Higher rate of TDS for non filer of ITR – All About Section 206AB

“Section 206AA of the Act provides for a higher rate of TDS for non-furnishing of PAN. Similarly, section 206CC of the Act provides for a higher rate of TCS for non-furnishing of PAN.”

• (a) Twice the specified rate of TDS in the provision;
• (b) Twice the rate of TDS in force;
• (c) At the rate of 5%.

(i) A person who has not furnished the return of income for the assessment year relevant to the previous year immediately preceding the financial year in which tax is required to be deducted, for which the time limit for furnishing the return of income under sub-section (1) of section 139 has expired; and

(ii) The aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in the said previous year.

5.1 Applicability of Section 206AB on Non-residents

Section 206AB nowhere states that the higher rate of TDS shall apply only to a resident non-filer of ITR. In fact, it refers to a specified person which covers both the resident and non-resident person.

However, section 206AB (3) expressly excludes only those non-residents who do not have a permanent establishment in India. Hence, non-residents having a permanent establishment in India are covered by the provisions of section 206AB.

It is further clarified that the expression “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. The provisions of section 206AB don’t apply to a non-resident who does not have a PE in India.

5.2 Section 194P and Applicability of Section 206AB

Section 194P is inserted in the statute by the Finance Act, 2021 in order to provide relief to senior citizens who are of the age of 75 years or above and to reduce compliance for them. The new section 194P provides relaxation from filing the return of income if the following conditions are satisfied:

• (i) The senior citizen is resident in India and of the age of 75 or more during the previous year;
• (ii) He has pension income and no other income. However, in addition to such pension income he may also have interest income from the same bank in which he is receiving his pension income;
• (iii) This bank is a specified bank. The Government will be notifying a few banks, which are banking company, to be the specified bank; and
• (iv) He shall be required to furnish a declaration to the specified bank. The declaration shall be containing such particulars, in such form and verified in such manner, as may be prescribed.

Once the declaration is furnished, the specified bank would be required to compute the income of such senior citizen after giving effect to the deduction allowable under Chapter VI-A and rebate allowable under section 87A of the Act, for the relevant assessment year and deduct income tax on the basis of rates in force. Once this is done, there will not be any requirement of furnishing return of income by such senior citizens for the assessment year.

Hence, section 194P expressly provides for exemption from filing of return of income if the conditions mentioned therein are satisfied.

6.1 Section 206AB vis-a-vis Section 206AA (Non-Furnishing of PAN)

Section 206AA provides that any person who is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVIIB of the Act shall furnish his Permanent Account Number (PAN) to the person responsible for deducting such tax, failing which tax shall be deducted at the rate mentioned in the relevant provisions of the Act or at the rate in force or at the rate of twenty per cent, whichever is higher.

If a person does not provide his PAN to the deductor then it will not be possible to know whether he has furnished his return or not. Further, in this case, the rate of TDS shall be 20% under section 206AA. In case, the rate of tax is more than 20%, then such a higher rate will prevail.

Hence when PAN of the deductee is not available or is invalid then the deductor has to compare the rate of TDS under section 206AA and section 206AB and then apply the highest rate of TDS on the amount of payment or credit.

Illustration assuming PAN is not available:

6.2 Applicability where Payment is Below Statutory Threshold Limit

It should be noted that section 206AB is not a provision to cast an obligation to deduct TDS. Rather, this provision only substitutes the rate of TDS with a higher rate in the case of a specified person.

Hence, section 206AB will come into play only when the deductor is required to deduct TDS under any of the provisions contained in Chapter XVIIB of the Act.

For example, if a person makes any payment to a contractor which is subject to TDS under section 194C and the amount of TDS is less than the threshold limit of Rs. 30,000, then no tax is required to be deducted under section 194C and thus the provisions of section 206AB will not apply even if the deductee/contractor is a non-filer in terms of section 206AB.

This is because section 206AB expressly provides that the provisions of section 206AB shall apply where tax is required to be deducted at source under the provisions of Chapter XVII B.

7.1 Amendments in Quarterly TDS Returns/Statements in Form 26Q/27Q

CBDT vide Notification No. 71/2021 dated 8.6.2021 and through Income-tax (17th Amendment) Rules, 2021 has amended Form 26Q and Form 27Q to incorporate the changes introduced by section 206AB for TDS.

