Higher TDS rates for Non-filers of Income-tax

Higher TDS rates for Non-filers of Income-tax

If you have not filed your income tax returns for the last two years, and the total on your tax deductions exceeds Rs 50,000 or more in each of the preceding two years, you will be subject to a higher TDS.

Concerned about all the hype around increased TDS deduction? Wondering what it is all about? Don’t worry, we’ve got you covered. Here is a detailed explainer on TDS (Tax deducted at source) and all the new rules surrounding it. 

The Central Board of Direct Taxes (CBDT) in a circular dated 25th June 21, notified the extension of TDS filing due date for the fourth quarter of FY 2020-21 to 15th July 21, from its previous deadline of 30th June 21. It also introduced three major TDS/ TCS changes per the Finance Act, 2021. These changes are enforceable starting 1st July 2021. 

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What is TDS? 

Simply put, TDS or Tax deducted at source is when a company or a goods/service provider deducts tax at the point of contact i.e. source if the payment amount exceeds a certain limit. For instance, under Section 192 of the IT Act, which details salary payments, a TDS amount per your income tax slab rate is required to be deducted. 

On the other hand, a TDS of 30 per cent is deducted under income classified under Section 194B, which includes winning money by way of lotteries, card games, crosswords, and more. 

What are the new changes that have been introduced? 

Following two noteworthy changes have been mandated with regards to this : 

Higher rate of TDS/TCS deduction

If you have not filed your income tax returns for the last two years, and the total on your tax deductions exceeds Rs 50,000 or more in each of the preceding two years, you will be subject to a higher TDS. Now, this higher TDS can mean two things- either double the specified TDS rate or 5 per cent, whichever is higher. 

This rule, introduced via the Finance Act, 2021 falls under two recently created sections of the IT Act, namely 206AB (deduction of TDS at higher rates) and 206CCA (collection of TCS at higher rates). You can also check the applicability of these sections on your income status by using the “Compliance Check” tool on the Income Tax department’s website. 

tds

However, section 206AB will not be applicable on the following, amongst others:

Section 192 (Salary) or Section 192A (Withdrawal of Provident Funds) Section 194B/194BB: Winnings from card games, lotteries, horse races, etc. Section 194LBC: Income against investment in securitization trust. 

TDS deduction for an amount exceeding Rs 50 lakhs or more CBDT also notified that the buyers would be required to deduct tax at source at the rate of 0.1 percent of the amount, in case the aforementioned payment or credit exceeds Rs 50 lakhs. This is only applicable with respect to the purchase of goods. Notably, the TDS will be levied only on the extra sum. For instance, if the total payment for goods purchased to be made by Mr. A to Mr.B stands at Rs 62,00,000, the TDS deduction would be calculated as follows: Rs 62,00,000-Rs 50,00,000 = Rs 12,00,000 TDS= Rs 0.1% (12,00,000)= Rs 1,20,000

What are the experts saying? 

Bhavesh Jindal, a Ludhiana-based Chartered Accountant and a Tax associate with Ashwani and Associates say that the Finance Act, particularly sections 206ABand 206CCA, leaves a lot of room for contradictions and unanswered questions.

Critical issues by way for FAQ for new Section 206AB

“As simple as it may sound, it has a lot of complexities to ascertain which two preceding years will be considered. It has also increased the compliance burden of the large corporate and MNCs, which have a large number of deductees, making it very easy to lose track. In fact, the department, with this rule, has created a certain contradiction, as filing of return is not mandatory if income is less than Rs. 2,50,000/-. Yet this section makes filing of return mandatory indirectly, to avail refunds of TDS/TCS or suffers higher deductions”

Section 206AB introduces a higher levy of TDS on tax defaulters from 01st July 2021

Section 206AB introduces a higher levy of TDS on tax defaulters from 01st July 2021

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:

 

1) Budget 2021 will see the introduction of Section 206AB:

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:

  • (i) at twice the rate mentioned in the applicable Act provision;
  • (ii) at twice the rate or rates in effect; or
  • (iii) at a rate of 5%.

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.

Discussion related to the credit of the TDS

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.

Lower TDS certificate

Application for the NIL / Lower TDS Deduction Certificate for FY 2020-21 may be made from 28 February 2020.

Under the provisions of the Income Tax Act, deduction of tax deducted at Sources (TDS) is mandatory while making payments. The taxpayer making the payment must deduct the TDS and deposit it to the Department of Income Tax before the assigned due date for depositing the TDS.

At times, the TDS is deducted from the total income of the taxpayer, i.e. the recipient, whereas the total tax liability of the taxpayer is calculated on the profit of that financial year. It is in accordance with the prevailing income tax rates/rules which may be less than the total amount of the TDS deducted.

In those cases, TDS will be deducted first, and the taxpayer can claim the refund of the excess amount of TDS deducted while filing the return on income tax (ITR). But the whole process turns out to be a hassle for many taxpayers because firstly TDS is deducted and later on the taxpayer asks for its refunds by filing ITR.

To make it easy, 

Section 197 has been issued by the government which allows taxpayers to use the Nil / Lower  Deduction of the TDS Certificate. But often the process of obtaining the Nil / Lower Deduction TDS Certificate takes a lot more time than expected.

To address this issue, the Government is allowing taxpayers to apply for the Nil / Lower TDS Deduction Certificate for the financial year 2020-21 from 28 February 2020.

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