TDS in case of non-filers of Income Tax Return- Section 206AB of Income Tax Act
A new section 206AB has been introduced by the Finance Act, 2021 which is going to increase TDS compliance burden of corporates and businessmen in a great manner. This section requires that the person (payer) who deducts TDS in case of a payee (who is a non-filer of income tax return), TDS shall be deducted at the higher rates. The purpose of the section 206AB is to boost tax-filers base in the country and thus increasing the direct tax revenue. In this article, we would discuss the provisions of section 206AB and also the manner it will have an impact on our TDS compliances.
Effective date of applicability of section 206AB
Section 206AB shall be applicable with effect from 01-07-2021.
Who is required to deduct TDS under section 206AB
Any person who is responsible to pay any sum or amount to a specified person shall be required to deduct TDS as per section 206AB on such sum or amount paid or payable or credited to the specified person.
Who is a specified person under section 206AB
“Specified Person” means:
- A person who has not filed the returns of income for both of the two previous years immediately before the previous year in which TDS is required to be deducted and the due date of filing return under section 139(1) has expired and
- The total amount of TDS and TCS in case of such person is Rs. 50,000 or more in each of these two previous years.
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Analysis: In simple words, whenever a person (deductor) who is required to deduct TDS on any payment so deducts TDS, he should first check the return filing status of the deductee. In case the deductee satisfied the two conditions mentioned below, the deductee will be treated as “Specified Person” and TDS shall be deducted at higher rates:
Condition-I: He has not filed the ITR of both of the two preceding financial years and the time limit of filing such ITR has expired AND
Condition-II: TDS & TCS credit is Rs. 50,000 or more in each of the 2 preceding financial years. |
Is section 206AB applicable in case of non-residents
Section 206AB shall not be applicable on a non-resident who is not having any permanent establishment in India. Therefore, TDS in case of non-residents shall continue to be deducted as per section 195 or any other provision of the Act.
What is the rate of TDS as per section 206AB
TDS under section shall be deducted at higher of the following:
- At twice the rate specified in the relevant provision of the Act or
- At twice the rate or rates in force or
- At the rate of 5%
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Example: X Limited makes payment of rent against commercial property to Y Limited Rs. 5 Lakhs on which it is required to deduct TDS @ 10% u/s 194I. Y Limited has not filed its ITR for last 3 financial years though TDS credit in its case is more than Rs. 50,000 every year. Please guide X Limited as regards TDS rates?
Solution: Y Limited is a specified person u/s 206AB as it fulfils both the limbs of the definition. Therefore, X Limited shall deduct TDS at the higher of:
Thus, the effective rate of TDS shall be 20% in case of Y Limited.
Take one more example: Suppose X Limited is required to make payment against any works contract to Y Limited Rs. 5 lakhs on which TDS is required to be deducted @ 2% u/s 194C.
Solution: In this example, the applicable rates u/s 206AB shall be higher of:
Thus, the effective rate of TDS shall be 5% in this case. |
What are the cases where section 206AB is not applicable
If tax is required to be deducted under the following sections, section 206AB shall not be applicable:
Cases where section 206AB is not applicable
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Section |
Description |
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192 |
TDS in case of Salary |
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192A |
TDS on withdrawal from accumulated balance of PF |
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194B |
TDS on winning from lottery or crossword puzzle |
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194BB |
TDS on winning from horse race |
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194LBC |
Income in respect of investment in securitization trust |
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194N |
TDS in case of cash withdrawals from banks |
Interplay between section 206AA and section 206AB
Section-206AB states: “If the provisions of section 206AA is applicable to a specified person, in addition to the provisions of this section, the tax shall be deducted at higher of the two rates provided in this section and in section 206AA.”
Section 206AA applies where the deductee does not furnish PAN to the deductor. In this case, the deductor is liable to deduct TDS at the higher of the following rates:
- At the rates specified in the relevant provision of the Act or
- At the rate or rates in force or
- At the rate of 20%
Thus, if deductee fails to furnish PAN to the deductor, the deductor should analyse the TDS rates as applicable under section 206AA as well as section 206AB and deduct TDS at the higher of the rates as applicable as per both the sections.
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Compliance Check facility for section 206AB on Income Tax Portal After reading the above article, a valid question comes in the mind of the deductor that it will be a quite cumbersome task to ask each deductee to first furnish copies of their 2 years ITR to check whether section 206AB is applicable on them or not. Even many corporates have started taking declarations from their deductees regarding filing of ITR.
To ease the burden of business community, the Government is soon going to provide “Compliance Check functionality for section 206AB & 206CCA” on the reporting portal of the Income-Tax Department. Through this compliance check facility, the TDS deductor can feed the single PAN or multiple PAN of the deductee and check whether such deductee is a specified person liable for higher rate of TDS u/s 206AB or not.
A circular has also been issued in this regard by the CBDT referred Circular No. 11/2021 dated 21st June, 2021. You may also refer the circular. |
