Analysis of Section 206AB/206CCA effective from 1st July, 2021

Section 206AB and Section 206CCA of the Income Tax Act were recently incorporated in the Income Tax Act, 1961 through the Finance Act, 2021. Both the sections are going to be applicable from 1st July, 2021. As per the provisions of both the sections, higher rate of TDS/TCS rate shall be levied by the Tax Deductors and Tax Collectors on the Specified Persons as mentioned in Section 206AB/206CCA.

Analysis of the Section 206AB and Section 206CCA

Section 206AB of the Act would apply on any amount paid or credited, by a person (herein referred to as Deductor) to a specified person. The proposed TDS rate in this section is higher of the followings rates:-

• twice the rate specified in the relevant provision of the Act; or
• twice the rate or rates in force; or
• the rate of five per cent

However, this section shall not apply where the tax is required to be deducted under sections 192 (TDS on Salary), 192A (TDS on Premature withdrawal of EPF), 194B (TDS on winnings from lottery), 194BB (TDS on winnings from horse races), 194LBC (TDS by securitization trust) or 194N (TDS on cash withdrawal) of the Act.

If the provision of section 206AA of the Act is applicable to a specified person, in addition to the provision of this section, the tax shall be deducted at higher of the two rates provided in this section and in section 206AA of the Act.

Similarly, if the provision of section 206CC of the Act, is applicable to a specified person, tax shall be collected a higher of the two rates provided in this section and in section 206CC.

As per Section 206AA, if a person is not having PAN, then TDS shall be deducted at the higher of the following rates:

1. At the rate specified in the relevant provision or

2. At the rate in force or

3. At the rate of twenty percent.

Similarly, as per Section 206CC, if a person is not having PAN, then TCS shall be collected from him at the higher of the following rates:

1. Twice rate specified in the respective TCS Provisions

2. At the rate of 5%

Meaning of ‘Specified Person’ as referred in Section 206AB/206CCA

Both of the following points need to be satisfied.

1. The person has not filed income tax return of two previous years immediately before the previous year in which TDS is required to be deducted for which the due date of filing income tax return under section 139(1) has already expired. Therefore, for the Financial year 2021-22, the relevant previous years for which the due date of filing return was expired was FY 2018-19 and FY 2019-20.

2. The aggregate amount of TDS and TCS credit of the person (Deductee/Collectee) was INR 50,000 or more in each of the two previous years as referred above.

Therefore, based upon the aforesaid provisions which are going to be effected from 1st July, 2021, every Tax Deductor/Tax Collector has the responsibility to ensure that the other party has filed income tax returns within due date particularly when Tax Deduction/Collection amount exceeds Rs. 50000/- in preceding two previous years. However, income tax portal does not provide any system to check whether any party is filing income tax returns within due date or not. Therefore, under the present circumstances there is no other alternative than to obtain a declaration from the deductee/collectee to this effect. However, such declaration shall not exclude the deductor/collector from their responsibility to deduct/collect tax at higher rate. As sample format of the declaration is as below:

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Format of Declaration For Not-Deducting (Collecting) Tax At Source (TDS/TCS) As Per Section 206AB/206CCA Of The Income Tax Act, 1961

To,
XYZ Private Limited,
[Address]

Newly inserted section 206AB [206CCA] * of the Income tax act provides for deduction of tax (TDS) [or collection of tax] at the higher rate as prescribed u/s 206AB [206CCA]* in case of payments to “Specified Person”. Specified person is person who satisfies all of the following conditions

a. A person who has not filed income tax return of two previous years immediately before the previous year in which tax is required to be deducted or collected* and the time limit of filing return of income under sub-section (1) of section 139 has expired for such two previous years; and

b. The total TDS and TCS is Rs 50,000 or more in each of the two previous years.

I/We undersigned, Proprietor/Partner/Director* of M/s________________ hereby declare that, My/Our* organisation/entity not falling under the criteria of specified person as stated under section 206AB and I/We have filed Income tax returns within time limit specified under section 139(1) for two previous years [ or In the process of filing Income tax return for the previous year for which time limit u/s 139(1) not yet expired]* and the aggregate of tax deducted at source and tax collected at source is less that rupees fifty thousand in each of these two previous years.

I/We* ___________________hereby declare that the information given above is complete and correct in all respects. I also undertake to indemnify your organisation for any loss/liability may arise in the event of the above information being incorrect.

FOR ABC LIMITED
__________________
Authorised Signatory

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Extract of Section – 206AB of Income-tax Act, 1961 

Special provision for deduction of tax at source for non-filers of income-tax return.

“(1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be deducted at source under the provisions of Chapter XVIIB, other than section 192, 192A, 194B, 194BB, 194LBC or 194N on any sum or income or amount paid, or payable or credited, by a person (hereafter referred to as deductee) to a specified person, the tax shall be deducted at the higher of the following rates, namely:—

(i) at twice the rate specified in the relevant provision of the Act; or

(ii) at twice the rate or rates in force; or

(iii) at the rate of five per cent.

(2) If the provisions of section 206AA is applicable to a specified person, in addition to the provision of this section, the tax shall be deducted at higher of the two rates provided in this section and in section 206AA.

(3) For the purposes of this section “specified person” means a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be deducted, for which the time limit of filing return of income under sub-section (1) of section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of these two previous years:

Provided that the specified person shall not include a non-resident who does not have a permanent establishment in India.

Explanation.—For the purposes of this sub-section, the expression “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.]”

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Detailed Provision of Section 206CCA

Extract of Section 206CCA of Income-tax Act, 1961

Special provision for collection of tax at source for non-filers of income-tax return.

“206CCA. (1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be collected at source under the provisions of Chapter XVII-BB, on any sum or amount received by a person (hereafter referred to as collectee) from a specified person, the tax shall be collected at the higher of the following two rates, namely:—

(i) at twice the rate specified in the relevant provision of the Act; or

(ii) at the rate of five per cent.

(2) If the provisions of section 206CC is applicable to a specified person, in addition to the provisions of this section, the tax shall be collected at higher of the two rates provided in this section and in section 206CC.

(3) For the purposes of this section “specified person” means a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be collected, for which the time limit of filing return of income under sub-section (1) of section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of these two previous years:

Provided that the specified person shall not include a non-resident who does not have a permanent establishment in India.

Explanation.—For the purposes of this sub-section, the expression “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.]”