TDS/TCS on non filer at higher rates: Effective from 1-7-2021, tax will be deducted (TDS) at a higher rate for non-filers of return of income whose aggregate amount of tax deducted or collected exceeds Rs. 50,000 referred to as ‘specified person’ in the law. This is provided in section 206AB of the Income Tax Act, 1961 (“Act”). A similar provision is inserted in the statute as section 206CCA for tax collection at source (TCS) at a higher rate than the prescribed rates of TCS for a ‘specified person’ who is a non-filer of return of income for the preceding two assessment years and his aggregate amount of TCS exceeds Rs. 50,000 in each of these two assessment years. It is further provided that in case of non-availability of PAN then the rate of TDS as per section 206AA or rate of TDS as per section 206AB whichever is higher shall prevail.
The discussion is mainly confined to the provisions of section 206AB which provides for a higher rate of TDS for non-filers on return of income (ITR). Section 206CCA provides for a higher rate of TCS for non-filers and is discussed at appropriate places.
Objectives for introducing section 206AB
The objectives for introducing the provisions for TDS/TCS on non-filers at higher rates are stated in the Memorandum Explaining the Provisions of the Finance Bill, 2021.
Section 206AA of the Act provides for a higher rate of TDS for non-furnishing of PAN. Similarly, section 206CC of the Act provides for a higher rate of TCS for non-furnishing of PAN. It is seen that while these provisions have served their purpose in ensuring obtaining and furnishing of PAN by various persons, there is a need to have similar provisions to ensure filing of return of income by those persons who have suffered a reasonable amount of TDS/TCS.
Hence, a new section 206AB in the Act is inserted as a special provision providing for a higher rate for TDS for the non-filers of the income tax return. Similarly, section 206CCA is inserted in the Act as a special provision for providing for a higher rate of TCS for non-filers of the income tax returns.
Thus, the basic intention of introducing these provisions is to ensure the filing of returns by those persons who have suffered a reasonable amount of TDS/TCS. Section 206AB and section 206CCA prescribes the reasonable amount of TDS/TCS at Rs. 50,000 in aggregate in a financial year.
This is despite the fact that the person may not be otherwise required to file the return of income under section 139 if his total income is less than the basic exemption amount of Rs. 2,50,000.
Note:
1. These provisions otherwise make filing of return compulsory even though the deductee is not otherwise mandatorily required to file return of income under section 139.
2. The provisions state that in case a person does not file his return of income for the last two previous years the section 206AB/206CCA will apply for him. Thus a deductor will deduct a higher rate of TDS or collect a higher rate of TCS if he is non-filer as on 1.7.2021. Now, as of 1-7-21, the preceding two previous years for which filing of return status will be considered is FY 2018-19 (AY 2019-20) and FY 2019-20 (AY 2020-21). The due date, as well as the due date to file the belated return for both these two years, are expired now. Hence, even if a person’s TDS is more than Rs. 50,000 but his total income was less than rs. 2,50,000 and if he did not file his return of income then he has to suffer a higher rate of TDS/TCS despite the fact that there was no requirement to file the return of income u/s 139 in these two past assessment years. Hence, applying the provision from FY 2021-22 itself is a harsh provision on these persons.
Basic Provisions of section 206AB
Finance Act, 2021 has inserted a new provision section 206AB in the Income Tax Act, 1961 to provide for the higher rate of TDS in certain cases. Similarly, a new section 206CCA is also inserted for higher rates of TCS in some cases.
Section 206AB reads as follows
Special provision for deduction of tax at source for non-filers of income-tax return.
206AB. (1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be deducted at source under the provisions of Chapter XVIIB, other than section 192, 192A, 194B, 194BB, 194LBC or 194N on any sum or income or amount paid, or payable or credited, by a person (hereafter referred to as deductee) to a specified person, the tax shall be deducted at the higher of the following rates, namely:—
(i) at twice the rate specified in the relevant provision of the Act; or
(ii) at twice the rate or rates in force; or
(iii) at the rate of five per cent.
(2) If the provisions of section 206AA is applicable to a specified person, in addition to the provision of this section, the tax shall be deducted at higher of the two rates provided in this section and in section 206AA.
(3) For the purposes of this section "specified person" means 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.
Explanation.—For the purposes of this sub-section, the expression "permanent establishment" includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.
Analysing the text of section 206AB
Overriding effect of Section 206AB
This section begins with the phrase “Notwithstanding anything contained in any other provisions of this Act” which makes this provision a non-obstante provision.
‘Non-obstante’ is a Latin word which means ‘notwithstanding anything contained'. That means this clause empowers the legislation or a provision in which it contains, to override the effects of any other legal provisions contrary to this under the same law or any other laws.
Section 206AB is a non-obstante clause and overrides the entire Income-tax Act but has an overriding effect only on the provisions related to deduction of income-tax under Chapter XVIIB of the Income-tax Act.
