SECTION 206AB- SPECIAL PROVISION FOR DEDUCTION OF TAX AT SOURCE FOR NON-FILERS OF INCOME-TAX RETURN

SECTION 206AB- SPECIAL PROVISION FOR DEDUCTION OF TAX AT SOURCE FOR NON-FILERS OF INCOME TAX RETURN
Effective date: 206AB is effective from 1st July 2021

206AB deals with the deduction of tax at a higher rate for specified persons.


RATE:
IF PAN IS SUBMITTED:
  1. At twice the rates specified in the relevant provisions of the act (or)
  2. At twice the rate or rates in force (or)
  3. At the rate of 5%

Whichever is higher

IF PAN IS NOT SUBMITTED:

The tax shall be deducted at higher of the two rates specified in this section and in section 206AA.

206AA:

  1. The rates specified in the relevant provisions of the act (or)
  2. The rate or rates in force (or)
  3. AT the rate of 20%

Whichever is higher

SPECIFIED PERSONS:

Meaning: Specified person means a person who is satisfying all the below-mentioned conditions.

Conditions:

  • A person who has not filed an income tax return for 2 previous years immediately preceding the previous year in which tax is to be deducted.
  • The time limit for filing such a return of income is expired under section 139(1).
  • The aggregate of TDS is 50000/- or more in each of these previous years.

Exception:
Non- Resident who doesn’t have a permanent establishment in India.

Example:
Mr Ajay doesn’t file his Income-tax return before the due date as per section 139 for the following two previous years even if the TDS amount deducted was :

FINANCIAL YEAR                                   TDS AMOUNT
2019-2020                                                      61000/-
2018-2019                                                      54000/-

Considered as a specified person.
Then deductor has to deduct TDS for Mr Ajay as per section 206AB

IF PAN SUBMITTED

1) At twice the rates specified in the relevant provisions of the act (or)
2) At twice the rate or rates in force (or)
3) At the rate of 5%
Whichever is higher

IF PAN NOT SUBMITTED

1) The rates specified in the relevant provisions of the act (or)
2) The rate or rates in force (or)
3) AT the rate of 20%, whichever is higher

Non- Applicability of the Section 206AB

1. If the specified person is a non-resident who does not have a permanent establishment in India.
2. The section has an overriding effect on all provisions of Chapter XVIIB of the Income Tax Act, 1961 except the below-mentioned sections

Table Representing Applicability of Section 206AB

TDS/TCS Provisions – Specified Assesses Identification – As per Circular No. 11/2021 dated 21/06/2021

Section 206AB and 206CCA requiring a higher rate of TDS & TCS are applicable from 1st July 2021 requiring deduction of TDS (other than salary, horse racing, etc) or TCS at twice the normal rates or 5% whichever is higher, in case, deductee or collected are specified persons ie not filed ITRs for 2 years, a total of TDS and TCS is Rs 50,000 or more.

Considering the fact that it is practically impossible for the deduction or collector to identify the specified persons, the new functionality has been issued by CBDT ‘Compliance check for 206AB and 206CCA’.

As per the functionality, Single or multiple searches of PAN can be made to identify the specified persons and bulk data can in fact be downloaded in pdf format.
A list of specified persons would be prepared at the start of the FY and no new specified person would be added during the FY.  If a specified person fulfils the conditions specified above, he would be removed from the list during the FY.

Digital payments up 30.2% in FY21: According to RBI data 

So as a rule, a new specified person list on the portal would be drawn at the start of the FY and no new person would be added during the year even if he becomes a specified person. So we just have to check at the start of the FY for specified persons. Only while adding a new vendor during the year, we might have to look if he is a specified person. Also, if the status of a specified person gets converted into a non-specified person, we might have to update our records.

Important Points

From the perusal of the above section, the following points are to be noted:

  • This punitive rate on the payee will be in addition to the interest, penalty, prosecution and other consequences of non-filing of ROI.
  • Credit will be available to the payees for the higher taxes paid while filing his return of income Interpretation of the threshold condition:
  • To compute a threshold of INR 50,000 or more, both TDS and TCS of respective FY needs to be aggregated. For example I Co is making an FTS payment to Mr A of Rs. 1 Lac on which TDS is required to be deducted u/s. 194J @10%. He had not filed ITR for the last 2 PY and due date u/s. 139(1) has also expired. For each of the last 2 PY, the tax deducted of Mr A was Rs. 20,000 and Rs. 35,000 respectively and TCS collected was Rs. 30,000 and Rs. 40,000 respectively.
  • Aggregate of TDS and TCS in year 1 – 20,000 + 30,000 = 50,000
  • Aggregate of TDS and TCS for year 2 – 35,000 + 40,000 = 75,000
  • The condition of having TDS & TCS of Rs. 50,000 or more in each of the 2 FY is satisfied in the given case.

