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Higher rate of TDS & TCS for Non-Filers

Introduction 

The concept of tax deductible at source (TDS) was introduced with an aim to collect taxes at the time of generation of income. A person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government as per the prescribed rates of tax. The deductee would be entitled to claim the credit of the tax so deducted by the deductor on the basis of TDS certificate issued by the deductor. 

In order to encourage people to file their income tax returns, a new provision under section 206AB of the Income Tax Act, 1961 is made applicable with effect from 01/07/2021, based on which deductors may have to deduct TDS at higher rate in case the deductee has not filed the Income Tax returns for 2 years and subject to other conditions. 

Overview of section 206AB 

  1.  Applicability of provisions of section 206AB: 

 

  1. Applicable on payments to be made to specified persons: 

“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: 

Provided that the specified person shall not include a non-resident who does not have a permanent establishment in India.” 

Therefore, all the following conditions must be satisfied in order to term the deductee as a specified person: 

 a. Deductee has not filed the return of income for both of the two assessment years relevant to the previous years immediately before the previous year in which tax is required to be deducted;                                                

      AND 

 b. The due date to file such return of income, as prescribed under Section 139(1), has expired;  

       AND 

c. The aggregate amount of tax deducted and collected at source is Rs.50,000/- or more in his case in each of these two previous years. 

 

  1. Rate of TDS if payment is made to a specified person: 

In cases where section 206AB is applicable and payment is to be made to a specified person, then TDS needs to be deducted at a higher of the following rate: 

a. Twice the rate specified in the relevant provision 

b. Twice the rate or rates in force 

c. At rate of 5% 

 

  1. In case where the specified person has not provided his PAN to the deductor, then TDS shall be deducted at a rate higher than the following:

a. Rates provided in this section

b. or At the rate of 20%. 

Ambiguity in the term ‘’in his case’’ for specified person and clarification from CBDT  

The third condition of specified person provides that the aggregate TDS and TCS in his case has to be greater than Rs.50,000/- in each of the two previous years. The moot question here is the meaning of the term ‘’in his case’’ because there are two views possible as under;  

1) Aggregate amount of Tax deducted and Tax collected at source by the deductor himself against payment to the payee 

AND 

2) Aggregate amount of Tax deducted and Tax collected at source by all the parties against payments to the payee 

CBDT Circular No.11 of 2021 dated 21/06/2021 provides that the Income Tax Portal has introduced a functionality where deductor can feed the PAN of the deductee and would get a response from the functionality if such deductee is a specified person or not. Therefore, before withholding tax, the deductors are advised to examine the Income Tax functionality and check whether the deductee is classified under the category of specified person or not. If the deductee is classified as specified person, then the deductor will have to withhold tax at a higher rate. Needless to mention, the response generated from the compliance portal has to be preserved by the deductors for documentation purpose. 

Due dates of filing ROI u/s 139 get expired in middle of the year and due dates are different for various assessee’s 

Going by the plain reading of the provisions, it seemed that deductor would have required to check whether the due date for filing original return of income u/s 139(1) for the immediately preceding year has expired or not because in the initial months of the year, due date for filing return of income u/s 139(1) for the immediately preceding year would not have expired, however at a later stage the due date u/s 139(1) for the immediately preceding year would expire.  

CBDT Circular No.11 of 2021 dated 21/06/2021 gives an impression that the two assessment years relevant as on the first day of the relevant year in which TDS is to be deducted has to be considered for the entire year i.e., irrespective of the date of deduction of TDS, the relevant two assessment years for the taxes to be deducted at source (under this provision) for the period 01/07/2021 to 31/03/2022 would be A.Y 2019-20 and A.Y 2020-21. Therefore, if the deductee is stated to be non-specified person on the compliance functionality as on 01/07/2021, then the said deductee would continue to be non-specified person till 31/03/2022.     

Examples 

Below are few examples for better understanding of the above discussed provisions:  

  1. Chris provided professional services worth Rs.10,00,000/- to ABC Ltd on 20/06/2021. Chris informs ABC Ltd that he has not filed return of income for the A.Y 2019-20 but has filed return of income for the A.Y 2020-21. From the records of ABC Ltd, amount of TDS deducted in the A.Y 2019-20 and A.Y 2020-21 is Rs.55,000/- in each year. Whether ABC Ltd is required to deduct TDS at higher rates as prescribed u/s 206AB? 

- The provisions of section 206AB of the IT Act are applicable with effect from 01/07/2021 and hence there is no need to check for any of the conditions laid down in the new provisions and accordingly there is no question of deducting TDS at higher rates.   

  1. What if the date of service in the above example is 10/07/2021 instead of 20/06/2021? 

- One of the condition for a person to fall under the meaning of specified person is that he should not have filed the income tax return for both the assessment year preceding the year in which payment is to be made. Here, although Chris has not filed the income tax return for the A.Y 2019-20, but has filed the income tax return for the A.Y 2020-21 and therefore ABC Ltd is not required to deduct tax at higher rates as prescribed under section 206AB. 

  1. United Ltd is likely to pay a rent of Rs.2,25,000/- to Mr. Evra for the period July 2021 to March 2022. Total TDS deducted by United Ltd in the preceding two years is Rs.60,000/- each. Mr. Evra informs United Ltd that he has not filed the return of income in any of the previous years. Whether United Ltd requires to deduct TDS at a higher rate as prescribed u/s 206AB while making payment to Mr. Evra? 