It means whatever is stated for the deduction of tax in this Act if the deductee is a non-filer of return of income and if his aggregate amount of TDS in a financial year exceeds Rs. 50,000 then tax shall be deductible at a higher rate irrespective of what is written in any other TDS provisions. Thus ignore any other provisions of TDS if tax is otherwise deductible on the payments made to the deductee. The clause following the non-obstante clause shall prevail over anything contrary to this clause. It means provisions of section 206AB shall prevail over other sections, say section 194C or section 194H or any other provisions in case of a non-filer of return of income.
Section 206AB is a Special Provision
The heading of section 206AB expressly states that the provisions of this section are special provisions and thus shall specifically apply only to non-filers at the time of deduction of tax. In other words, if tax is required to be deducted from the payments, then the filing status of the deductee is required to be checked at the time of deduction of tax. In the case of non-filers, this special provision shall apply over the general provision.
Overriding effect of section 206AB on the rate of TDS only
The applicability of special provisions or overriding effects of section 206AB & 206CCA shall be limited to the applicability of the rate of TDS only. It does not in any manner affect the applicability of the nature of TDS from a particular payment. For example, if any payment is made to a contractor for carrying out any work then the payment is covered under the provisions of section 194C. Now if the payee is a filer then the normal rate of TDS of 1% (for individuals) or 2% (other than individuals) as specified for section 194C shall prevail.
In case the payee is a non-filer and a specified person as per the special provisions of section 206AB/206CCA then by virtue of the overriding effect of the provisions of section 206AB, the rate of TDS shall be determined as per section 206AB(1) and not as per section 194C. Hence, section 206AB shall have an overriding effect for the rate of TDS only and not for the nature of the payment. Hence, in this case, tax will be deductible under section 194C but at the rate of 5% as per section 206AB instead of 1% or 2%.
Exclusion from the applicability of section 206AB
The provisions of section 206AB related to deduction of tax at a higher rate for a non-filer of return of income shall not apply in the following cases-
The basic intention of introducing a higher rate of TDS under this section is to encourage more people to file their returns. Hence, where the rate of TDS is already at the maximum rate of 30%, the same is excluded.
The exclusion means a deductor is not required to verify whether the deductee is a filer or a non-filer. Thus when a person is making a payment to a lottery winner, the payer is not required to check whether the winner is a filer or non-filer. The payer will deduct TDS @ 30% in any case. Similarly, an employer is not required to verify whether the employees are filers or non-filers. The employer has to deduct tax at the applicable rates of the employees.
Note: Pension to employees falls under the head ‘salary’ and tax is deductible under section 192, hence, section 206AB will not apply to a pensioner. In case of family pension, the same is taxed under the head ‘Income from other sources’. In other words, ‘Family Pension' is chargeable to tax under the head “Income from other sources” and not under the head “Salaries”. Therefore, provisions of section 192 of the Act are not applicable. Hence, tax is not required to be deducted on family pension.
Anomaly in the expression used in Section 206AB
In sub-section (1), after the words “any sum or income or amount paid, or payable or credited, by a person” it is written in the brackets that such person shall be referred to as the ‘deductee’ in the following words- “(hereafter referred to as deductee)”.
There are two anomalies in this expression. Firstly, it should be referred to as a ‘deductor’ and not a ‘deductee’. Secondly, the word ‘deductee’ is not used anywhere in the provision except in the bracketed expression. Thus this expression is superfluous.
Higher rate of TDS under section 206AB
Section 206AB prescribes deduction of tax at a rate higher than the normal prescribed rate of TDS.
Under the Income-tax Law, the rate of TDS is prescribed in the following places-
1. In the TDS section of the Income-tax Act itself like section 194, section 194C, section 194H, etc.
2. In the relevant year Finance Act like section 192, section 194A, section 194B, etc. The rate of TDS as prescribed in the annual Finance Act is known as ‘rates in force’.
3. Apart from the above two places, the rate of TDS is also provided in section 206AA and section 206AB.
Sub-section (1) provides for a higher rate of TDS in the following manner-
Illustration: Mr. Rakesh is a specified person i.e. a non-filer as per section 206AB and thus any person making any payment which is subject to TDS shall attract a higher rate of TDs as per section 206AB as illustrated below-
Specified Person as per Section 206AB
The law has not used the expression ‘non-filers’ so not defined the term. Only the heading of section 206AB has used the expression ‘non-filers of income-tax return’. Instead, the provision has referred to the words ‘specified person’
Section 206AB(1) provides that where a person makes any payment or credit any amount to a ‘specified person’ then tax shall be deducted at a higher rate as stated above.
Sub-section (3) of section 206AB states that for the purposes of this section "specified person" means -
(i) 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
(ii) 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.
A person shall be a ‘specified person’ if he satisfies both the above two conditions.
