With a view of collecting more and more revenue and in the name of ease of doing business, year on year the taxation laws are being amended to plug loopholes. In this process either new loopholes are created or law becomes complicated.
This article deals with section 206AB of The Income Tax Act, 1961 which is going to be effective from 1st July, 2021. The practice of putting some other date instead of first day of the financial year from which the amendment could apply seems to be unexplainable and such provisions coming into effect from such date (not from the first day of financial year) also do not caution the taxpayers clearly in advance on smooth application of the provisions.
The Finance Bill, 2021 proposes to insert Section 206AB to provide for deduction at source on mandatory basis without regard to certain provisions if the payee has not furnished his Return of Income. It provides that, if an assessee has failed to file his return of income for a specified period, the tax will be deductible at higher rates. Income-tax Act already contains two similar provisions – Section 206AA and Section 206CC, these provisions provide for deduction or collection of tax at a higher rate if the deductee or collectee fails to furnish his Permanent Account Number (PAN).
Memorandum explaining the provisions in The Finance Bill, 2021 stated that, it is seen that while these provisions (Section 206AA and 206CC) have served their purpose in obtaining and furnishing of PAN by the various person, there is a need for similar provisions to ensure filing of return of income by that person who has suffered a reasonable amount of TDS/TCS. Accordingly, the Finance Bill, 2021, has proposed to insert two new Sections 206AB and 206CCA, with effect from 01-07-2021. These sections provide for deduction or collection of tax at higher rates in case of non-filers of Income-tax Return.
Now, finding out the correct rate of TDS under section 206AB is like solving a complex theorem.
The section provides that the “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 section 139(1) has expired and the aggregate of tax deducted at source and tax collected at source in his case is Rs. 50,000 or more in each of these two previous years. The section also provides that, the specified person shall not include a non-resident who does not have a permanent establishment in India.
Non-obstante clause – “Notwithstanding”
The provisions of this section overrides all other provisions of the Act. It will apply even if the deductee has obtained Certificate for deduction at lower rate under section 197 or deductee has filed a declaration under Section 197A for non-deduction of tax or deductee is otherwise not liable to file the return of income. However, this provision will be attracted only if the tax is otherwise deductible under Chapter XVII-B.
[For Example: if the recipient of income by way of Commission does not file his return of income in the last two assessment years, this provision will not apply if sum paid or payable during the financial year does not exceed the threshold limit prescribed under section 194H]
The sum of income is liable for higher rate of TDS
This provision shall apply in respect of any sum or income or amount from which tax is deductible under any provision of Chapter XVII-B except those specified:
i) Section 192 – TDS on Salary;
ii) Section 192A – TDS on payment of accumulated PF balance due to employee;
iii) Section 194B – TDS on winning from lottery or crossword puzzle;
iv) Section 194BB – TDS on winning from horse race;
v) Section 194LBC – TDS on income in respect of investment in Securitization Trust; and
vi) Section 194N – TDS payment of certain amounts in cash (i.e. cash withdrawal).
All other payments not covered under the specified list above are to be tested under section 206AB. However, this provision shall not apply to such sum or income or amount paid or payable or credited to a non-resident who does not have permanent establishment in India, for the purpose of this section, the expression “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.
Subsection (3) of section 206AB provides the conditions to be tested to classify as “specified person”:
i) Who has not filed the returns of income for both of the 2 assessment years relevant to the previous years immediately prior to the previous year in which tax is required to be deducted;
ii) The time limit of filing return of income under section 139 (1) has expired; and
iii) The aggregate of TDS and TCS in his case is Rs. 50,000 or more in each of these two previous years.
The provisions for this section is effective from 1st July, 2021 and deduction on or after this date shall be subject to the provisions of section 206AB. For all deductions up to 31st March, 2022, deductor is under the obligation to check return filing status of the recipient for AY 2020-21 and AY 2019-20 (i.e. previous years 2019-20 and 2018-19).
The Rate of TDS
The tax shall be deducted at the higher of the following rates:
a) at twice the rate specified in the relevant provision of the Act; or
b) at twice the rate or rates in force; or
c) at the rate of five per cent.
However, where both the provision of this section and Section 206AA are applicable, i.e., the deductee has neither furnished his PAN to the deductor nor has he furnished his return of income for the specified periods and TDS or TCS is more than Rs. 50,000 in each year, the tax shall be deducted at the rates provided in this section or in section 206AA, whichever is higher.
No exemption is given for recipients who are not liable file returns:
The condition to invoke the provisions of this section is non-filing of return of income by the recipient. There is no exemption given for recipients who were not liable to file the return of income.
The way forward
Section 194N contains similar provisions. It provides for deduction of tax from the cash withdrawal at different rates if the assessee has not furnished the return of income for the specified period. To determine the rate for deduction of tax under this provision, the CBDT had enabled an option in the Income Tax e-filing Portal called “Verification of applicability u/s 194N” to check the applicable TDS rate under Section 194N. Using this facility, the Bank/Post Office can know the applicable rate of TDS under section 194N by entering the PAN of the person who is withdrawing cash.
The threshold limits specified under section 194N are higher amounts i.e., Rs. 20 Lakh and Rs. 1 Crore, it may not be essential for the bank to verify the ITR status of the account holder until the threshold mark is achieved. Whereas, under new Section 206AB, it will be mandatory for the deductor to verify the return filing status of every deductee and for all payments other than those specified. This will become an annual activity for every deductor to check ITR status of deductee.
If department does not come up with an option to verify the ITR filing status of the deductee/recipient under section 206AB, the deductor has to get a declaration from the deductee to calculate the applicable rate of TDS.
|Particulars||Provisions of sections 206AB|
|a) Applicability||When a deductee fails to furnish return of income for the specified period and the aggregate amount of tax deducted and collected during such specified period exceeds the specified limit.|
|b) Rate for deduction of tax||Higher of:
|c) Exemption||i) For sums liable to deduct under following sections:
a) Section 192
b) Section 192B
c) Section 194B
d) Section 194BB
e) Section 194LBC
f) Section 194N
ii) Where recipient is non-resident and does not have PE in India.