Amendments in TDS/TCS Provisions

The amendments and introduction of new provisions are significant and have potential for replacement of Income Tax Returns filings, making it just a procedural submission of documentary evidence for record purposes. Some of the amendments in the proposed provisions are a welcome move as the same were required based on genuine hardships faced by business houses at large and are also in line with globally accepted policies.

The Finance Bill, 2021 has also proposed to introduce certain provisions like Section 206AB and Section 206CCA to encourage deductees to file their Returns, pay their correct taxes, and claim their refunds, if any due. Resultingly, the percentage of individual return filers, which are presently less than 1% of the total population of the country, are bound to increase with the implementation of new provisions.

The proposed amendments with effective dates have been tabulated as under:

Provisions relating to Deductions of Tax effective from 1st April, 2020

Section 194 – TDS on Dividends

Provision relating to deduction of TDS on Distribution of Dividend was introduced and made effective from 1st April, 2020 by withdrawing Dividend Distribution Tax (DDT) in the Finance Act, 2020. The second proviso to Section 194 stated that this section shall not apply if dividend is paid to an insurance company or insurers. The Finance Bill, 2021 now proposes to extend this benefit retrospectively also to business trusts and states that if any dividend is paid or credited to a business trust established for a special purpose vehicle (SPV) or in whose hands dividend is exempt, or also payments made to any other person as may be notified by the Government, then TDS will not be deducted.

Provisions relating to Deductions of Tax effective from 1st April, 2021

Section 194A – TDS on Interest Other than Interest on Securities

In Section 194A of the Income-tax Act, in sub-section (3), in clause (x), after the words “infrastructure capital fund or”, the words “infrastructure debt fund or” shall be inserted. Accordingly, interest payable to an infrastructure debt fund will not be liable for deduction of TDS.

Section 196D – TDS on Income of FII from Securities

The Section has been modified in order to rationalise the provision concerning withholding on payments made to Foreign Institutional Investors (FIIs). Accordingly, it is proposed to insert a proviso to sub-section (1) of Section 196D of the Act to provide that in case of a payee to whom an agreement referred to in Section 90(1) or Section 90A(1) applies and such payee has furnished the Tax Residency Certificate (TRC) as required under Section 90(4) or Section 90A(4) of the Act, then tax shall be deducted at the rate of twenty per cent or the rate or rates of income-tax provided in such agreement for such income, whichever is lower.

Section 194P – TDS on Interest to Specified Senior Citizens

Section 194P has been introduced to give specific relief to Senior Citizens. It has been proposed in the Finance Bill that Banks before deducting TDS will have to take into consideration the allowable deductions under Chapter VIA, rebate under Section 87A, and then deduct TDS. The Banks will have to compute the Total Income of specified Senior Citizens and deduct TDS as a certain category of income earners have been exempted from filing of Return of Income.

The Banks will have to take appropriate care and precaution as they will be required to report all such details in TDS returns while filing e-returns. The Banks having to update their software accordingly should not be a challenging task in the era of digitisation.

For the purpose of this Section, the explanations given by the provisions in the Finance Bill are as under:

Provisions relating to Deductions of Tax effective from 1st July, 2021

Section 194IB – Payment of Rent by Certain Individuals or Hindu Undivided Family

The Finance Bill seeks to include the words, figures, and letters in the said provision “Section 206AA or Section 206AB”, such that TDS is now proposed to be deducted at the higher of the applicable rates of any of such sections, in case of default including non-filing of Return of Income for a consecutive period of two years by a resident individual or HUF rent receiver.

Section 194Q – TDS on Purchase of Goods over a Limit

In the last Finance Bill, Section 206C(1H) was introduced as a levy being TCS on sale of goods, and this year, a new Section 194Q, being TDS on purchase of goods on similar lines, is proposed to be introduced. The proposed Section mandates TDS on purchase of goods above a specified limit, provided the following conditions are satisfied:

1. Buyer Responsibility: Any person, being a buyer, who is responsible for paying any sum to a resident (hereinafter referred to as the “seller”) for purchase of any goods of the value or aggregate of such value exceeding ₹ 50 Lakhs in a previous year shall deduct 0.1% (5% in cases where no PAN or Aadhaar is furnished) of such sum exceeding ₹ 50 Lakhs as income tax;
2. Turnover Threshold for Buyer: A buyer means a person whose total sales, gross receipts, or turnover from the business carried on by him exceeds ten crore rupees during the financial year immediately preceding the financial year in which goods are purchased;
3. Applicability on Credit: If the amount is credited to any account by whatever name called, these provisions shall apply.

However, the Central Government may, by notification in the Official Gazette, specify categories of persons subject to prescribed conditions who shall be exempted from TDS under this section.

It is also stated that if the transaction is covered for TDS/TCS under any other provision of the Act and the deductor has deducted such amount, it shall be exempted from this provision.

Other Provisions

Section 206CC is proposed to be introduced on the lines of Section 206AB wherein the higher of the two rates provided in the section shall apply in case of non-filers of Return of Income.

Compliance Provisions – Special Measures for Non-Filers (Sections 206AB & 206CCA)

Section 206AB and Section 206CCA have been proposed in the Finance Bill, which will require that the Deductor/Payer will have to ensure that while making payment shall deduct TDS of a resident person under the provisions of Chapter XVIIB (other than Section 192, 192A, 194B, 194BB, 194LBC or 194N), the “specified person” has also filed the Return of Income for the last two financial years immediately prior to the financial year in which payment is made.

In case of non-filing of Return of Income by such resident deductee, except in cases where the time limit under Section 139(1) has not expired and the aggregate TDS and TCS in his case is ₹ 50,000 or more in each of these two previous years, then TDS will have to be deducted at the higher of the following rates as applicable under the Section in which payment is made:

1. At twice the rate specified in the relevant provision of the Act; or
2. At twice the rate or rates in force; or
3. At the rate of five percent (5%).

On similar lines, the Collector will also have to ensure that while complying with TCS provisions under Chapter XVIIBB, the person from whom payment is collected has filed the Return of Income for the last two financial years immediately prior to the financial year in which collection is made. In case of such non-compliance, TCS will have to be collected at the higher of the following rates as applicable under the Section in which payment is required to be collected:

1. At twice the rate specified in the relevant provision of the Act; or
2. At the rate of five percent (5%).

The CPC/Government will provide an Online verification mechanism on the website of the Income Tax Department (ITD) in due course, which will enable the Deductor/Payer to verify whether the Payee/Recipient has filed the Return of Income for the last two years or not, as it has now become very user-friendly after the implementation of CPC 2.0.