Thus, the basic ingredients of Section 206AB(3) defining the term ‘specified person’ are as follows-
1. Filing of returns for last two years: According to section 206AB(3), if a person has not filed his income tax return for the last two assessment years then he will be considered as a non-filer. However, the draft language suggests two interpretations on this issue-
View (i) The person has not filed the income tax return for those two assessment years for which the due date of filing of return as specified under section 139(1) is expired. In other words, the time limit for filing of the income-tax return (ITR) under sub-section (1) of section 139 of the Act has expired for both these assessment years to be computed from the previous year in which tax is required to be deducted.
Illustrating the same with an example. If the tax deduction previous year is 2021-22, then as per this interpretation, the last two assessment years (or previous years) for which time limit to file return of income has expired are as follows-
Comments: In this case, the tax is being deducted in the previous year 2021-22 and the last two assessment years for which the due date to file the return of income is expired are AY 2019-20 and AY 2020-21. Since the due date to file the return of income u/s 139(1) for the AY 2021-22 is not expired, the same is not considered.
One should remember that the first due date to file ITR u/s 139(1) is 31st July 2021 for the AY 2021-22 (PY 2020-21), though it is extended to 30th September 2021 for AY 2021-22 due to the COVID-19 pandemic. However, the fact of extension is ignored for simplicity. Hence, from 1st August 2021, the applicable assessment years for individuals having no tax audit, HUF, etc., will be AY 2021-22 and AY 2020-21 and not AYs 2019-20 and 2020-21. But for Companies, etc. AY 2019-20 and AY 2020-21 will be applicable.
View (ii) The language of section 206AB(3) alternatively suggests that the status of filing of return of income for the immediately last two previous years from the tax deduction year needs to be checked. In case the due date for filing of return of income for anyone previous year is not expired then only the status of return filing of that previous year is required to be verified for which the due date is expired. In other words, if the due date to file the return of income under section 139(1) of any of the two previous years, immediately preceding the current previous year (in which tax is being deducted) has not expired, then there is no need to deduct tax at higher rates as per section 206AB.
Illustrating the same with an example. If the tax deduction previous year is 2021-22, then as per this interpretation, the last two assessment years (or previous years) shall be computed as follows-
Comments: As per this interpretation, the last two immediate assessment years are AY 2021-22 and AY 2020-21. Since the due date to file the ITR u/s 139(1) for any category of the assessee for the AY 2021-22 has not yet expired, the return filing status of only one AY 2020-21 needs to be checked.
One should remember that the first due date to file ITR u/s 139(1) is 31st July 2021 for the AY 2021-22 (PY 2020-21), though it is extended to 30th September 2021 for AY 2021-22 due to the COVID-19 pandemic. However, the fact of extension is ignored for simplicity. Hence, from 1st August 2021, the applicable assessment years for individuals having no tax audit, HUF, etc., will be AY 2021-22 and AY 2020-21 and not AYs 2019-20 and 2020-21. But for Companies, etc. AY 2019-20 and AY 2020-21 will be applicable.
Conclusion: Thus, there are two possible interpretations for selecting the relevant two assessment years for verifying the filing status. As per the explanatory memorandum to the Finance Bill, “The specified person is a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years which are immediately before the previous year in which tax is required to be deducted or collected, as the case may be. Further, the time limit for filing a tax return under sub-section (1) of section 139 of the Act has expired for both these assessment years.”
Going by the stated objective and in consonance with the spirit with which such changes are introduced, view (i) seems to be a more appropriate interpretation and needs to be followed. It is on a safer side to verify the ITR filing status of the deductee for the last two assessment years, prior to the current FY in which tax is being deducted, whose due date to file the return of income under section 139(1) has expired.
This is strengthened further on the fact that if AY 2021-22 is taken, then the other condition of the aggregate amount of TDS of Rs. 50,000 or more cannot be ascertained before 31st May, since the TDS statement/return for the 4th quarter of the FY 2020-21 will be delivered by that date (though this time the time limit to furnish the TDS statement for the 4th quarter is extended to 15th July 2021).
Note: CBDT Circular 11/2021 also fortifies this view.
2. Aggregate amount of TDS: In order to be a specified person for section 206AB, apart from return filing status, there is another condition that aggregate of tax deducted at source and tax collected at source, in this case, is Rs. 50,000 or more in each of these two previous years. In other words, only when the aggregate amount of TDS/TCS of the deductee exceeds Rs. 50,000 in aggregate in each of the two relevant assessment years, then the question of verifying his filing status will trigger.
In this context, it should be remembered that the aggregate amount of TDS is specific deductee wise and not the amount of TDS between the deductor and deductee. For example, if Mr. A is making a payment to Mr. B and tax is required to be deducted by Mr. A, then the aggregate amount of TDS of Mr. B from all the deductors for the two relevant assessment years needs to be checked. It is not limited to the amount of TDS between Mr. A and Mr. B in the last two relevant assessment years. Even if Mr. A has not deducted any TDS in the last two relevant assessment years or Mr. A is making the payment for the first time in FY 2021-22, the aggregate amount of TDS/TCS of Mr. B in excess of Rs. 50,000 needs to be checked.
