Section-by-section analysis on TDS/ TCS perspective on the finance bill 2021

The Union Budget, which was presented in Parliament, proposed a number of significant modifications to the Income Tax Act. Certain adjustments to the TDS and TCS sections of the Act have been made in particular. The proposed modifications to the TDS/TCS provisions of the Income Tax Act will be discussed in this article.

Section 194 exempts dividend payments to a business trust from the TDS requirement.

Exempting requirement of deducting TDS on interest paid by an infrastructure debt fund- Section 194A

Providing a higher rate of TDS for non-filers of TDS under section 194-IB

Section 194P provides a deduction for senior citizens who are 75 years or older.             

 Section 194 P:

• This provision takes effect on July 1, 2021, and applies to Indian residents aged 75 and up who only receive income from a specific bank in the form of pension and/or interest. Eligible individuals must file a declaration with the designated bank in the appropriate form and manner, and the designated bank will deduct TDS on their behalf after taking into account the deductions allowed under Chapter VI-A and the rebate allowed under section 87A.

• If the foregoing conditions are met, such a senior citizen is exempt from filing an income tax return for the preceding year.

• Under Section 139 of the Income Tax Act, every individual whose total income during the previous year exceeds the maximum amount not subject to income tax is required to submit an ITR on or before the due date.

• However, for senior persons, filing an ITR may be a challenging task. As a result, a new section 194P is proposed to be incorporated into the Income Tax Act to exempt senior individuals from the necessity of filing an ITR. Only certain senior citizens are covered under Section 194P.

• If TDS has already been deducted under Section 194P, the indicated elderly citizen is not required to file an ITR, according to Section 194P.

Now you're probably wondering what is meant by "senior citizen" and how TDS is calculated under section 194P. Take a look at the following: -

What does it mean to be a "Specified Senior Citizen"?

A Senior Citizen who meets the following criteria is a senior citizen: -

• Who is a permanent resident of India

• Who, at any point during the relevant financial year, is 75 years old or older &

• Whose only source of income is a pension or interest from the same bank where he gets his pension &

• For this purpose, the bank is a specified (notified) bank.

He must submit a declaration to his bank in the prescribed format, detailing his income for the fiscal year and the deductions that he is entitled to.

Under section 194P, how would TDS be deducted?

Once the bank receives the declaration from the specified senior citizen, the bank will compute the senior citizen's income on the basis of the declaration, after deducting deductions eligible under Chapter VI-A related to 80C/80CCC/80D/80G, etc. and allowing rebate under section 87A of the Act, and deduct TDS equal to tax computed on such income based on the current tax rates.

Is Section 194P truly advantageous to the elderly?

This portion will not relieve older folks' burdens in any way. They are currently calculating their income and submitting their information to a tax professional in order to file their ITR. Furthermore, as mentioned by the Finance Minister, practically all incomes, including as pension and interest income, will now be pre-filled in the ITR on the Income Tax Portal. Additionally, the senior person must visit his bank and provide a written statement of his income, which he previously provided to his tax counsellor. It will not, in any way, lessen the rigour of senior citizens.

It would have been preferable if the Hon'ble FM had been more liberal in terms of tax rebates to senior persons.

This section took effect from April 1, 2021.

TDS on goods purchased- Section 194Q

The government had previously introduced section 206C(1H), which provided for the collection of tax at source (TCS) at 0.1 per cent (without PAN 1 per cent) on receipt of consideration for sales of goods exceeding Rs. 50 lakhs by a seller with a previous financial year turnover of more than Rs. 10 crores. This limit was set to relieve small taxpayers of the difficulty of compliance.

Section 194Q applies to any person who is a buyer of products with a turnover or sales of more than Rs. 10 crores in the previous financial year. If a buyer makes a purchase from a resident (seller) for a value or aggregate value exceeding Rs. 50 lakhs during the year, the buyer must deduct TDS at 0.1 per cent (5 per cent if a PAN is not provided) at the time of credit to the seller's account or at the time of payment, whichever comes first.

Section 206AA imposes a higher rate of TDS if the payee fails to provide a PAN.

