You must have received contact from your vendors/suppliers/buyers, etc., requesting confirmation that you have submitted your IT Return for the previous two financial years or that your total TDS deducted in the previous two financial years exceeds Rs. 50,000/-.
All of this is due to significant changes in TDS Provisions beginning July 1, 2021.
Let us look at one key modification in TDS regulations that will take effect on July 1, 2021:
Section 206AB of the Income Tax Act was added by Finance Act 2021.
Section 206AB has a significant impact on current TDS regulations and rates.
TDS on any payment other than salary is to be deducted at twice the current rates or 5%, whichever is higher if the recipient or deductee has not filed returns of income (ITR) for the previous two financial years for which the time limit for filing ITR has expired and the aggregate of tax deducted at source and tax collected at source in his case is rupees.
If the deductee/recipient has not filed his ITR for the past two financial years and his total TDS and TCS deducted in each of the preceding two years is more than Rs. 50,000/-, the deductor must deduct TDS at:
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whichever of the following rates is higher:
As a result, beginning July 1, 2021, if you are deducting TDS on behalf of a person who has not filed an ITR for the previous two financial years and whose total TDS and TCS exceeds Rs. 50,000/-, you must deduct TDS at twice the standard rate or 5%, whichever is higher.
For example, if you deduct TDS under section 194C, TDS will be deducted at a rate of 5% if the deductee/payee has not filed an ITR for the previous two financial years and their TDS and TCS exceed Rs. 50,000/- in each FY. (twice the rate of 2% = 4% or 5%, whichever is higher, i.e. 5% )
Similarly, if you are deducting TDS under section 194J, TDS will be deducted at twice the rate, i.e. 20% (10% * 2) or 5%, whichever is higher, for a total of 20%.
The government’s plan is to collect tax at source from people who don’t file their tax returns.
Ques: How will we know whether the deductee/recipient of the payment is filing their ITR for the previous two financial years and their TDS exceeds Rs 50,000/- in both previous Financial years?
Ans: The Govt. has come up with a utility where every person can check if their deductee/payee is a specified person on whom a higher rate of TDS is applicable.
If a person is a ‘specified person’ then a higher rate as mentioned above shall be required to be deducted for such person.
You can also make a declaration or an undertaking from all the persons of which you are liable to deduct tax in respect of the same but please note that a declaration or undertaking is no substitute for checking if the person is a specified person from the Govt. prescribed utility.
Ques: What if a specified person on whom the higher rate is to be deducted does not have a PAN?
Ans: Income Tax Act prescribes TDS at 20% where PANis not available.
This new section clearly states that TDS will be deducted at the rate prescribed in this section or 20% whichever is higher.
Ques: Whether similar provisions are available in the case of Tax Collected at Source (TCS)?
Ans: Yes, budget 2021 has introduced similar provisions in TCS where a higher rate of TCS is to be collected from a ‘specified person’ who has not filed ITR of two previous financial years and total TDS and TCS exceeds Rs. 50,000/- vide section 206CCA.
Ques: ITR for which FY should be filed to determine whether higher TDS is to be deducted or not.
Ans: For FY 2021-22, ITRS for FYs 2019-20 and FY 2018-19 need to be checked. Therefore, if any person has filed ITRs for FY 2019-20 and FY 2018-19 then a higher rate of TDS is not applicable to such person.
ITR for FY 20-21 will not be checked for this purpose as the time limit for filing such a return has not expired yet.
Ques: If a person has not filed ITRs for the preceding two Financial years, whether it is certain that TDS at a higher rate will be deducted?
Ans: Section 206AB/206CCAprescribe two conditions for deduction of tax at the higher rate. Along with filing ITR for the previous two financial years, the total aggregate TDS and TCS of the deductee/payee/recipient of payment should also be Rs. 50,000/- or more in each of the two previous financial years.
Therefore, if the payee/deductee does not have a total aggregate TDS and TCS of Rs. 50,000/- or more during each of the two previous financial years then TDS will not be deducted at higher rates even if such payee/deductee has not filed his ITR for the previous two financial years.
Ques: Whether aggregate of TDS and TCS of Rs. 50,000/- is for the payment on which TDS rate is to be checked or is it the total TDS and TCS of the payee/deductee during the FY on all amounts received by him?
Ans: Total TDS and TCS of the payee/deductee on the aggregate of all amounts received by him during the FY is to be checked. Therefore, the total TDS/TCS showing in form 26AS of the deductee for the financial year is to be considered for the purpose of this section.
TDS/TCS amount on that particular payment is not to be considered for determining a higher rate of TDS on such payment.