Further, the cumulative amount of TDS and TCS shall be more than Rs. 50,000 in these two relevant assessment years. If anyone of TDS or TCS exceeds Rs. 50,000/-, the provisions of section 206AB will trigger. For example, if TDS is Rs. 40,000 and TCS is Rs. 20,000 then the provision gets attracted. Similar will be the case if TDS is Rs. 60,000 and TCS is Rs. Nil.
The condition that the deductee's aggregate amount of TDS/TCS must exceed Rs. 50,000/- in each of the two relevant assessment years means the two assessment years for which the due date to file the return of income u/s 139(1) has expired as discussed above.
Illustration: The conditions for applicability of section 206AB are thus discussed below-
Note 1: The plain reading of section 206AB suggest that the first condition to check is whether the person has filed his return of income for both the two relevant assessment years. Thereafter, one needs to check whether the aggregate amount of TDS/TCS exceeds Rs. 50,000 in each of these two assessment years. If the aggregate amount of TDS/TCS exceeds in one AY and in another year if aggregate TDS/TCS does not exceed Rs. 50,000 then the provisions of section 206AB will still apply. This is because of the conditions of aggregate TDS of Rs. 50,000 or more is required to be satisfied for each of the last two assessment years which is different from 'both the assessment years'. Hence, in case III above, section 206AB shall apply if ITR for AY 2019-20 is not filed.
Thus, the specified person is a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years which are immediately before the previous year in which tax is required to be deducted or collected, as the case may be. Further, the time limit for filing a tax return under sub-section (1) of section 139 of the Act has expired for both these assessment years. There is another condition that 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.
The first proviso to section 206AB(3) further states that the 'specified person' shall not include a non-resident who does not have a permanent establishment in India.
Section 206AB is applicable on any ‘Person’
Section 206AB is applicable to any ‘person’ - be it a deductor or be it a deductee. Thus, it is not confined to individuals or companies or firms, but it covers every person. According to section 2(31) of the Act, "person" includes—
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.
Applicability of section 206AB on Non-residents
Section 206AB nowhere states that the higher rate of TDS shall apply only to a resident non-filer of ITR. In fact, it refers to a specified person which covers both the resident and non-resident person.
However, section 206AB(3) expressly excludes only those non-residents who do not have a permanent establishment in India. Hence, non-residents having a permanent establishment in India are covered by the provisions of section 206AB.
It is further clarified that the expression "permanent establishment" includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. The provisions of section 206AB don’t apply to a non-resident who does not have a PE in India.
Section 206AB and Requirement to file return of income under section 139
The law relating to the filing of return is governed by section 139 of the Act. According to section 139(1)(a) read with the third proviso to section 139, every company or a firm shall furnish on or before the due date the return in respect of its income or loss in every previous year. Thus, a company or a firm is mandatorily required to furnish its return every year irrespective of its quantum of income or loss or even if it has no or nil income.
In contrast, section 139(1)(b) read with 6th proviso to section 139, every person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, whether incorporated or not or an artificial juridical person, if his total income without giving effect to the provisions of
clause (38) of section 10 or
section 10A or
section 10B or
section 10BA or
section 54 or section 54B or section 54D or section 54EC or section 54F or section 54G or section 54GA or section 54GB or
Chapter VI-A
exceeded the maximum amount which is not chargeable to income-tax, shall, on or before the due date, furnish a return of his income.
Hence, in the case of an individual, HUF, AOP, BOI, AJP, filing of return is mandatory only if the total income (before giving effect to the above provisions) exceeds the basic exemption limit of Rs. 2,50,000. If the total income does not exceed Rs. 2,50,000 then such a person is not required to file any return of income.
Thus there is no provision that mandates the filing of return on the basis of the quantum of TDS prior to the introduction of section 206AB.
However, there are certain non-income based criteria of filing of return of income like foreign assets, seventh proviso to section 139, etc. But all these also do not mandate the filing of any return on the basis of TDS/TCS.
Henceforth, if TDS/TCS exceeds Rs. 50,000 in any financial year, such a person is required to file the return of income in order to avoid a higher rate of TDS even if his total income does not exceed the basic exemption limit of Rs. 2,50,000.
Senior Citizens and Very Senior Citizens
The basic exemption limit for a senior citizen is Rs. 3,00,000 whereas a very senior citizen who is 80 years or above have a basic exemption limit of Rs. 5,00,000. Those senior/very senior citizens’ whose income comprises pension and/or interest on bank deposits normally do not file a return of income if the total income does not exceed Rs. 3,00,000 or Rs. 5,00,000 respectively.
Those senior citizens will now face the wrath of section 206AB in the form of a higher rate of TDS which may go up to 20% if their aggregate TDS exceeds Rs. 50,000.
Section 194P and Applicability of section 206AB
Section 194P is inserted in the statute by the Finance Act, 2021 in order to provide relief to senior citizens who are of the age of 75 years or above and to reduce compliance for them.
