It has always been the Government’s endeavor to widen the tax base and ensure that more and more people file their tax returns in time. A number of steps have been used in the past to achieve this goal. The Finance Act 2021, introduced a new provision Sec 206AB, through which the Government has tried to further this objective and ensure that all businesses file the Income Tax Returns within time, by specifying a higher rate of TDS subject to certain conditions.
The Section inter alia reads as follows:
Sec 206AB – Special provision for deduction of tax at source for non-filers of Income Tax Returns
(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 sections 192, 192A, 194B, 194BB, 194LBC or 194N on any sum or income or the 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 percent.
(2) 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.
(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.]
Sec 206CCA has been similarly worded for TCS.
A plain reading of the section does indicate that the intent behind the section is to discourage non-compliance and the practice of non-filing or delayed filing of returns, particularly in those cases where higher amounts of tax have been deducted or collected. However, the section also comes with a number of unintended consequences which we shall try to highlight in this article.
- When do these sections come into effect?
These sections shall come into force from 1st July 2021. The Finance Bill had intended to implement the same from 1st April 2021, however, due to the COVID situation, the same has presently been delayed.
- On what kind of transactions, these sections would be attracted?
The sections would be attracted in all cases where TDS is deductible under the provisions of Chapter XVII – B or TCS is collectible under the provisions of Chapter XVII-BB. However, for TDS certain relaxations have been given. Payments under the following sections have been kept out of the purview of higher TDS deduction i.e., higher TDS is not applicable on these payments:
- 192 (salary)
- 192A (Payment of accumulated balances to employees)
- 194B (Winnings from Lottery)
- 194BB (Winnings from Horse Races)
- 194LBC (Income from investment in Securitisation Trust)
- 194N (Cash Payments by Banks)
- Who shall comply with these provisions?
These sections shall be attracted in the case of a specified person. Specified Person has been defined to mean a person who:
- Has not filed his return 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 time limit of filing return of income u/s 139(1) has expired.
- Has an aggregate of tax deducted at source and tax collected at source in his case in each of the two previous years is Rupees Fifty Thousand or more.
Now, let us try to understand the above with the help of an example.
Let us assume M/s XYZ Pvt Ltd, pays a monthly rent of INR 1 Lakh to Mr. X. Under normal circumstances, TDS @ 10% would be deductible u/s 194-I. However, let us understand how the same may work out in different situations in the present year.
The tax is to be deducted in FY 2021-22 (Previous Year). Let us assume that the time limit for filing IT Return u/s 139(1) for Mr. X is 31st July 2021 only and there are no extensions. In such a case, let us see how Mr. X may become a specified assessee in various cases.
| Rent for the month | Date of Payment/ Deduction | Relevant Previous Years (PY) | TDS & TCS during FY | Status of filing ITR for FY | Specified Assessee? | Comments | ||||
| 18-19 | 19-20 | 20-21 | 18-19 | 19-20 | 20-21 | |||||
| June | 01-07-2021 | 18-19 & 19-20 | 20000 | 25000 | 30000 | Yes | Yes | No | NO | Since ITR for FY 20-21 can be filed upto 31st July 2021, relevant PY remains 18-19 & 19-20 |
| June | 01-07-2021 | 18-19 & 19-20 | 58000 | 60000 | 65000 | Yes | Yes | No | NO | Since ITR is filed |
| June | 01-07-2021 | 18-19 & 19-20 | 58000 | 60000 | 65000 | Yes | No | No | NO | Since filing is made for one of the 2 relevant PY. |
| June | 01-07-2021 | 18-19 & 19-20 | 48000 | 60000 | 65000 | No | No | No | NO | Since TDS deducted in one of the two relevant PY is below 50000 |
| June | 01-07-2021 | 18-19 & 19-20 | 58000 | 60000 | 65000 | No | No | No | YES | TDS deducted above 50000 in both of the relevant PY and no filing done for either of the relevant PY |
| July | 01-08-2021 | 19-20 & 20-21 | 20000 | 25000 | 30000 | Yes | Yes | No | NO | Since the due date for ITR for 20-21 has passed, hence relevant PY becomes 19-20 & 20-21 |
| July | 01-08-2021 | 19-20 & 20-21 | 50000 | 60000 | 65000 | Yes | No | No | YES | As the due date for filing ITR is 31st July 2021, in case of nonfiling, Mr X becomes a specified assessee the very next day |
| August | 01-09-2021 | 19-20 & 20-21 | 50000 | 60000 | 65000 | Yes | No | Yes | NO | If in the above example, Mr X files his return during the month of Aug, he would be a specified assessee for the previous transaction but for this and subsequent month’s rent he will not be a specified assessee |
The opinion is divided on the above – with another school of thought supporting the opinion that since immediate two preceding previous years need to be seen, it would be 2019-20 and 2020-21 in the above cases. However, the same would render the section ineffective for the first few months every year, and thus, in the author’s opinion the above is the more prudent opinion.
