In an attempt to widen and deepen the tax base, and to nudge taxpayers to furnish their income returns, Finance Act, 2021 introduced two new sections, 206AB and 206CCA, in the Income tax Act 1961 with effect from July 1, 2021.
Higher TDS non-IT return-filers
Section 206AB requires the deductor to withhold tax deducted at source (TDS) at higher of the following rates on payments made to “specified persons”: (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 5 percent.
The term “specified person” is further defined (as amended by Finance Act, 2022) to include the following:
(a) A person who has not furnished return of income for assessment year (AY) relevant to the previous year immediately prior to the financial year (FY) in which tax is required to be deducted. The previous year to be considered is the year for which the time limit for filing the return of income under section 139(1) has expired; and
(b)Aggregate tax deducted/collected is Rs 50,000 or more in the relevant previous year.
A specified person shall not include a non-resident (NR) who does not have a permanent establishment (PE) in India.
Section 206AB is not applicable to certain payments like salary, lottery, horse race winnings, etc. as specified in the provision. Similarly, section 206CCA was inserted to provide for higher rate of tax collected at source (TCS) for non-filers of income-tax return.
To ease the compliance burden of deductors and collectors, the tax department would make available a list of specified persons not meeting the conditions specified in sections 206AB and 206CCA of the Act to whom higher TDS rates will be applicable. Accordingly, a new functionality Compliance Check for Section 206AB & 206CCA has been introduced on the income tax reporting portal.The list of specified persons for FY 2022-23 is prepared on the basis of the following:
Entities required to make payments can punch in the Permanent Account Number (PAN) of the relevant person / entity to whom payment(s) is to be made. If the name appears, then higher tax deduction/collection rate shall apply. A ‘bulk search’ option is also made available to the entities.
The list would be drawn afresh at the start of each FY in a similar manner. For example, let’s say ABC Ltd has to make payment to Mr A on April 20, 2022 (i.e., in FY 2022-23) and TDS is required to be deducted on the said payment. Accordingly, ABC Ltd. will have to check on the portal if Mr A is included in the list of specified persons. Mr A’s name will be reflected in the list if he has not: (a) Filed the tax return for FY 2020-21 (being the relevant previous year); and (b) Total tax deducted / collected is Rs 50,000 or more during the FY 2020-21.
However, if the payment is to be made after July 31, 2022, the relevant previous year will be FY 2021-22 as the timeline for filing the return of income for FY 2021-22 (which is July 31, 2022) has expired. Accordingly, ABC Ltd. will have to check if Mr. A’s name is removed or not from the list of specified persons while making the payment.
Non-filers of tax returns are required to file their tax returns within the due date to avoid deduction / collection of taxes at higher rates. Also, the compliance check facility is a welcome relief to deductors / collectors, who would otherwise be mandated to obtain a declaration from all applicable payees.
Homi Mistry is a Partner with Deloitte India. With inputs from Niji Arora (Senior Manager) and Zalak Shah (Deputy Manager) with Deloitte Haskins and Sells LLP