The new section 194P provides relaxation from filing the return of income if the following conditions are satisfied:-
(i) The senior citizen is resident in India and of the age of 75 or more during the previous year;
(ii) He has pension income and no other income. However, in addition to such pension income he may also have interest income from the same bank in which he is receiving his pension income;
(iii) This bank is a specified bank. The Government will be notifying a few banks, which are banking company, to be the specified bank; and
(iv) He shall be required to furnish a declaration to the specified bank. The declaration shall be containing such particulars, in such form and verified in such manner, as may be prescribed.
Once the declaration is furnished, the specified bank would be required to compute the income of such senior citizen after giving effect to the deduction allowable under Chapter VI-A and rebate allowable under section 87A of the Act, for the relevant assessment year and deduct income tax on the basis of rates in force. Once this is done, there will not be any requirement of furnishing return of income by such senior citizens for the assessment year.
Hence, section 194P expressly provides for exemption from filing of return of income if the conditions mentioned therein are satisfied.
Now, a question arises if such a senior citizen does not furnish return of income under section 139 due to the applicability of section 194P then whether section 206AB will apply for deduction of tax at a higher rate on FD or other interest so paid by the banks.
In this context, it is to be noted that both section 194P and section 206AB is a non-obstante clause and therefore have an overriding effect. However, both the provisions override each other and thus have a circular overriding impact. Section 194P overrides every other provision of Chapter XVIIB of the Act whereas section 206AB overrides any other provision of the Income-tax Act. However, both the sections - Section 194P and section 206AB are placed in Chapter XVIIB of the Act.
Section 206AB neither contains any express provision on the issue nor included section 194P in the excluded lists of sections. Thus, it has to be interpreted in such a manner to give objective meaning to both the provisions in the right spirit of the legislative intent.
It is a case when there is a non-obstante clause in more than one provision. When two or more provisions operate in the same field and each contains a non-obstante clause, cases of conflict have to be decided in. reference to the object and purpose of the provision under consideration.
When two or more laws or provisions operate in the same field and each contains a non-obstante clause stating that its provision will override those of any other provisions of law, stimulating and intricate problems of interpretation arise.
In resolving such problems of interpretation, no settled principles can be applied except to refer to the object and purpose of each of the two provisions, containing a non-obstante clause. Two provisions in the same Act each containing a non-obstante clause requires a harmonious interpretation of the two seemingly conflicting provisions in the same Act.
Further, there is one test in which the newest provisions are given more weight in the overriding effect compared to older ones since the new provisions are enacted keeping in mind the old provision. However, in this case, both the provisions are introduced in the same year by the Finance Act, 2021.
In this backdrop, the interpretation shall be made considering the object and purpose of each of the two provisions.
Section 194P is introduced with an intention to provide relief to certain senior citizens from filing a return of income if tax is deducted from their income. The memorandum as well as the Finance Minister in her Budget speech iterated the objective of the government to exempt senior citizens from the filing of return of income under section 139.
On the other hand, section 206AB is introduced to encourage more people to file their return of income if substantial TDS is deducted. Thus the objective is to generate tax on all other income of the person which did not suffer tax deduction. In the case of section 194P, the entire income of the person is considered and tax is deducted and paid to the government by the concerned bank and thus the object for which section 206AB is introduced is fully satisfied.
Further, if section 206AB operates over section 194P then the provision of section 194P and the consequential relief would become otiose and become redundant.
Hence, to conclude, where no return is filed by a person being a senior citizen, since tax is deducted under section 194P, he will not be considered as a non-filer of return of income for the purpose of section 206AB and a thus higher rate of TDS as specified in section 206AB will not apply. In other words, section 206AB will not operate where no return is filed by virtue of deduction of tax under section 194P.
Section 206AB vis-a-vis Section 206AA
Similar to section 194P and section 206AB, both section 206AA and section 206AB are non-obstante clauses and begin with the same expression and thus overrides all the provisions of the Income-tax act.
Unlike section 194P, the conflict between section 206AA and section 206AB is put to rest in the statute itself. Section 206AB(2) provides that if the provisions of section 206AA are applicable to a specified person, in addition to the provision of this section, the tax shall be deducted at higher of the two rates provided in this section and in section 206AA.
Section 206AA provides that any person who is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVIIB of the Act shall furnish his Permanent Account Number to the person responsible for deducting such tax, failing which tax shall be deducted at the rate mentioned in the relevant provisions of the Act or at the rate in force or at the rate of twenty per cent, whichever is higher.
If a person does not provide his PAN to the deductor then it will not be possible to know whether he has furnished his return or not. Further, in this case, the rate of TDS shall be 20% under section 206AA. In case, the rate of tax is more than 20%, then such a higher rate will prevail.
Hence when PAN of the deductee is not available or is invalid then the deductor has to compare the rate of TDS under section 206AA and section 206AB and then apply the highest rate of TDS on the amount of payment or credit.
In case PAN is not linked with the Aadhaar Number, such a PAN will be considered as inoperative and thus section 206AA will apply accordingly. The government has extended the last date to link the PAN with Aadhaar to 30th September 2021.
