Comparative analysis of section 206AB & section 206CCA

Overview on Provisions u/s 206AB & 206CCA

Brief Introduction

In the Finance Bill 2021, government proposed to insert two new sections, namely, Section 206AB and Section 206CCA under Income Tax Act, 1961.

These sections would provide for application of a higher rate of TDS and TCS, in respect of the deduces who did not file their Income Tax Returns related to the 2 FY’s immediately preceding the FY in which tax is required to be deducted or collected.

Provisions In Respect of Non- Filers

1. It is to be noted, that under Section 206AA of the Income Tax Act 1961, a higher rate of TDS is deducted, where the deductee does not furnish their PAN.
2. Under Section 206CC of the Income Tax Act 1961 higher rate of TCS is collected, where the collectee does not furnish their PAN.

Section 206AB – Higher TDS for ITR Defaulters w.e.f. 01.07.2021-

The Govt proposed to insert new section 206AB & section 206CCA in the Income Tax Act, 1961, which will provide a special provision.

• wherein a higher rate for TDS & TCS be applied on the Non-Filers of income-tax return.
• Under the proposed section 206AB, the higher rate be applied on the amount or income which is paid or payable, by the deductor to a specified person.

The proposed rate for deduction of TDS under this section will, higher of the following –

• At twice the rate or rates that are there in force.
• 2 Time of the rate, as specified in the relevant provision of the income tax Act.
• At the rate of 5%.

Summarization of Rate of TDS U/s – 206AA & 206AB

Under Section 206AA- Rate of TDS when a person fails to file of Permanent Account Number: Rate of TDS U/s 206AA Higher of-	Under Section 206AB- Rate of TDS when a person fails to file 2 years ITR’s: Rate of TDS U/s 206AB Higher of-
AT RATE, AS SPECIFIED IN THE RELEVANT PROVISION.	AT TWICE THE RATE, AS SPECIFIED IN THE RELEVANT PROVISION OF THE ACT.
2 time of rate  or  Rate in Force .	AT TWICE THE RATE OR RATES THAT ARE THERE IN FORCE.
AT THE RATE OF 20%.	AT THE RATE OF 5%.

Rate of TDS In case both sections  206AB & 206AA are attracted?

Under this situations according to U/s 206AB(2), Tax deducted at sources will be deducted at a higher rate from the below :
•     TDS Rate determined according to section 206AA
•     Rate of TDS determined according to section 206AB

Comparison of section 206AA & section 206AB

BASIS	SECTION 206AA	SECTION 206AB
APPLICABILITY	WHERE THE DEDUCTEE FAILS TO FURNISH THEIR PAN	WHERE THE DEDUCTEE FAILS TO FURNISH THE RETURN FOR A SPECIFIED PERIOD AND THE AGGREGATE AMOUNT OF TDS, TO BE DEDUCTED, DURING SUCH SPECIFIED PERIOD EXCEEDS THE SPECIFIED LIMIT
RATE OF TDS	HIGHER OF – ·         AT RATE, AS SPECIFIED IN THE RELEVANT PROVISION. ·         AT RATE OR RATES THAT ARE THERE IN FORCE. ·         AT THE RATE OF 20%.	HIGHER OF – ·         AT TWICE THE RATE. AS SPECIFIED IN THE RELEVANT PROVISION. ·         AT TWICE THE RATE OR RATES THAT ARE THERE IN FORCE. ·         AT THE RATE OF 5%.
EXCEPTIONS	WHERE THE INCOME IS RECEIVED BY A NON-RESIDENT INDIVIDUAL OR COMPANY – ·         INTEREST ON BONDS REFERRED UNDER SECTION 194LC. ·         SPECIFIED PAYMENTS AS REFERRED UNDER RULE 37BC. ·         INCOME IN RESPECT OF INVESTMENT IN CATEGORY I OR CATEGORY II AIFS AS REFERRED UNDER RULE 114AAB.	WHERE THE INCOME IS REQUIRED TO BE DEDUCTED UNDER THE FOLLOWING SECTIONS –   ·         SECTION 192 ·         UNDER SECTION 192A ·         SECTION 194B ·         UNDER SECTION 194BB ·         SECTION 194LBC ·         UNDER SECTION 194N   HOWEVER, THIS EXEMPTION SHALL NOT BE AVAILABLE TO A NON-RESIDENT, NOT HAVING A PERMANENT ESTABLISHMENT IN INDIA.
SPECIAL RATE OF TAX	A TAX @ 5% BE LEVIED, WHERE THE TAX IS DEDUCTIBLE UNDER SECTION 194-O AND SECTION 194Q. HOWEVER, WHERE TDS IS DEDUCTIBLE UNDER SECTION 192A, THE RATE SHALL BE THE MAXIMUM MARGINAL RATE APPLICABLE.	Not applicable

