Higher TDS/TCS Rate for non-filers of income Tax Return

Section 206AB and Section 206CCA – Special provision for deduction of tax at source (TDS) and collection of tax at source (TCS) for non-filers of income Tax Return at Higher Rates

The new section 206AB and 206CCA are proposed to be inserted in the Income Tax Act, 1961 (“Act”) by the Finance Bill, 2021. The said sections provide for higher rate of TDS / TCS to be applied if the transactions are done with the non-filers of income-tax return. The said section has been inserted after Section 206AA and Section 206CC respectively of the Act which provides for higher rate of TDS/TCS for non-furnishing of Permanent Account Number (“PAN”).

To have a better understanding of newly inserted section, let us first understand the applicability of section 206AA and section 206CC in short as below-

Section 206AA and 206CC are applicable in case where the person fails to furnish the PAN, in which case the person who is responsible for deducting / collecting the tax, as the case maybe, is required to apply the tax rate at the higher of the following:

The main purpose of the section 206AA and Section 206CC was to encourage the person to obtain the PAN. Further, in line with the above sections, section 206AB and section 206CCA have been proposed in the Finance Bill, 2021.

The section 206AB is applicable to the specified person as defined in the provision. The provisions of sub-section (1) of section 206AB provides for TDS rate to be applied if the amount is paid or credited to a specified person being higher of the below rates –

(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 5%.

The provision of sub-section (1) of section 206AB does not apply in case where tax is required to be deducted under 192, 192A, 194B, 194BB, 194LBC or 194N.

Further, sub-section (2) of section 206AB provides that where both the section 206AA and 206AB are applicable i.e. the specified person has not submitted the PAN as well as not filed the return; the tax shall be deducted at the higher rate amongst both the sections i.e. TDS is required to be deducted at the higher rates amongst section 206AA and 206AB.

The term “specified person” is defined in sub-section (3) of section 206AB who satisfies the following conditions:

• A person who has not filed the Income Tax Return for two previous years immediately prior to the previous year in which tax is required to be deducted;
• The time limit of filing return of income under sub-section (1) of section 139 is expired; and
• The aggregate tax deducted at source or tax collected at source, as the case maybe, is Rs. 50,000 or more in each of the two previous years.

The non-resident who does not have the permanent establishment is excluded from the scope of specified person. For better understanding, the same has been tried to explain through the below chart:-

Applicability of Section 206AA and 206AB

Similarly, section 206CCA is proposed to be inserted which provides for TCS rate were tax is required to be collected from the specified person being higher of the below rates –

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

(ii) at the rate of 5%.

Further, the sub-sections (2) & (3) of section 206CCA are similar to the provision of sub-sections (2) & (3) of section 206AB as explained above. However, while comparing the provision of section 206CC and 206CCA, the impact on the assesse is same as earlier since the rates under both the sections are same and there is no adverse impact on the rate of TCS under the proposed section 206CCA.