Read Also: The Saga of PAN and Aadhaar Linking in Income Tax
Applicability of Section 206AB where any payment is not subject to TDS since below threshold limit
It should be noted that section 206AB is not a provision to cast an obligation to deduct TDS. Rather, this provision only substitutes the rate of TDS with a higher rate in the case of a specified person.
Hence, section 206AB will come into play only when the deductor is required to deduct TDS under any of the provisions contained in Chapter XVIIB of the Act.
For example, if a person makes any payment to a contractor which is subject to TDS under section 194C and the amount of TDS is less than the threshold limit of Rs. 30,000, then no tax is required to be deducted under section 194C and thus the provisions of section 206AB will not apply even if the deductee/contractor is a non-filer in terms of section 206AB.
This is because section 206AB expressly provides that the provisions of section 206AB shall apply where tax is required to be deducted at source under the provisions of Chapter XVII B.
Amendments in Quarterly TDS Returns/Statements in Form 26Q/27Q for Section 206AB
CBDT vide Notification No. 71/2021 dated 8.6.2021 and through Income-tax (17th Amendment) Rules, 2021 has amended Form 26Q and Form 27Q to incorporate the changes introduced by section 206AB for TDS.
In this context, a new tagging code “U” is specified for section 206AB in Form No. 26Q/27Q. Thus, if the deduction is on a higher rate in view of section 206AB for non-filing of return of income (applicable from 1-7-21), the deductor shall tag the record with “U” in the specified column.
As stated earlier, there is no change in the nature of deduction i.e. tax will be deducted under the respective section but the rate will be applied as per section 206AB if the deductee is a non-filer. However, such a record will be tagged with ‘U’ in Form 26Q/27Q. In Form 27Q, the equivalent code is ‘J’ where the TDS rate is applied as per section 206AB.
Applicability of TDS rate as per section 206AB when certificate under section 197 is issued
When a certificate is issued under section 197 authorizing a deductor to deduct tax at a rate specified in the certificate, then the deductor is under obligation to apply the lower TDS rate as per the certificate issued under section 197.
Thus irrespective of the rate specified in any provision or rates in force, the lower TDS rate as specified in the certificate shall prevail over such prescribed rates.
Section 197 is a special provision that provides relief from a higher tax deduction in case deduction of tax at such higher rates is not justified by the total income of the deductee. But, section 206AB is a non-obstante provision that has an overriding effect over section 197.
In this case, the deductor has to check the status of the deductor as per section 206AB. There is no corresponding amendment in section 197 which prohibits or restricts the income-tax department to issue any lower/Nil TDS certificates under section 197. Thus it is not necessary that if the lower rate of TDS is so authorized the deductee cannot be a non-filer.
Section 206AB is inserted to encourage the voluntary filing of returns in case aggregate TDS exceeds Rs. 50,000/-. Thus, if the aggregate amount of TDS of the deductee is Rs. 50,000/-even after applying the lower TDS rate and he is a non-filer as per section 206AB, then the provisions of section 206AB shall apply to him. In this case, the higher rate shall be double the lower rate of TDS as specified in the certificate u/s 197 or 5% whichever is higher.
Section 197 overrides the prescribed rate of TDS with the lower rate of TDS as specified in the certificate so issued under section 197.
Hence, a higher rate of TDS as per section 206AB shall apply to a case where a lower TDS certificate u/s 197 is issued.
Applicability of TDS rate as per section 206AB when Form 15G/15H submitted
In order to provide relief to certain categories of taxpayers from TDS on certain incomes, the income tax law has enshrined the provisions of filing of Form No. 15G and Form No. 15H to the payer or deductor by the payee so that TDS on income can be saved.
Section 197A of the Act and Rule 29C of Income Tax Rules, 1962 contain the provisions related to the filing of Form 15G and Form 15H for non-deduction of income tax or TDS on certain incomes.
When Form 15G or Form 15H is submitted to the payer of the income, the deductor is not required to deduct any tax on the income so paid or payable to the deductee. Hence, when no tax is required to be deducted, provisions of section 206AB will not apply and thus the question of deduction of tax at a higher rate will not arise. Further, if no tax is deducted then the threshold quantum of aggregate TDS of Rs. 50,000 will not come into the picture.
Section 206AB only substitutes the prescribed rate of TDS with a higher rate for non-filers of return of income. When no tax is required to be deducted either by virtue of payment not exceeding the threshold limit or due to filing of Form 15G/15H, provisions of section 206AB will not apply.
Further, section 206AB expressly provides that the provisions of section 206AB shall apply where tax is required to be deducted at source under the provisions of Chapter XVII B.
Applicability of section 206AB to Timely Return filed u/s 139(1) or Belated return filed u/s 139(4)
As per the provisions of section 206AB, a person who has not filed his or its return of income for the last two consecutive assessment years prior to the previous year in which cash is being withdrawn and the time limit to file the return of income as prescribed in section 139(1) has expired then as per the amended provisions TDS on cash withdrawals shall apply on a different threshold limit.