In this context, a new tagging code “U” is specified for section 206AB in Form No. 26Q/27Q. Thus, if the deduction is on a higher rate in view of section 206AB for non-filing of return of income (applicable from 1-7-21), the deductor shall tag the record with “U” in the specified column.

As stated earlier, there is no change in the nature of deduction i.e., tax will be deducted under the respective section, but the rate will be applied as per section 206AB if the deductee is a non-filer. However, such a record will be tagged with ‘U’ in Form 26Q/27Q. In Form 27Q, the equivalent code is ‘J’ where the TDS rate is applied as per section 206AB.

7.2 Applicability of TDS Rate as per Section 206AB when Certificate under Section 197 is Issued

When a certificate is issued under section 197 authorizing a deductor to deduct tax at a rate specified in the certificate, then the deductor is under obligation to apply the lower TDS rate as per the certificate issued under section 197.

Thus, irrespective of the rate specified in any provision or rates in force, the lower TDS rate as specified in the certificate shall prevail over such prescribed rates.

Section 197 is a special provision that provides relief from a higher tax deduction in case deduction of tax at such higher rates is not justified by the total income of the deductee. But section 206AB is a non-obstante provision that has an overriding effect over section 197.

In this, the deductor has to check the status of the deductee as per section 206AB. There is no corresponding amendment in section 197 which prohibits or restricts the income-tax department to issue any lower/Nil TDS certificates under section 197. Thus it is not necessary that if the lower rate of TDS is so authorized the deductee cannot be a non-filer.

Section 206AB is inserted to encourage the voluntary filing of returns in case aggregate TDS is Rs. 50,000/- or more. Thus, if the aggregate amount of TDS of the deductee is Rs. 50,000/- or more even after applying the lower TDS rate and he is a non-filer as per section 206AB, then the provisions of section 206AB shall apply to him. In this case, the higher rate shall be double the lower rate of TDS as specified in the certificate u/s 197 or 5% whichever is higher.

Section 197 overrides the prescribed rate of TDS with the lower rate of TDS as specified in the certificate so issued under section 197.

Hence, a higher rate of TDS as per section 206AB shall apply to a case where a lower TDS certificate u/s 197 is issued.

8.1 Online Functionality to Check Compliance u/s 206AB

In order to ensure compliance under section 206AB and section 206CCA, the government has released an online tool for compliance check under Section 206AB and section 206CCA.

In this context, CBDT issued an order u/s 138(1)(a)(i) of the Income-tax Act, 1961 (“Act”) on 21.06.2021 for the purposes of the launch of Compliance Check Functionality for Section 206AB and section 206CCA related to deduction/collection of tax (TDS/TCS) at a higher rate for non-filers of ITR.

Further, on 21st June 2021, CBDT issued Circular No. 11/2021 regarding the use of the functionality under sections 206AB and 206CCA of the Act.

Thereafter, on 22nd June 2021, the Directorate of Systems notified the procedure for Compliance Check for Section 206AB & 206CCA functionality on the reporting portal.

Features of Online Functionality

Based on PAN of the deductees/collectees on the portal, a response sheet is generated that shows whether the deductee/collectee is a “specified person” or not.

There are two types of search options available on the portal:

1. Single PAN Search: Where you can check and verify only a single PAN; and
2. Bulk Search: Where you can search Multiple PANs in one go. All you need to do is upload all the PAN numbers in a CSV file. After this, an output CSV file will be generated containing the list of all the “specified persons”.

8.2 Higher Rate of TCS as per Section 206CCA for Non-Filers

In line with the provision of section 206AB, similar provisions for the collection of tax at a higher rate are introduced by section 206CCA. Thus, in case of a non-filer of return of income for the last two assessment years where the aggregate amount of TDS or TCS is Rs. 50,000 or more, a higher rate of TCS shall apply.

Rate of TCS under section 206CCA shall be the higher of the following two rates:

• i) Twice the Rate of TCS specified in the relevant provision;
• ii) 5%.

Apart from the above, all the provisions of TDS as per section 206AB shall be applicable for section 206CCA.

“Section 206AB of the Income-tax Act is introduced for the collection and deduction of TDS at higher rates in case a sum is payable or paid to a particular individual who didn’t file the ITR as required under this section.”