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. 

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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.

TDS Payment with respect to Life Insurance Policy

As per recent provisions, any payment in respect of life insurance policy to a resident individual shall be subject to TDS at the rate of 1% under Section 194DA. The tax shall be deducted under this provision at the time of payment, if amount payable increases Rs. 1 lakh. Tax is not required to be deducted if amount payable under an insurance policy is removed from tax under Section 10(10D) or the amount is received on the occasion of death of the insured person.

An amendment has been proposed under this section as taxpayers were facing hardships due to reduction of tax from the gross amount whereas they were liable to pay tax only on overall income. Usually, in Chapter XVII tax is required to be deducted on the amount paid or payable and not on the income component except in Section 192 and Section 195. The Finance Bill has proposed an amendment to Section 194DA which needs the deductor to deduct tax only on the income com-ponent comprised in the insurance pay-roll. This amendment has been proposed so that the income as per TDS return of the deductor can be matched automatically with the return of income filed by the assessee. The tax shall be deducted at the rate of 5% computed on the income component (in contrast to 1% on the gross amount).

The provisions of Section 194DA does not give any mechanism for computation of taxable in-come in case of insurance policies. When an insurer takes the insurance policy, he gets the right to receive amount due against his insurance policy either on maturity or on its surrender. Therefore, right to receive sum from insurance policy is a capital asset within the meaning of section 2(14) and any income or losses arising on its transfer shall be chargeable to tax under the head ‘Capital Gains’. If an insurance policy has been held for more than 36 months, it shall be considered as long-term capital assets, accordingly the benefit of cost inflation index shall be given while computing the amount of capital gains.

Example, In Financial Year 2013-14, Mr A buys an insurance policy of Rs. 50 lakhs (for a term of 20 years) by making payment of the premium of Rs. 10 lakhs. He surrenders the policy for Rs. 15 lakhs on 01-10-2019. Prior to the Finance Bill, 2019, the payer insurance co. was required to deduct tax at the rate of 1% on total sum paid (i.e., Rs. 15 lakhs) to Mr. A. However, after the proposed amendment, tax shall be deducted at the rate of 5% on the net income and not on the gross amount paid to insured (Mr A).

Thus, the insurance agency will be required to compute the taxable amount in hands of Mr. A. In this case, long term capital gains will arise in the hands of Mr. A as period of holding is more than 36 months. Let’s assume the cost increase index for the financial year 2019-20 is 289, the indexed cost of acquisition of such insurance policy shall be Rs. 13,13,636 lakhs (Rs. 10 lakhs * 289 (CII for FY 2019-20)/220 (CII for FY 2013-14). Thus, the long-term capital gains in such case shall be Rs. 1,86,364 lakhs (i.e. Rs. 15,00,000 less Rs. 13,13,636 lakhs). Insurance company shall deduct tax under Section 194DA at the rate of 5% on the taxable income only – Rs. 9,318 (5% of Rs. 1,86,364 lakhs).

As section 194DA does not prescribe any mechanism for computation of Income, the income from surrender or maturity of insurance policy shall be calculated in the manner as given above.

Enquire with Certicom Consulting in case of any queries.