Higher TDS for Income Tax Return Defaulters w.e.f. 01.07.2021-Decoding section 206AB

[Manish Gupta]

Have you filed ITR for the previous two years? If not, then this article can disappoint you. This is the hard truth that income tax department has introduced a new section 206AB effective from 01.07.2021 that ensures higher deduction of TDS of the payees who has defaulted in filing their return of income for the preceding 2 years.

The Governments always want to widen the tax base and ensure that more and more people file their income tax returns on time. Several steps and measures have been taken in the past to achieve this goal. A need was felt to have some provisions to ensure filing of return of income by those persons who have defaulted in filing their ITR despite TDS deduction. Hence, the Finance Act 2021 has introduced new provisions under Section 206AB to cover maximum persons for timely filing of their income tax returns.

This newly inserted section can create a problem for those who have not filed ITR for the previous two years, subject to certain conditions. Those people may face deduction of TDS at higher rates thereby blocking their working capital needs.

Let’s take a look at the newly inserted Section 206AB of the Income Tax Act, 1961.

Applicability of section 206AB

The newly introduced Section 206AB of the Income Tax Act 1961 mandates the person paying the amount to deduct TDS if the “specified person” fails to file an income tax return. This new section shall be applicable from 1st July 2021. The main objective behind the introduction of Section 206AB is to ensure that taxpayers do not fail to file their income tax return.

The provisions of this section apply to any sum or income or the amount paid, or payable or credited, by a person to a “specified person”. Along with section 206AB, the provisions of section 206AA shall also be applicable to a specified person.

The rate at which TDS must be deducted under these sections mentioned above is discussed further in this article.

Who is referred to as a Specified Person?

As per section 206AB, “specified person” refers to the person who satisfies all the following criteria-

1. The person who has not filed an income tax return for the two assessment years relevant to the two previous years immediately preceding the previous year in which TDS was required to be deducted;
2. The time limit to file an income tax return as per section 139(1) is expired; and
3. The total TDS is INR 50,000 or more in each of the two previous years.

Note: Specified person doesn’t include a non-resident who does not have a permanent establishment in India.

For example: For Financial Year 2021-22, the deductor is required to check the ITR for P.Y. 2019-20 and 2020-21 respectively. If ITR has not been filed for both these years, then deductor is required to deduct TDS w.e.f. 01.07.2021 at higher rates provided the amount of TDS is 50,000 or more in both the previous years.

There is no exception under section 206AB even if the recipient is 'not liable' to file the return:

One of the conditions to invoke section 206AB is non-filing of return of income by the recipient. The provisions of this section do not provide any exception to the recipient who was otherwise not liable to file the income tax return. This section provides for deduction of tax at higher rates if the deductee, i.e. the recipient, has not furnished the return of income of the specified period, irrespective of the fact that whether he was required to furnish ITR or not.

This may call for troubles for the non-residents who have a Permanent Establishment in India but otherwise not liable to file ITR in view of the exemption granted by Section 115A(5).

 The super senior citizens will also face the implications of section 206AB if the tax was deducted from their income, yet they did not file the return of income.

For Example: Mr. X (80+ Years) has earned an interest income of ₹ 5,00,000 in both the preceding years. TDS of ₹ 50,000 has been deducted under Section 194A in each preceding year. He was neither liable, nor furnished the return of income of the relevant period, as his income during both preceding years was below the maximum exemption limit.

But in the current year, as per section 206AB, the tax will be deducted at the higher rates as he has not filed ITR in both the preceding years, and the total TDS deducted was ₹ 50,000 each of the preceding years.

Non-Applicability of section 206AB

Provisions of section 206AB shall be applicable where tax is required to be deducted at source under the provisions of Chapter XVIIB except for the following sections:
• Section192: TDS on Salary
• Section 192A: TDS on Payment of accumulated balance due to an employee
• Section 194B: TDS on Winnings from lottery or crossword puzzle
• Section 194BB: TDS on Winnings from a horse race
• Section 194LBC: TDS on Income in respect of investment in securitization trust
• Section 194N: TDS on Payment of certain amounts in cash

Rate of TDS under section 206AB/206AA

Let’s know about the implications of provisions of section 206AA and 206AB on the specified person.

Section 206AA is applicable when the taxpayer who receives the taxable income fails to furnish the PAN to the payer of such income. Both residents and non-residents come under the ambit of this section.

Section 206AB is applicable when the person who receives the taxable income fails to file two years return for the previous years immediately preceding the previous year. 

As per the respective sections, the person, i.e. the deductor responsible for deducting the tax, is required to apply the tax rate in the manner given below.

Section 206AB- TDS rate when a person fails to file two years returns:

In such case, Tax is required to be deducted at higher of the following rates:

• twice the rate specified in the relevant provision of the Act; or
• twice the rate or rates in force; or
• at the rate of 5%.

Rates in force mean rates that are applicable at present.

Section 206AA- TDS rate when a person fails to submit PAN:

In such case, Tax is required to be deducted at higher of the following rates:

• at the rate specified in the relevant provision of this Act.
• at the rates in force.
• at the rate of 20%.

Tax rate when both sections 206AA & 206AB are attracted?
In such case, as per section 206AB(2), TDS will be deducted at a higher rate from the following:
•     Rate determined as per section 206AA
•     Rate determined as per section 206AB

Challenges due to the newly inserted section 206AB

There are significant challenges that emerge from this section. These challenges relate to the difficulty that the deductor face to determine:

• If the deductee has filed its income tax return for the previous two years;
• If the TDS aggregate in the previous two years is more than 50,000 rupees;
• If the deductee mandatorily required to furnish its income tax return.

Thus, the duty of collecting all the required information from the deductee can confine the tax deductors to function with ease and can impose an additional burden.

However, for the ease of tax deductors, CBDT has released a new functionality which is discussed below.

Compliance Check for Section 206AB

• CBDT through a circular dated 22nd June, 2021, has released a new functionality “Compliance Check for Section 206AB & 206CCA”, to facilitate tax deductors/collectors to verify if a person is a "Specified Person" as per section 206AB & 206CCA.
• The logic behind this functionality has been explained through CBDT Circular No. 11/2021 and Notification No.  01 of 2021, dated 21st June, 2021 and 22nd June,2021, respectively. Read the circulars for detailed understanding about the Compliance Check for Section 206AB & 206CCA.
• The Circular has eased the burden of the tax deductors by ensuring that the deductors need to check the PAN in the functionality at the beginning of the financial year. Also, tax deductors are not required to again check the PAN of the non-specified person during that financial year.
• This compliance check facility will tell the tax deductors if the particular PAN holder is a specified person for the purpose of section 206AB.
• The non-filers can be verified for a single PAN as well as a deductor can verify multiple PANs in bulk mode.
• With this new functionality, the Government has reiterated its commitment to ease the compliance burden of taxpayers.

Consequences for non-compliance of provisions of section 206AB

If the deductor fails to comply with above-mentioned provisions of section 206AB, then the following implications would possibly arise: -

1. He will be considered as “Assessee in Default”.

2. Disallowance of Expenditure

3. Levy of penalty for non-compliance of TDS Provisions

4. Interest in terms of Section 201(1A) of the Act

Conclusion

The provisions of section 206AB are likely to impact the persons who do not file income tax returns. Such persons will start furnishing the return of income after understanding that non-filing of return will lead to tax deduction at a higher rate. By specifying a higher TDS rate subject to certain conditions, the Government has tried to ensure that all the persons file the Income Tax Returns within time.

Authored by CA Manish Gupta & CA Rahul Pareva, assisted by Akansha Gupta

For any queries or suggestions, email at [email protected]