For example, if a person is withdrawing cash on July 7, 2021, then the last three assessment years shall be-
For July 7, 2021, the Current Financial Year is 2021-22 (AY 2022-23)
Last 2 Assessment Years
If the date of the transaction is 7th July 2021, the relevant two years would be-
Since AY 2021-22 (FY 2020-21) is the current previous year in which the transaction is undertaken, the same is out of the purview of section 206AB.
The due date for AY 2021-22 (FY 2020-21) is still not expired. Hence cannot be considered for section 206AB.
Regarding AYs 2020-21 and 2019-20, the due dates specified in section 139(1) have expired and hence can be only considered for the purpose of Section 206AB. The status of a noon-filer can change to a filer if he files his return of income after the expiry of due date but within the time allowed u/s 139(4). However, in these cases, the time limit to file belated return u/s 139(4) is also expired for these two assessment years.
Issues with the filing of return of income and applicability of section 206AB
It is not clear how the deductor will satisfy the condition of filing of return of income by the recipient in the last two assessment years and that too filing within the due date as prescribed in section 139(1).
The task becomes more tedious and cumbersome when we have seen that the due dates were extended many times in the past. Further, the Income Tax Act, 1961 prescribes different due dates for different types of assessees.
It is not clear what will happen to those who are not required to file the return of income due to income below the basic exemption limit. It appears that the rule of lower threshold applies if no return is filed for any reason, for example, if the person is not required to file the return of income since his total income is less than the basic exemption limit. Another view is that when no return is required to be filed there is no requirement to file the return of income and hence the provisions of section 206AB will not apply to them.
Over to all these, it is not clear how the deductors will ensure compliance with this requirement. If the deductors start taking a copy of ITR acknowledgement every time, it will, no doubt, only add to the woes of the deductors.
Further, different Due Dates for filing of return of income for different categories of assessees have been specified under section 139(1) of the Income Tax Act, 1961. These dates are extended from time to time for various categories of assessees.
Apart from the filing of return, there is one more condition that needs to be checked. This is the aggregate amount of TDS of Rs. 50,000 or more of the deductee in each of these two years. This is the cumulative amount of TDS of the deductee from all the sources and is not limited to the TDS amount between the deductee and the deductor. The deductor has to ascertain that the aggregate amount of deductee’s TDS in each of these two years is more than Rs. 50,000.
Under the circumstances, it is not clear how the deductor will ensure compliance with this requirement.
From the language of the provision, it implies that timely filing of return is mandatory for the last two assessment years to avoid the penal provisions of a higher rate of TDS under section 206AB. After the expiry of the due date and till the date of filing of the return, the deductee will be marked as non-filer.
Further, in the case of the new assessee, it is not clear whether the provisions of section 206AB will apply to him or not because he is not in any way file the return of income in the last two assessment years. Hence, the provision of section 206AB shall not be made applicable for the first two years in the case of a new assessee. The filing of return of income criteria and applying a higher rate of TDS under section 206AB will also pose problems where the business is not in existence for two years. How will the deductor ensure this fact?
It appears that there is a deliberate attempt to discourage delay in filing of return of income. The government wants people to file not only his return of income but a timely return of income.
Unless appropriate guidelines are issued by the CBDT, this compliance will be an uphill task. Different interpretations may lead to disputes between the deductor and its vendors. For smooth compliance, it needs support services from the income-tax department so that the return filing status can be obtained by the deductor and TDS can be made accordingly.
Burden on Deductors
It is crystal clear that the burden is on the deductor to prove that he has deducted tax as per normal rates of TDS and not a higher rate of TDs as per section 206AB because the deductee has filed his return of income for the last two assessment years.
Declaration from Deductees to ascertain the applicability of section 206AB
It was initially thought to obtain a declaration from all the deductees. Many deductors started sending formats of declarations for section 206AB to their deductees to inform them about the filing status for the last two assessment years. Also, the aggregate amount of TDS from each of the deductees was also asked for. However, the government has provided an online tool to ascertain the applicability of section 206AB to the deductees based on their PAN. After the introduction of the online compliance tool for section 206AB, the exercise of obtaining declaration from the deductees has become futile.
A deductor can check the filing status of the deductees and applicability of the provisions of the higher rate of TDS as per section 206AB to them. Further, it also provides information about PAN-Aadhaar link status for the individuals. Since, in case of non-linking of PAN with Aadhaar, provision of section 206AA will apply after 30th September 2021 when the last date to link the same expires unless extended further. This online tool to check the compliances under section 206AB and section 206CCA is commonly called ‘Compliance Check for Section 206AB and 206CCA’ and is available on the reporting portal of the income-tax.
Online tool for ascertaining applicability of section 206AB
In order to ensure compliance under section 206AB and section 206CCA, the government has released an online tool for compliance check under Section 206AB and section 206CCA. This will ease the burden of the deductors from obtaining declarations and compiling information for the deductees.