The Income Tax Act, Section 206AA, states that if the deductee fails to provide his PAN to the deductor, the deductor must deduct TDS at the higher of the following rates: 

• at the rate set forth in the applicable section of this Act; or

• At the current rate; or

•  20% discount

If a deduction is made under section 194-O, the first proviso to section 206AA (1) specifies a rate of 5% instead of 20%.

After the first proviso, another proviso is proposed that provides that when TDS is necessary to be deducted u/s 194Q and the deductee's PAN is not accessible, TDS shall be deducted at 5% instead of 20%. The change will take effect on July 1, 2021.

Cases in which TDS is not deductible under section 194Q

TDS is not required to be deducted in the following two instances under section 194Q: -

• Transactions that are subject to TDS under any other provision of the Act

• Transactions that are subject to TCS under section 206C, excluding those that are subject to section 206C (1H).

This means that if TDS/TCS is required under any other provision of the Act, TDS is not deductible under section 194Q. However, there is one exception. If a transaction is subject to TCS under section 206C (1H) and TDS under this section, only TDS will be deducted from the transaction under this section. Furthermore, the CBDT has been given authority to establish guidelines to help with the implementation of this section's obligations. Every CBDT guideline must be put before each house of parliament and is binding on tax authorities and those who are required to deduct tax.

It should also be mentioned that if the seller's PAN is not accessible, TDS of 5% would be deducted. The second proviso to section 206AA's sub-section (1) has been included for this purpose.

The provisions of the preceding section took effect on July 1, 2021.               

Section 196D: Amendment to the provision relating withholding tax on payments made to FIIs:

• Section 196D of the Act allows FIIs to deduct tax on income derived from securities as described in clause (a) of sub-section (1) of section 115AD. Such a deduction is done at a rate of 20%.
• A proviso is proposed to be included in section 196D to rationalise the provision by enabling the benefit of agreements u/s 90 or 90A of the Act while deducting TDS on payments to FIIs (1).
• The proposed amendment states that if a payee (FIIs) to whom an agreement referred to in section 90(1) or 90A (1) applies and the payee has furnished the tax residency certificate referred to in section 90(4)/ 90(4A) of the Act, the tax will be deducted at the rate of 20% or the rates provided in the agreement, whichever is lower.
• The modification took effect from April 1, 2021.

206AB and 206CCA (Sections 206AB and 206CCA)

• Effective July 1, 2021, Sections 206AB and 206CCA principally demand the deduction (TDS) and collection (TCS) of tax at higher rates* for the indicated person.

A specific individual is a person who has been identified.

• Who has not filed an Income tax return for 2 assessment years relevant to the previous years immediately prior to the previous year in which tax is required to be deducted/ collected
• The due date to file such return of income, as prescribed under Section 139(1), has expired
• The aggregate amount of tax deducted and collected at source is Rs. 50,000 or more in each of these 2 previous years.

^*Higher rate of deduction:

TDS/TCS rates are higher for non-filers of ITRs; a new section 206AB/206CCA has been added.

An exception to these parts: If TDS is deductible under the following sections, section 206AB will not apply.

• TDS on Salary (Section 192);

• TDS on EPF withdrawal under Section 192A;

• TDS on winnings from lotteries, crossword puzzles, and other similar activities (Section 194B).

• TDS on racehorse winnings, Section 194BB;

• TDS on revenue from a Securitization Trust investment under Section 194LBC;

• TDS on cash withdrawals (Section 194N).

Furthermore, non-residents who do not have a permanent establishment in India will be exempt from this part.

• As previously stated, the term of a specified person includes those individuals who have not filed an ITR for both of the applicable assessment years. As a result, if the individual has submitted a return for any of the two assessment years, the provisions of this section do not apply.

• This section makes no exceptions for those who are not required to file an ITR. As a result, even though the person is not required to file an ITR under the provisions of the Income Tax Act, 1961, this section will apply if he has not filed an ITR for the relevant two assessment years.

Audit Procedure:

• Auditors will need to verify the Deductor's declarations from its deductee in order to determine the TDS/TCS rate in accordance with sections 206AB and 206CCA.