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Critical issues by way for FAQ for new Section 206AB

Critical issues by way for FAQ for new Section 206AB

Q1: From when the Section has been made applicable?

Section 206AB has been inserted in the Income-tax Act, 1961 (‘the Act’) through Finance Act, 2021 with effect from 1 July 2021. Therefore, as discussed earlier, compliance with this Section is mandatory from 1 July 2021.

Q2: Is the Section applicable for payments that are subject to tax deduction at source (‘TDS’) under Section 194C, 194J, 194I 195 etc.?

Yes. Except for the specific carve-outs provided under Section 206AB, it is applicable for all other nature of payments under different provisions of Chapter XVII-B which require deduction of tax at source. The carve-outs provided in the Section are as below –

  • Section 192 – TDS on salary
  • Section 192A – TDS on withdrawal from EPF
  • Section 194B – TDS on winning from lotteries, crossword puzzles, etc.
  • Section 194BB – TDS on winning from racehorses
  • Section 194LBC – TDS on income in respect of investment in Securitization Trust
  • Section 194N – TDS on cash withdrawal

Q3: What is the applicability of Section 206AB where the payment to a particular vendor is not crossing the minimum thresholds provided under the respective Sections of Chapter XVII-B?

Where the payment is not crossing the minimum thresholds requiring compliance of TDS under various Sections of Chapter XVII-B, provisions of Section 206AB would not be applicable.

Q4: What could be the relevance of the non-obstante clause in the Section?

Section 206AB starts with a non-obstante clause overriding all other provisions of the Act. Given this, it would apply even to those cases where the Tax deductees have obtained a Nil or lower TDS certificate from the Tax Office or have provided a declaration under Section 197A of the Act etc.

Q5: What would be the applicable rate of TDS where Section 206AB is triggered?

Where Section 206AB is triggered, the tax shall be deducted at the higher of the following rates:

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

However, where both the provision of this Section and Section 206AA are applicable (Section 206AA requires furnishing of PAN where TDS is deductible under the provisions of Chapter XVII-B), the tax shall be deducted at the rates provided in this Section or in Section 206AA, whichever is higher.

Q6: What is the threshold given from a Tax deductor standpoint for applicability of this Section?

There is no minimum threshold given for applicability of this Section from a Tax deductor standpoint. Therefore, the compliance of this Section is mandatory for all the types of Tax deductors irrespective of any threshold in terms of expenses, turnover etc.

Q7: Which years are relevant for FY 2021-22 based on the definition of “Specified person”?

Reading of the definition of “Specified person” in Section 206AB gives an impression that the relevant Previous Years (‘PYs’) to be considered for this purpose are those years which are immediately preceding the subject Previous Year (‘PY’)for which the due date of filing income-tax return under Section 139(1) has expired.

Based on the above, as of 1 July 2021, the time limit for filing Income-tax returns under section 139(1) is expired for FY 2018-19 and FY 2019-20 in case of all the types of taxpayers and as such the due date for FY 2020-21 is not expired. Therefore, these two PYs i.e. FY 2018-19 and FY 2019-20 are relevant PYs for checking the applicability of Section 206AB as of 1 July 2021.

However, once the time limit for filing the Income-tax return expires for Financial Year (FY) 2020-21, the relevant PYs would be FY 2019-20 and FY 2020-21.

Q8: What are the possible ways the Tax deductors can ensure compliance with this Section from 1 July 2021?

Given that the Section is applicable from 1 July 2021, before the said date, it is pertinent that the Tax deductors make sufficient arrangements to ensure the compliance of this Section. Tax deductors can reach out to their respective Deductees in this regard to obtain an appropriate declaration on compliance of filing of the Income-tax returns for applicable PYs. Such a declaration can be obtained manually from the Deductees or through online forms or by way of the survey through survey Apps etc. It also needs to be noted that the confidentiality of the data obtained from the Tax deductees is appropriately maintained in whichever mode the data is obtained. Further, given the sensitivity of the information involved, the Tax deductees may not be willing to share the tax return acknowledgements etc. for this purpose.

Furthermore, the Tax deductors can obtain sufficient indemnities while taking the declaration from the Tax deductees in order to cover the risks of non-compliance involved in this regard.

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Q9: Should a separate declaration be taken once the Section 139(1) date for FY 2020-21 gets over?

Right now, there is no mechanism or platform available for the Tax deductors to check the compliance of Income-tax return filing by the Deductees. Given this, it would be useful if the Tax Department comes up with an online platform that can provide the requisite data for determining the applicability of Section 206AB in the case of the vendors. However, in the absence of any such platforms, it may be required to take a top-up declaration/confirmation from the vendors in relation to the status of filing of the tax return for FY 2020-21.

Q10: What happens if the Tax deductee has filed the tax return for one of the years in the applicable two PYs?

Such a Deductee would not be treated as “Specified person” since the definition of “Specified person” is triggered only when the Deductee has not filed the tax return for both the two assessment years. Given this, technically Section 206AB provisions should not be applicable here the tax return is not filed for one of the years.

