All You Need to Know About Section 206AB and 206CCA
The author is a member of the Institute. She can be reached at caumra08@gmail.com and eboard@icai.in.
1. Introduction: Policy Genesis & Statutory Background
The finance budget was presented on 1st February 2021 by our Honourable Finance Minister, and several amendments in various sections of the Income Tax legislation were proposed. Out of the several proposals at the time of the presentation of the Budget 2021, the amendment which caught special attention was the proposal for the insertion of a new section 206AB and section 206CCA i.e., TDS/TCS at higher rates in case of non-filers of Income Tax Returns.
At present, Section 206AA of the Income-tax Act, 1961, already provides for a higher rate of TDS for not furnishing PAN details. Similarly, section 206CC of the Income-tax Act, 1961 provides for a higher rate of TCS for not furnishing PAN information.
The motive behind introducing these two sections is to ensure the filing of return of income by those persons who have suffered a reasonable amount of TDS/TCS. This section provides for the higher rate of TDS and TCS respectively for those deductees, who had not filed their Income Tax Returns for both assessment years, i.e., relevant to the two previous years which are immediately before the previous year in which tax is required to be deducted or collected.
Effective Date of Enforcement: This amendment takes effect from 1st July 2021.
2. Verbatim Statutory Texts: Section 206AB and Section 206CCA
Text of Section 206AB: Special Provision for Deduction of Tax at Source for Non-Filers of Income Tax Return
(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 Section 206AA.
(3) For 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 before 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 (PE) in India.
Explanation: For 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.
Text of Section 206CCA: Special Provision for Collection of Tax at Source for Non-Filers of Income Tax Return
(1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be collected at source under the provisions of Chapter XVII-BB, on any sum or amount received by a person (hereafter referred to as collectee) from a specified person, the tax shall be collected at the higher of the following two rates, namely:
- (i) at twice the rate specified in the relevant provision of the Act; or
- (ii) at the rate of five percent.
(2) If the provisions of Section 206CC apply to a specified person, in addition to the provisions of this section, the tax shall be collected at the higher one of the two rates provided in this section and Section 206CC.
(3) For 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 before the previous year in which tax is required to be collected, 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.
3. In-Depth Analysis of Section 206AB and 206CCA
This section proposes to penalize a person for not filing a return of income. It provides that, if an assessee fails to file his return of income for a specified period, the tax will be deductible or collected at higher rates. Income-tax Act already contains two similar provisions—Section 206AA and Section 206CC. As per these provisions, if the deductee or collectee fails to provide his Permanent Account Number (PAN), then tax at the higher rate of 20% will be deducted or collected.
As per the memorandum of the Finance Bill 2021, explaining the provisions, has stated that as the provisions of Section 206AA and 206CC have served their purpose in ensuring obtaining and furnishing of PAN by the various persons. Therefore, there is a need to have similar provisions to ensure the filing of return of income by that person who has incurred a reasonable amount of TDS/TCS.
Consequent upon which, the Finance Act 2021, has proposed to insert two sections 206AB and 206CCA, with effect from 01.07.2021. These sections provide for deduction or collection of tax at higher rates in the case of non-filers of Income-tax Return.
Now, to find out the relevant rate of TDS or TCS, it will be likely to solve the complex theorems of TDS/TCS.
4. Criteria to Determine ‘Specified Person’
This provision applies to a specified person only. The Section 206AB(3) provides the following conditions to classify a recipient as a ‘specified person’:
- The person who has not filed his return of income for 2 assessment years relevant to the previous years immediately prior to the previous year in which tax is required to be deducted;
- The due date to file such return of income, as prescribed under Section 139(1), has expired; and
- The aggregate amount of tax deducted and collected at source is Rs. 50,000 or more in each of these 2 previous years.
Operational Testing Timeline for FY 2021–22:
This provision is applicable from 01-07-2021. As a result of which any payment made after this date shall go through the testing process of Section 206AB. And for any payment on or after the 01.07.2021 but before 31-03-2022, the deductor shall be under an obligation to check whether the deductee has filed his return of income of the last two assessment years 2020-21 and 2019-20 (previous years 2019-20 and 2018-19).
5. Scope of Payments & Statutory Exclusions
These provisions shall apply in respect of every sum or income or amount from which tax is deductible under any provision of Chapter XVII-B except those specified under Section 206AB, namely:
TDS on Salary
TDS on withdrawal from EPF
TDS on winning from lotteries, crossword puzzles, etc.