Note from the author: -

• The insertion of new sections 206AB and 206CCA has increased the assessee's compliance burden. Previously, the assessee would merely ask for the deductee/PAN. collectee's TDS/TCS was made at a higher rate if PAN was not supplied. However, after July 1, 2021, the assesses must also check whether the person has submitted an ITR for the previous two fiscal years. He should also check whether the TDS/TCS amount in those two years was Rs. 50,000 or more.
• As a result, after inserting these two sections, you must use extreme caution when deducting TDS or collecting TCS. To comply with sections 206AB and 206CCA, be prepared to ask the party for a copy of their ITR as well as Form 26AS. These parts have no rhyme or reason. The government is simply imposing additional responsibility on the assessee, which was always a requirement of the government to ensure that the ITR is completed by the person from whom TDS or TCS is deducted or paid.

Section 194Q

This section, which takes effect on July 1, 2021, allows for the deduction of tax at source on products purchased by the "buyer" at a rate of 0.1 percent at the time of crediting such sum to the resident seller's account or at the time of payment by any method, whichever comes first.

The section's application is further discussed below:

• This clause applies to buyers whose total sales, gross receipts, or turnover from the business in the preceding financial year exceeded Rs.10 crores.
• ii) During the year, such buyer must deduct the TDS of each such seller from whom the total purchase value exceeds Rs. 50 lacs.
• ii) During the year, such buyer must deduct the TDS of each such seller from whom the total purchase value exceeds Rs. 50 lacs.
• iii) TDS is deducted at a rate of 0.1 percent on the amount by which the total purchase price exceeds Rs. 50 lacs.

Example: If party A makes 55 lacs in purchases from party B throughout the year and has a turnover of more than Rs. 10 crores in the preceding financial year, party A will have to deduct the TDS of party B on Rs. 5 lacs (55-50) at the rate of 0.1 per cent.

Interaction with TCS-related region 206C (1H):

The Finance Bill 2020 includes a comparable section, Section 206 C. (1H). The following table compares and contrasts this part with section 194Q:

If a transaction is covered by both sections 194Q and 206C (1H), the requirements of section 194Q will take precedence.

illustrative Situations for applicability of TDS and TCS:

Some key interpretations: 

1) If the buyer does not comply with section 194Q, the seller is required to collect TCS under section 206C (1H) on such transactions.

2) For FY 20-21, the aggregate value of purchase shall be computed from April 1, 2021, notwithstanding the fact that the provision is effective July 1, 2021.

3) Purchase includes the purchase of capital items for the purposes of section 194Q.

Consequences of non-compliance with section 194Q:

1) Section 40a (i a): In the event of a default under section 194Q, 30 per cent of the tax-deductible purchase value shall be disallowed under section 40a (i a).

2) Section 201(1A): In the event of a default in deducting tax or depositing tax after deducting tax, the assessor will be liable to pay simple interest I at 1% for each month or part of a month on the amount of such tax from the date on which such tax was deductible/collectible to the date on which such tax is deducted; and (ii) at 1.5 per cent for each month or part of a month on the amortization of such tax.

3) Section 271C: A penalty is imposed under this section in the event of a failure to deduct tax at source, which is equal to the amount of tax that the person failed to deduct or collect, and is imposed by the Joint Commissioner.

Procedures for auditing:

a) Use Form 26 AS to reconcile sales and purchases:

The sale and purchase of products were not covered by TDS/TCS prior to the implementation of sections 194Q and 206C (1H). Form 26 AS, on the other hand, can now be used as extra audit proof to verify/confirm important revenue and goods acquisition transactions.

b) Tax audit implications:

Where the auditor is obliged to remark on the assessee's overall TDS/ TCS compliances under clause 34a of the Form 3CD, comprehensive reconciliation for these newly added areas may be requested.

c) Implications for calculating income tax provision and, if applicable, interest:

Noncompliance with these provisions leads to disallowances, interest, and penalties, as outlined in the preceding paragraphs. Auditors must carefully consider the same when creating a tax provision in the books of account, as well as when calculating the Income Tax liability and its influence on deferred taxes.

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