- The total amount of rent payable for the entire year 2021-22 is below the threshold limit as prescribed under section 194-I of the Income Tax Act, 1961 and hence no TDS is required to be deducted while making payment by United Ltd to Mr. Evra, irrespective of the fact that Mr. Evra falls under the category of specified person. 

      4. DEF Ltd has to pay a sum of Rs.1,25,000/- to Mr. Ron on account of professional services. Mr. Ron has not filed his return of income for the two previous years as he was not required to file the return of income. DEF Ltd has deducted TDS in the earlier two years in excess of Rs.50,000/-. Whether DEF Ltd requires to deduct TDS at a higher rate as prescribed u/s 206AB while making payment to Mr. Ron? 

- If Mr. Ron is classified as a specified person in the Income Tax compliance functionality, then DEF Ltd may have to deduct TDS at higher rate as prescribed u/s 206AB while making payment to Mr. Ron. 

       5. Abhishek Ltd has to pay an interest of Rs.5,00,000/- to Mrs. Kavita on 31/07/2021. Abhishek Ltd is informed that Mrs. Kavita has not filed her income tax return for the A.Y 2019-20 and A.Y 2020-21. Aggregate TDS/TCS deducted/collected of Mrs. Kavita in the A.Y 2019-20 was Rs.51,000/- and A.Y 2020-21 was Rs.46,500/-. Whether Abhishek Ltd is required to deduct TDS at the higher rate as prescribed under section 206AB? 

- One of the conditions is that the aggregate TDS in the case of the deductee has to exceed Rs.50,000/- in each of the two previous years. Here, in the A.Y 2020-21, aggregate TDS deducted by Abhishek Ltd against payment made to Mrs. Kavita is below Rs.50,000/- and hence Abhishek Ltd should not be required to deduct higher rate of TDS as prescribed u/s 206AB.  

     6. MU Ltd is likely to deduct TDS while making payment to a Non-Resident of India, Mr. Bruno on 31/07/2021 on account of professional services. Mr. Bruno has a permanent establishment in Mumbai and has not filed the return of income for the A.Y 2019-20 and A.Y 2020-21. Aggregate TDS deducted of Mr. Bruno in the A.Y 2019-20 and A.Y 2020-21 is Rs.55,000/- and Rs.61,000/- respectively. Whether MU Ltd is required to deduct TDS at a higher rate as prescribed u/s 206AB?  

- Provisions of section 206AB are not applicable to a Non-resident of India, who do not have a permanent establishment in India. Here in the given case, Mr. Bruno has a permanent establishment in India and hence the provisions of section 206AB would be applicable. Mr. Bruno has not filed the return of income for the previous two assessment years and the aggregate TDS deducted by MU Ltd is above Rs.50,000/- in both the years and hence MU Ltd TDS will have to deduct at a higher rate as prescribed u/s 206AB. 

 

Flowchart for applicability of higher rate of TDS 

 

 

 

 

 

#Section other than section 192/192A/194B/194BB/194LBC/194N 

Consequences of deduction at a lower rate 

If the deductor has deducted taxes in accordance with the provisions of relevant section viz., 194, 194A, 194C, 194J, 194-I, etc and if it is held that the deductor under the circumstances was required to deduct TDS at the rates prescribed under section 206AB of the Income Tax Act, 1961, then: 

  1. Asseesse-in-default proceeding can be initiated against the deductor (payer) and shortfall amount of tax can be recovered from the deductor along with interest. 

  1. Penalty proceeding can also be initiated for failure to comply with TDS provisions. 

The deductor can avoid assessee-in-default proceedings if; 

  1. Payee/deductee is a resident and has filed return of income for the relevant year AND 

  1. Payee has taken into account such sum for computing income in the return AND 

  1. Payee has paid the tax due on the said income AND 

  1. Presents Form 26A from a Chartered Accountant. 

Similar amendment for TCS at higher rate if payment received from specified persons  

  1. Section 206CCA: 

  1. A similar Section 206CCA has been inserted to provide that the collector shall collect tax at a higher rate if the collectee is a specified person. The collector shall collect tax under this provision at the higher of the following rates: 

i. Twice the rate specified in the relevant provision of the Act; or 

ii. At a rate of 5%. 

  1. If the collectee has neither furnishes PAN or Return of income, then the collector shall collect tax at rates 

i. Provided in this section or  

ii. At the rate of 5%, whichever is higher. 

Comments 

Although all transactions may not get covered under this new provision, but the onus is on the deductor/collector to ensure that they properly comply with the provisions as every transaction wherein deduction of Tax/collection of tax is required, has to be passed through this test of specified persons and deductor/collector is required to check whether the deductee/collectee falls in the category of specified person or not. To discourage non-filers of the Income Tax Returns, a higher rate of TDS/TCS is made applicable with responsibility being shouldered on the deductors/collectors, who cannot afford to put a foot wrong while complying with the provisions given the fact that non-compliance may lead to severe consequences. 

There were uncertainties with reference to the meaning of the term ‘’in his case’’ and whether or not the deductor has to consider the immediately preceding year after the period of filing return of income u/s 139(1) for that immediate preceding year gets expired. Thus, the circular from the CBDT has not only cleared the minds of the deductors but also the professionals and introduction of the compliance check functionality on the Income Tax Portal could go a long way in building standard procedure and refraining declarations. 

Higher rate of TDS & TCS for Non-Filers
Articleship at GBCA