In this context, CBDT has issued an Order u/s 138(1)(a)(i) of the Act for furnishing information of “Specified Persons” as per section 206AB and section 206CCA to “Tax Deductor/Tax Collector” through the functionality “Compliance Check for Section 206AB & 206CCA”.
Further, on the same day on 21st June 2021, CBDT issued Circular No. 11/2021 regarding the use of the functionality under sections 206AB and 206CCA of the Act.
Thereafter, on 22nd June 2021, the Directorate of Systems notified the procedure for Compliance Check for Section 206AB & 206CCA functionality on the reporting portal.
The Directorate of Systems issued ‘Compliance Check for Section 206AB and 206CCA-Quick Reference Guide’ and ‘Compliance Check for Section 206AB and 206CCA- FAQs’ on 21st June 2021 to guide the deductors on using the compliance functionality.
Issues with procedures mentioned in the CBDT Circular on implementation of section 206AB
As stated above, after the introduction of the online tool and issuance of CBDT Circular No. 11/2021, all the declarations collected from deductees for section 206AB and section 206CCA are meaningless.
It is clarified by Circular No. 11/2021 that-
1. All persons have to check this online utility only once during the financial year and that too at the beginning of the previous year.
2. FY 2018-19 and FY 2019-20 to be considered till the due date to file the return of income under section 139(1) does not expire for FY 2020-21.
It means the income-tax department utility will consider three Financial Years for ascertaining the applicability of section 206AB and section 206CCA in the current financial year.
3. The utility will remove the name of ‘Specified persons’ or non-filers as and when they complete their compliances even at a belated date.
Now consider a case. Mr. Rakesh has filed his ITR for the FY 2018-19 and his TDS amount is Rs. Nil for that year. In the next FY 2019-20, his TDS was Rs. 60,000 but he did not file his return of income. So he will be considered as a filer as on 1st July 2021 (or at the start of the previous year). He will remain filer till the due date to file the return of income for the FY 2020-21 expires.
The due date to file the return of income for the AY 2021-22 is 31st July 2021 which is now extended to 30th September 2021. If his aggregate amount of TDS is Rs. 55,000 for the FY 2020-21 and if he does not file his return of income by 30.09.2021, then will his name be added to the list of non-filers on 1-10-2021? Whether the higher rate of TDS as per section 206AB will apply from 1st October 2021 on him?
As per the Circular, his name will be added to the list of specified persons from the FY 2022-23 and not in FY 2021-22; since at the start of the FY 2021-22, Mr Rakesh was a non-specified person and hence he will remain a non-specified person for the whole FY 2021-22.
Consider another case. In this case, the data of Mr. Rakesh is given below-
Now, on 1-7-2021 (or as on the first day of the current FY) his Mr. Rakesh will not be categorized as a ‘specified person’ means he will be considered as a filer and section 206AB will not apply to him.
Say on 10th August 2021, one deductor has revised his TDS return and increased the TDS amount for Mr. Rakesh for the FY 2019-20 from Rs. 48,000 to Rs. 52,000.
Now, whether his name will be added as a specified person from 1st day of the FY or from 10th August 2021? As per the Circular, his name will be included in the list of the specified person from next FY onwards.
Note: The list of specified persons will be generated at the start of each financial year. During this FY, no new names will be added to the list of the specified persons. Thus, no new name of the non-filers would be added to the list of specified persons in the middle of any FY. All the persons to whom the new PAN allotted during the FY will be considered as non-specified persons.
On the contrary, the name of a person would be removed from the list of specified persons during the FY if he files a valid ITR during the current FY.
Hence, the deductor is required to check the list of specified persons at the time of making tax deductions or tax collection since his name may be removed from the list of specified persons.
In short, during an FY, a non-filer can become a filer but a filer will never become a non-filer under any circumstances. This checking of deductee’s PANs is needed at the start of every new financial year.
It may be noted that as per the provisions of sections 206AB & 206CCA of the Act, the specified persons shall not include a non-resident who does not have a permanent establishment in India. Tax deductors & collectors are expected to carry out necessary due diligence in this regard.
Higher rate of TCS as per Section 206CCA for non-filers of return of income
In line with the provision of section 206AB, similar provisions for the collection of tax at a higher rate are introduced by section 206CCA. Thus, in case of a non-filer of return of income for the last two assessment years where the aggregate amount of TDS or TCS is Rs. 50,000 or more, a higher rate of TCS shall apply. In this case, the following higher rate of TCS shall be applicable-
Apart from the above, all the provisions of TDS as per section 206AB shall be applicable for section 206CCA.
Read more Articles on Section 206AB & Section 206CCA
CBDT Circular on Implementation of Section 206AB and Section 206CCA for non-filers
CBDT Issues Order to Launch Compliance Check Functionality for Section 206AB and 206CCA
Clarification for use of functionality under section 206AB and 206CCA
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