Non-furnish of PAN as well as non-filing of ITR.

• As per section 206AB (2), where a person does not furnish their PAN and has also not filed their ITR, the said person be shall be liable to higher rate of Tax deducted as source under both the section 206AA & 206AB.
• However, the rate of tax shall be determined as the highest rate amongst the rate determined under both sections respectively.

There is no exception U/s 206AB even if the recipient person is ‘not liable’ to file Income tax Return:

• Non-filing of a tax return by the recipient is one of the conditions for triggering section 206AB. This clause makes no exceptions for recipients who are not otherwise required to file a tax return.
• If the deductee, i.e. the recipient, has not provided the report of income for the designated time, regardless of whether he was required to do so or not, this provision allows for a greater rate of tax deduction.
• This could prove problematic for non-residents who have a Permanent Establishment in India but are not required to submit an ITR due to Section 115A’s exemption (5).
• If the tax was deducted from their income but they did not file an income return, they will be subject to the implications of section 206AB.

Exemption from section 206AB.

It is provided, that the provisions of section 206AB, shall not apply on the amount on which TDS is required to be deducted under the following sections –

• TDS deducted on salary under Section 192.
• Tax deducted as source deducted in respect of accumulated balance due to an employee U/s 192A.
• TDS deducted in respect of winnings from lottery or crossword puzzle u/s 194B.
• Tax deducted as source deducted in respect of Winnings from a horse race under Section 194BB.
• TDS deducted in respect of investment in securitization trust under Section 194LBC.
• Tax deducted as source deducted in respect of Payment of certain amounts in cash withdrawals under Section 194N.

Who is as a Specified Person?

Specified Person

A person is said to be a specified person, where all the following conditions are fulfilled –

1. A person who did not filed their Income Tax Return in relation to the 2 financial years, immediately preceding the financial year in which tax is required to be deducted.
2. Also, the prescribed time limit for filing return of income under section 139(1) has been expired.
3. The aggregate amount of TDS/TCS to be deducted/collected, is Rs. 50,000 or more in each of the previous 2 financial years.
4. It excludes a Non-resident, not having a permanent establishment in India.
5. Under section 206CCA, it was proposed, that where a person, receives any amount from a specified person and such a specified person fails to furnish their Income Tax Return in relation to the 2 financial years, immediately preceding the financial year in which tax is required to be collected.
6. The higher rate of TCS under this section will be, the higher of the below –

• • 2 Time of rate the rate as specified in the relevant provision of the income tax Act.
  • At the rate of 5%.

In case, a person is liable to higher rate of TCS, under the provision of both section 206CCA and Section 206CC, the tax shall be collected at the highest rate, as determined under both the section respectively.

What are challenges due to new section 206AB

There are big issue that emerge from section 206AB. New challenges in related to difficulty that deductor face to determine:

• In case the deductee has filed its ITRs for the last 2 years;
• If the Tax deducted at sourses total in the last year 2 years is more than INR 50,000;
• In case the deductee compulsory needed to furnish its ITR.