CBDT needs to issue some clarification in this regard to ensure that the taxpayers can do adequate clarification without undue hardships.
Also, it is to be noted that if payment or credit is made before 1st July 2021 and TDS is deducted after 1st July, the section would still not apply as the trigger point for all sections is credit or payment whichever is earlier and hence date for the same would be before 1st July 2021 only.
Given this scenario, it is imperative that the Income Tax Department needs to release a utility or a facility wherein a deductor/collector can find out through PAN/AADHAAR whether a particular assessee is a ‘specified assessee’ and appropriate TDS can be deducted. The same needs to be done before the implementation of this section.
If the same does not happen, the deductor/collector would need to obtain a declaration from each deductee that he is not a specified assessee. The same would be required twice, once before the due date of filing ITR u/s 139(1) and then after such date has elapsed.
New Assessee – It has been widely speculated that the section would be enforced on a newly incorporated assessee, however, the same is NOT possible as a new assessee would not have any TDS deducted in the previous years.
- Rate of tax deduction
The tax shall be deducted at the higher of the following rates:
- Twice the rate specified in the relevant provisions of the Act
- Twice the rate/rates in force, or
- At the rate of 5%
For Eg. In the above case, if Mr. X becomes a specified assessee, then the tax rate prescribed by the act is 10% u/s 194-I, however, tax shall be deducted at twice such rate, i.e., 20% by virtue of this section.
Moreover, if section 206AA also applies to the assessee, then tax shall be deducted at the higher rate specified under this section and the rate specified u/s 206AA.
As per the provisions of sec 206AA, a person must furnish his PAN if he is entitled to receive any sum of money on which tax is deductible. If such person fails to furnish PAN, then tax shall be deducted at higher of the following rates:
- At the rate prescribed in the act;
- At the rate in force;
- At the rate of 20% (5% in case of Sec 194-O and 194-Q)
Now, let us suppose TDS is deductible on a payment for the advertisement contract to Mr Y, who does not have a PAN. In the past two years, Companies have deducted tax @ 20% due to non-availability of PAN and hence tax deducted exceeds INR 50000 in both of the relevant previous years. Now, as per Sec 206AB, higher tax-deductible would be higher of tax-deductible u/s 194C, i.e., 2% (2 x 1%) or 5%. Thus, here, the assessee would gain an unfair advantage. Thus, to negate the same the section clarifies that in such a scenario tax should be deductible at the higher rate among the rate u/s 206AB and 206AA. Thus, even in this situation, the tax would be deductible at the rate of 20% and not 5%.
- Non-Residents
In the case of Non-Residents, the section shall not apply, if such non-resident does not have a Permanent Establishment in India.
- Consequences of wrong deduction
The primary consequence of deduction of tax at a lower rate than applicable would be the deductor becoming an assessee in default u/s 201 of the act and would thus be liable for interest and penalty for the short deduction.
One major area of concern is the disallowance of expense as well in such a situation. Different High Courts have taken divergent views in such situations. While Hon. Calcutta High Court has taken a view favoring the assessee, stating that Sec 40(a)(ia) requires tax to be deducted and paid to the Government. The shortfall in deduction would not attract disallowance under this section. (CIT v SK Tekriwal). However, Hon. Kerala High Court, took a view that the expression tax deductible at source in the section must be read as tax-deductible at source under appropriate provisions. Hence, deduction under the wrong section would hold the assessee liable for disallowance. (CIT v PVS Memorial Hospital Ltd)
Thus, one must be careful while determining the rate and make sure to apply the appropriate rate of deduction/collection.
- Impact on Business
As a consequence of this amendment, businesses would now have to ensure appropriate determination as to whether a deductee is a specified assessee, before proceeding with tax deduction. It is particularly difficult in the case of assessees who have voluminous transactions and a huge number of parties to deal with.
In most cases, copies of two years ITR would have to be availed and where such ITR has not been filed, copies of Form 26AS shall have to be obtained to ensure that adequate compliance is made.
CONCLUSION
The section adds to the list of those provisions, where an unnecessary burden has been put on businesses for additional documentation. Presently, all corporates and non-corporates are seeking return filing data, 26AS from all the vendors, which in some ways is also a violation of the right to privacy. That apart, the present state of the portal is making matters worse for the taxpayers. Unless, the department can come up with an appropriate utility/tool/facility for the determination of an assessee as a specified assessee or otherwise, the trade and industry are in for a difficult time determining the status of each and every deductee as a specified deductee. The intention of the legislation is good and it would discourage one from non-compliance but at the same time, the implementation once again leaves much to be desired.
The author may be reached at ravi@raviladia.in or through www.raviladia.in