Q11: What happens if the Tax deductee has filed the tax returns after the due date of filing return under section 139(1) of the Act?

A Tax deductee will be treated as a “Specified person” where he has not filed the tax returns for both the applicable PYs. As such, the Section does not require that the Tax deductee should have filed the tax return within the due date mentioned in Section 139(1),for not being treated as a “Specified person” under the Section.

Given this, it appears that even if the Deductee has filed the tax return after the due date of filing the return under Section 139(1), the Deductor should not be required to apply the provisions of Section 206AB of the Act in such cases since the requirement of filing of the tax return has been met by the Tax deductee.

Q12: What happens if the Tax deductee is not liable to file the tax return under the provisions of the Act and therefore he has not filed the returns for applicable PYs?

It may be noted that Section 206AB does not provide an exemption in such cases. However, the Tax deductors can keep in mind the threshold of INR 50,000 of TDS while determining the applicability of Section 206AB in case of such Deductees.

Q13: Would the compliance be necessary if the tax deduction done by the Deductor is less than INR 50,000 in case of any particular Deductee for both the applicable PYs?

A Tax deductee would be treated as a “Specified person” if the aggregate of TDS and tax collected at source (‘TCS’) in his case is INR 50,000 or more in each of the two PYs. Therefore, the aggregate of TDS / TCS should be calculated from the perspective of the all the TDS / TCS available to the Tax deductee concerned (as may be reflected in his Form 26AS) and not from the perspective of the quantum of TDS / TCS made by the subject Tax deductor.

Representation for extending dates for furnishing belated/Revised Returns 

Q14: What happens if the TDS is less than INR 50,000 in one of the two applicable PYs and the Tax deductee has not filed the tax returns for both the applicable PYs?

In such a scenario, the Tax deductee should not be treated as a “Specified person” since the Section requires the aggregate of TDS and TCS to be INR 50,000 or more in each of the applicable PYs.

Q15: Is there any relaxation for non-residents who are subject to TDS under section 195 of the Act?

Yes, a non-resident who does not have a “permanent establishment” (PE) in India is outside the purview of applicability of Section 206AB.

Further, it may be noted that Section 206AB has provided an inclusive definition of PE for this purpose, wherein it suggests that a PE includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. Given that the Section provides a definition for PE, the relevance and applicability of this definition vis-à-vis relevance and applicability of the definitions typically provided for PE in the Double Taxation Avoidance Agreements may become a matter of debate in future. It may be also relevant to include a reference of the PE definition / PE contemplated under Section 206AB of Act in the PE related declarations that are typically obtained from the non-resident vendors for the purposes of withholding under Section 195 of the Act.

Q16: What could be the potential implications in case of non-compliance with Section 206AB?

The following implications could possibly arise where a Tax deductor does not comply with the provisions of Section 206AB of the Act –

  •  Classification as “assessee in default” in terms of Section 201 of the Act
  • Interest in terms of Section 201(1A) of the Act
  • Penalty in terms of Section 221 of the Act
  • Penalty in terms of Section 271C of the Act
  • Where there is said to be a short-deduction of tax due to trigger of Section 206AB, potentially disallowance of expense in terms of Section 40 of the Act
  • Disclosure in Clause 34 of Form 3CD

Tax on Collection @ Sale on Goods – Extended wef.Oct’20

The Government of India has introduced a new Section 206C(1H) of the Income Tax Act, 1961 with regards to “Tax Collection at Source”. Applicable to all sellers of goods whose turnover for the preceding Financial Years exceeds Rs. 10 Crores rupees.

Example:-

If during FY 2019-20, turnover was exceeded ?10 Crores, then For FY 2020-21 w.e.f 01.10.2020, this provision will apply to such sellers.

Applicable from 01.10.2020

1. Every seller who has received any amount as sale consideration above Rs. 50 lakhs has to collect additional 0.075% of bill amount, collect PAN and pay as TCS every month.

section 206c

2. TCS returns have to be filed as like TDS returns are filed.

3. So everyone is advised to complete accounting for half year till 30.09.2020 and separate parties with whom sale of Rs. 50 lakhs is made.

4. From every sale after 01.10.2020 to such parties levy 0.075% TCS in every bill and keep record of the same

Accordingly, sellers will need to add 0.075% to the bill value and deposit with the government on receipt of the payment from buyers.

tax collection at source

Exceptions:- Seller is not required to Collect TCS on all the Types of sales under Section 206C(1H) provided:

  • If the Goods are exported out of India
  • If the goods are of such type on which TDS is liable to be deducted by the buyer (Like in the case of Job Work, Composite Supply).
  • If the seller is liable to collect the TCS under any other clause of Section 206C. (Like in the case of Motor Vehicle dealer he shall collect the TCS on the motor vehicles if the value of the vehicle exceeds Rs. 10 Lac)
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