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The Indian Government has consistently focused on improving tax compliance and broadening the taxpayer base. To increase tax compliance, two provisions were introduced in the Income Tax Act. 1961 – Section 206AB and Section 206CCA. These sections are designed to encourage more individuals and entities to file their income tax returns. The sections are designed to penalise habitual non-filers through higher rates of TDS(Tax Deducted at Source) and TCS(Tax Collected at Source).
What is Section 206AB?
Section 206 AB is applicable when tax needs to be deducted at the source from a specified person who has not filed an ITR. The section aims to deduct TDS at a higher rate than usual if the recipient of the income has not filed their income tax return for the preceding financial year and the TDS in the year exceeds Rs. 50000. The deductor must deduct tax at a higher rate. The higher of the following rates is applied:
- Twice the rate specified in the Income Tax Act or Finance Act or
- 5%
If the person does not furnish his PAN card, the rate becomes 20% or double the normal rate, whichever is higher.
What is Section 206CCA?
Section 206CCA deals with the Tax Collected at Source. If a person is required to collect tax from a buyer or customer and the buyer has not filed their ITR for the preceding financial year, and the TCS exceeds Rs. 50,000, then the TCS will be collected at a higher rate. The higher rates applied can be of the following:
- Twice the rate specified in the Income Tax Act or the Finance Act or
- 5%
If the person fails to produce their PAN card in an attempt to avoid the extra payment, the tax will be collected at a rate of 20% or a higher rate, as per Section 206CCA.
Who is the Specified Person?
For both sections, the specified person is defined as:
- One who has not filed the Income Tax Return for the preceding financial year and the income tax return filing date has expired and
- The total amount of tax deducted or collected in the last financial year exceeds Rs. 50000.
The definition of a specific person is not applicable to a non-resident who does not have a permanent establishment in India. The permanent establishment here refers to a fixed place of business where his enterprise’s business is carried out wholly or partially.
Additionally, the definition of ‘specified person’ also excludes individuals who are not required to furnish the return of income for the assessment year.
Illustrations
- Suppose a company makes a contract payment of Rs. 5 lakh to person X. Consider the standard TDS rate to be 2%. However, if Mr X has not filed their ITR for the preceding assessment year, section 206AB will be applicable, and the TDS will be deducted at a higher rate:
- Twice of the original rate (2*2) = 4% or,
- 5%
In this case, 5% is the higher rate.
Nature of Transactions that are Not Impacted by These Sections
- TDS on salaries, under section 192
- TDS on the accumulated balance due to an employee, under section 192A
- TDS on winnings from the lottery, under section 194B
- TDS on winnings from horse rate, under section 194BB
- TDS on payment of certain amounts in cash, under section 194N
- TDS on income in respect of investment in securitisation trust, under section 194LBC
Conclusion
The Income Tax Department introduced sections 206AB and 206CCA to drive compliance. They are critical tools to encourage timely income tax return filing. It presents a simple idea that if you are earning an income that attracts TDS or TCS, you must also duly file your return regularly. These sections provisions that ensure that non-filers face financial consequences.
If you are a taxpayer, make sure you file your income tax return on time, not just to avoid the penalties but also to ensure that you do not lose out on liquidity due to higher TDS or TCS. Filing your income tax return is a fundamental responsibility that ensures a healthy and compliant financial ecosystem for all.
