology in TDS Management

Managing GST TDS as well as managing income tax TDS, manually can be stressful. That’s where digital tools can be most important. Our GST billing software also helps in proper GST TDS calculation and filing of GSTR-7.

Auto-calculation of GST TDS, creation of reports and dashboard tracking of the return deadlines is made easy by MargBooks that does compliance testing for you.

With MargBooks, any small retailer can avoid errors when it comes to TDS deductions and can concentrate on its main business.

Businesses that use MargBooks can easily reconcile their accounts and ensure that they are filed on time. Later on when businesses are expanding they can also add accounting software which handles payroll TDS, contractor payments and statutory filings under income tax.

Best Practices to Manage GST TDS and Income Tax TDS

• Segregate transaction for purpose of GST and income tax.

• Accomplish reconciliations monthly using computer assisted reconciliation tools.

• Automate return filing using MargBooks software.

• For complex cases seek expert advice from tax professionals.

Conclusion

It becomes very important for Indian businesses to differentiate between the GST TDS rate and the normal TDS as per the Income Tax Act. The one refers to GST compliance, while the frictional means to advancing the collection of income tax. Using them interchangeably can result in fines and cash flow problems. This is why you should embrace digital solutions for businesses. 

Our MargBooks software makes compliance easier, reporting more accurate, and makes keeping track of filing deadlines easier. In tandem with our software, these tools provide SMEs and professionals with a definite advantage in keeping up with tax compliance and aiming towards growth.