- Check what Finance Act 2021 says ?
Earlier Article “stringent-provisions-under-the-income-tax-act-1961”, we discussed on section 194Q in details.
Now, in this article we will discuss on Section 206 AB.
There are certain rules about to change from July 1, 2021 in accordance with the announcements made in the Union Budget and as per Finance Act 2021.
One of the important changes that will come into effect from next month is related to your income tax returns filing.
From July 1, you may have to pay double Tax Deducted at Source (TDS) in case you have failed to file your ITR for the last two years.
So let us understand above changes After section 206AA of the Income-tax Act, the following section shall be inserted with effect from the 1st day of July.
Section 206AB (BARE PROVISION):
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 sections 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.
Explanation of relevant terms used in above bare provision:
- “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.
(“specified person” is A person who will satisfy below two conditions will be considered as a specified person for higher rate of TDS u/s 206AB.
1) A person who has not filed income tax returns for two previous years.
2) A person whose aggregate of tax deducted and collected exceeds Rs 50,000/- in both previous years)
- “Permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.’.
(Non-resident who have a permanent establishment in India then provision of this section is applicable)
The Finance Minister in Budget 2021 introduced a special provision of TDS in the Income Tax Act 1961. A new section has been inserted, which shall be applicable from 1st July 2021 (Section 206AB of Income Tax Act, 1961.)
Objective of this Section
The main objective behind inclusion of Section 206 AB is to ensure that taxpayers file their income tax return without fail. In this article, we shall take a discuss the newly inserted Section 206AB of Income Tax Act, 1961.
Overview of above Section
The provision of Section 206AB overrides all provisions of the IT Act 1961 as it begins with the non-obstante clause (Notwithstanding anything contained in any other provisions of this Act).
The provisions of this section shall replace the applicability of TDS rate with a higher rate of TDS for those who have NOT filed income tax returns for previous two years despite the fact that the aggregate of tax deducted and collected is beyond 50000 rupees in each of those two previous years.
Thus Section 206AB mandates the person to deduct the tax at a higher rate to penalize the specified persons. Hence at the time of deducting TDS, a consideration to the provisions of this section is mandatory by the Deductor.
Applicability of Section
A higher TDS rates shall apply on the deductees:
- Who hasn’t filed the income return for both of the two assessment years that are immediately before the previous year where the tax is to be deducted;
- Where the time limit to file ITR under Section 139 of the Act has expired for both assessment years;
- Where the TDS amount in each of the two assessment years is more than 50000 rupees.
- The Specified Person has provided his PAN
Higher rate of TDS –
The TDS rates will be higher of the following (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.
Note: If pan is not furnished and return not filed for last 2 years then rate shall be higher of Section 206AA and 206AB.
Example – If a company pays a professional services provided by A and it is liable to deduct 10% TDS on the payment to the professional, it has to go and check on the portal whether A has filed its last 2 ITRs or not. If A has not filed last 2 ITRs and the total TDS deducted from A is more than Rs 50,000 then the company has to deduct TDS under Section 194J shall be higher of the following-
- Twice the rate mentioned in the relevant provision of the Act- 20%;
- Twice the rates in force- 20%;
Eventually, TDS will be deducted at 20%.
Non Applicability of Section –
The provision of TDS deduction at higher rate will not apply on the following
- Section 192- TDS on salary;
- Section 192A- TDS on premature withdrawal of EPF;
- Section 194B- TDS on winnings from lottery;
- Section 194BB- TDS on winning from horse race;
- Section 194LBC- TDS by securitization trust;
- Section 194N- TDS on withdrawal of cash;
- Non-resident not having permanent establishment in India.
Above provisions are NOT applicable in following cases
1) The payer is not liable to deduct TDS. 2) TDS is applicable under sections 192, 192A, 194B, 194BB, 194LBC or 194N.
3) Aggregate of tax deducted at source in his case does NOT EXCEED Rs. 50,000/- or more in each of these two previous years.
Conclusion:- Deductor has to keep in mind following points
1) Whether the deductees has filed its income tax return for the previous two years.(Possible solution – Obtain Copies of ITR-V or Declaration incorporating E-filing Acknowledgement Number of ITRs filed from the Specified Persons)
2) Whether the aggregate amount of TDS in the previous two years is more than 50000 rupees except sections 192, 192A, 194B, 194BB, 194LBC or 194N whose time limit of filing return of income under sub-section (1) of section 139 has expired.
3) Whether the deductees mandatorily required to furnish its income tax return.
4) Whether due date of filing the return hasn’t expired.
5) Whether dedicatees are resident or non-residents?
Therefore, it would be mandatory for the deductees to provide the proof of having filed the income return for the previous two years to avoid deduction at higher rates, and this can increase the overall compliance burden.
Declaration should be obtained from the deductees that he has filed the return of income for the previous two assessment years, where limit under section 139(1) is expired, or the TDS amount is not equal or more than 50000 rupees in case of non-filing of return. We expect that new income tax portal on http://www.incometax.gov.in provides utility to verify the return filing status of deductees for last relevant years.
BIO of Author:-
The author, CA Jayprakash Pandey is a practicing Chartered Accountant (Founder of Jayprakash P & Company) having Office at Mumbai, with more than 5 years of professional cum practical experience, Direct Tax, International Taxation, Indirect Tax & FEMA related advisory, litigation & compliance matters.
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