So, the main duty of collecting all needed details from the deductee can confine TDS to function with ease & can impose an additional burden.

COMPARISON OF SECTION 206CC & SECTION 206CCA

BASIS	SECTION 206CC	SECTION 206CCA
Applicability of section 206AB	WHERE THE COLLECTEE FAILS TO FURNISH THEIR PAN.	WHERE THE COLLECTEE FAILS TO FURNISH THE RETURN FOR A SPECIFIED PERIOD AND THE AGGREGATE AMOUNT OF TCS, TO BE COLLECTED, DURING SUCH SPECIFIED PERIOD EXCEEDS THE SPECIFIED LIMIT
RATE OF TCS	HIGHER OF –   ·         AT TWICE THE RATE. AS SPECIFIED IN THE RELEVANT PROVISION. ·         AT THE RATE OF 5%.	HIGHER OF –   ·         AT TWICE THE RATE. AS SPECIFIED IN THE RELEVANT PROVISION. ·         AT THE RATE OF 5%.
EXCEPTION	ANY NON-RESIDENT NOT HAVING A PERMANENT ESTABLISHMENT IN INDIA	ANY NON-RESIDENT NOT HAVING A PERMANENT ESTABLISHMENT IN INDIA
SPECIAL TAX RATES	TAX B Specified person E LEVIED @ 1% WHERE IT IS COLLECTABLE UNDER SECTION 206C(1H).	Not applicable

. Specified person

A person is said to be a specified person, where all the following conditions are fulfilled –

1. A person who did not filed their Income Tax Return in relation to the 2 financial years, immediately preceding the financial year in which tax is required to be collected.
2. Also, the prescribed time limit for filing return of income under section 139(1) has been expired.
3. The aggregate amount of TDS/TCS to be deducted/collected, is Rs. 50,000 or more in each of the previous 2 financial years.
4. It excludes a Non-resident, not having a permanent establishment in India.

Such amendment be made effective from 1st July 2021.

Summarization of section 206AB and 206CCA

HIGH RATE OF TDS ON NON-FILERS OF ITR UNDER SECTION 206AB	HIGH RATE OF TCS ON NON-FILERS OF ITR UNDER SECTION 206CCA
APPLIES WHEHRE THE DEDUCTEE FAILS TO FURNISH TO FURNISH THEIR ITR FOR 2 FINANCIAL YEARS, IMMEDIATELY PRECEEDING THE FINANCIAL YEAR IN WHICH THE TDS IS REQUIRED TO BE DEDUCTED.	APPLIES WHEHRE THE DEDUCTEE FAILS TO FURNISH TO FURNISH THEIR ITR FOR 2 FINANCIAL YEARS, IMMEDIATELY PRECEEDING THE FINANCIAL YEAR IN WHICH THE TCS IS REQUIRED TO BE COLLECTED.
SPECIFIED PERSON – A PERSON IS SAID TO BE A SPECIFIED PERSON, WHERE ALL THE FOLLOWING CONDITIONS ARE FULFILLED – A PERSON WHO DID NOT FILED THEIR INCOME TAX RETURN IN RELATION TO THE 2 FINANCIAL YEARS, IMMEDIATELY PRECEEDING THE FIANCIAL YEAR IN WHICH TAX IS REQUIRED TO BE COLLECTED. ALSO, THE PRESCRIBED TIME LIMIT FOR FILING RETURN OF INCOME UNDER SECTION 139(1) HAS BEEN EXPIRED. THE AGGREGATE AMOUNT OF TDS/TCS TO BE DEDUCTED/COLLECTED, IS RS. 50,000 OR MORE IN EACH OF THE PREVIOUS 2 FINANCIAL YEARS. IT EXCLUDES A NON-RESIDENT, NOT HAVING A PERMANENT ESTABLISHMENT IN INDIA.
EXEMPTED   WHERE THE INCOME IS REQUIRED TO BE DEDUCTED UNDER THE FOLLOWING SECTIONS –   ·         SECTION 192 ·         UNDER SECTION 192A ·         SECTION 194B ·         UNDER SECTION 194BB ·         SECTION 194LBC ·         UNDER SECTION 194N   HOWEVER, THIS EXEMPTION SHALL NOT BE AVAILABLE TO A NON-RESIDENT, NOT HAVING A PERMANENT ESTABLISHMENT IN INDIA.	EXEMPTED   WHERE INCOME IS RECEIVED BY ANY NON-RESIDENT NOT HAVING A PERMANENT ESTABLISHMENT IN INDIA
RATE WOULD BE HIGHER OF – AT THE RATE OF 5%. 2 Time of the rate as specified in the relevant provision . AT TWICE THE RATE OR RATES THAT ARE THERE IN FORCE.	RATE WOULD BE HIGHER OF – 2 Time of the rate as specified in the relevant provision . AT THE RATE OF 5%.
THE SECTIONS WILL BE EFFECTIVE FROM 1ST JULY, 2021.