TDS on winning from racehorses
TDS on income in respect of investment in Securitization Trust
TDS on cash withdrawal
All other payments shall be going through the test of Section 206AB, even if they are not considered as income in the hands of the assessee. However, this provision shall not apply to such sum (or income or amount) paid (or payable or credited) to a non-resident who does not have a permanent establishment (PE) in India.
6. Non-Obstante Clause & Recipients ‘Not Liable’ to File Returns
Overriding Legal Effect of the Non-Obstante Clause
The Section 206AB overrides all other provisions of the Income-tax Act. This means that the provisions shall apply even if the assessee has a nil TDS certificate, or has filed a declaration under Section 197A for non-deduction of tax, or is otherwise not liable to file the return of income.
What if the Recipient is ‘Not Liable’ to File the Return?
No exception is given in these provisions even to the recipient who are not liable to file the return of income. One of the conditions to invoke these provisions is non-filing of return of income by the recipient. The provision does not carve out an exception in favour of the recipient who was otherwise not liable to file the return.
This section provides for deduction of tax at higher rates if the deductee has not furnished the return of income of the specified period, irrespective of the fact that whether he was required to furnish it or not. This may invite troubles for the non-residents who are having a permanent establishment in India but otherwise not liable to file the return of income because of the exemption extended by Section 115A(5). The super senior citizens will also face the heat if the tax was deducted from their income yet they did not file the return of income.
Practical Case Illustrations
Example: Mr. Naresh (85 Years) earned an interest income of Rs. 5,00,000 in both the preceding years. TDS of Rs. 50,000 has been deducted under Section 194A each year. As his income was below the maximum exemption limit, he was neither liable nor furnished the return of income of the relevant period. But, after insertion of this new section, now the tax will be deducted at the higher rates prescribed under Section 206AB.
Example: Mr. Ram is going abroad for higher studies for a period of two years. He buys foreign currency for an amount equivalent to Rs. 20 lakhs each in the next two financial years. The authorized dealer will collect a tax of Rs. 65,000 from such amount under Section 206C(1G)(a). As Mr. Ram will not have any income, he will not file the return of income for both the previous years. When he returns to India after completion of his studies, his income (other than the excluded one) shall be subject to TDS at a higher rate due to the operation of Section 206CCA at least for one year.
7. Prospective Compliance Scenario & Section 194-IB Ceiling Amendment
Yearly Verification & CBDT Compliance Functionality
These provisions apply only if the deductee or collectee has not furnished the return of income for the specified period. And after insertion of section 206AB it will be mandatory for the deductor to verify the return filing status of every deductee or collectee. It will now be a yearly exercise to verify the ITR status of the deductee and collectee. Therefore, a tool is made available by the government to check the ITR filing status. Circular No. 11 dated 21.06.2021 is also issued regarding the use of functionalities u/s 206AB and 206CCA.
Significant Amendment to Section 194-IB (TDS on Rent by Individuals / HUFs)
As per section 194-IB: “Every Individual or HUF shall be required to deduct tax at source on any sum payable by way of rent, if his gross receipts or turnover in the financial year immediately preceding the financial year, in which rent is paid or credited, does not exceed Rs. 1 crore in case of business and Rs. 50 lakhs in case of a profession.”
Now, as per the existing provisions, if a recipient fails to furnish his PAN, tax is required to be deducted at the higher rates as prescribed under Section 206AA. However, as per Section 194-IB, if the deductee does not furnish his PAN to the deductor, the tax shall be deducted at the rate prescribed under Section 206AA, subject to the condition that the amount of TDS cannot exceed the amount of rent payable for the last month of the year or the last month of the tenancy, as the case may be.
Since Section 206AB is similar to Section 206AA, an amendment has been made to Section 194-IB also, to provide that in case the tax is required to be deducted at the higher rates as prescribed in Section 206AB, the amount of TDS cannot exceed the amount of rent payable for the last month of the year or the last month of the tenancy, as the case may be.
8. Conclusion
From the above analysis, it is clear that the above two sections are inserted to keep a check on the persons who are not filing their Income Tax Return and to ensure that such persons file their return of Income within the stipulated time. It is expected that these two sections will also serve the purpose as the sections 206AA and 206CC have done.