Way forward

• The above discussed provisions shall be applicable on the deductees or collectees, not furnishing their ITR for the specified period. As per the amendment,
• Section 194N will substituted by the Finance Act, 2020. The section relates to deduction of TDS in case of cash withdrawal, where the assessee does not furnished their ITR for the specified period.
• CBDT also came up with a tool on the e-filing portal, for calculation and determination of the rate TDS applicable under section 194N.
• Such a toll be used by banks and post offices in deducting TDS, in respect of customer not providing their ITRs.
• One of the demerits of Section 194N is that there is a high threshold limit of default (Rs. 20 lakhs/Rs. 1 Crore), thereby making it unessential to the bank’s executive to verify the ITR status of their customers.
• Because of this, new Section 206AB is proposed, since it makes it mandatory for the deductor to verify the status of ITR filing of every deductee or collectee, even though the amount to be deducted/collected is 5,000 under Section 194A.

Amendment to Section94-IB

Also, under Section 194-IB, every Individual or HUF were required to deduct TDS on the amount paid as rent, provided their gross receipts or turnover in a particular financial year immediately preceding the financial year in which the TDS/TCS on rent paid is required to be deducted/collected, does not exceed Rs. 1 crore in case of a business and Rs. 50 lakhs in case of a profession.

However, where the PAN is not furnished by the deductee or collectee, tax be deducted/collected at the higher rates prescribed Section 206AA, but the same shall be subject to the maximum amount of TDS to be deducted.

But after the introduction of Section 206AB, an amendment be made to Section 194-IB, to provide for deduction of TDS at the higher rates in case of non-filing of ITR.

What are the implications for non-compliance of section 206AB

In case deductor fails to comply provisions of U/s 206AB, then below Consequences would possibly arise: –

• Expenditure will be Disallowance
• deductor will be taken to be considered as “Assessee in Default”.
• Interest in terms of U/s 201(1A) of the income tax Act
• in addition to above penalty Levy for non-compliance of Tax deducted at souse provisions

Conclusion

• People who do not file income tax returns are likely to be affected by the provisions of section 206AB. Such persons will begin filing income tax returns after learning that failure to do so will result in a greater rate of tax deduction. By requiring a higher TDS rate if certain conditions have been met,
• The government has made every effort to guarantee that everybody submits their income tax returns on time.
• Inserting the sections 206AB & 206CCA would create an additional compliance burden upon the assessee, since earlier, they were required to furnish only their PAN,
• However, they will now be required to furnish their ITR for immediately preceding 2 FY’s as well and check whether their TDS/TCS liability during those 2 financial years were of Rs. 50,000 or more or not.
• Thus, with greater compliance, comes greater attention and the assessee would not be very careful in deducting TDS or collecting TCS.

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