The government of India has been implementing measures to curb tax evasion and increase tax compliance by streamlining the tax collection processes. One of those measures is to impose high rates of tax deducted at source (TDS) and tax collected at source (TCS) for non-filers of income tax returns.
What is TDS and TCS?
Tax deducted at source (TDS) and Tax collected at source (TCS) are provisions contained under the Income Tax Act, which require specific individuals and entities to deduct tax at source or collect tax at source before making any payments to the respective recipient. TDS needs to be deducted for payments made for salaries, interest, rent, and professional fees. At the same time, TCS is applicable to certain transactions like the sale of minerals, forest produce and scrap.
Introduction of new Section 206AB and 206CCA
Previously, the rates of TDS and TCS were uniform for all taxpayers. However, with the aim of encouraging tax compliance, the government of India has introduced higher rates of TDS and TCS for non-filers of income tax returns.
Budget 2021 has introduced Section 206AB which requires the deduction of TDS at a higher rate when making payments to a “Specified person”. The rates would be higher of the following
– twice the rate as specified in the Income Tax Act; or
– twice the rate or rates which are in force; or
– five per cent.
The rationale behind this provision is to discourage individuals from avoiding the filing of income tax returns.
Similarly, Section 206CCA of the Income Tax Act has been incorporated to regulate Tax Collected at Source (TCS) at elevated rates from buyers. This provision is placed after section 206CC and empowers the government to collect TCS on the amounts received from buyers. The collection of tax is carried out at a higher rate than the standard rate. The tax is collected at the source and is computed on the higher of the two following criteria:
– twice the rate as specified in the Income Tax Act; or
– five per cent.
Moreover, if the specified person fails to file their income tax return or provide their PAN, a tax rate of 20% or rates applicable as per the section, whichever is higher, will be levied.
Who is a Specified Person?
A specified person is someone who hasn’t filed the income tax return for two years preceding the year of deduction where such income tax return was due, and if TDS or TCS deducted from such person’s income is INR 50,000 or more in each of these two years. For example, for FY 2023-24, if a person has not filed his income tax return in both or any of the two previous FY i.e. FY 2021-22 or FY 2020-21, then such person will be considered a specified person.
Conditions to be checked before deducting tax at higher rates
Conditions which need to be checked before deducting tax at higher rates
- The time limit to file the income tax return under Section 139(1) has expired for both the AYs.
- Aggregate of TDS and TDS in each case is INR 50,000 or more in each of the two previous years.
- A specified person won’t include a non-resident who doesn’t have a permanent establishment in India.
Who are exempted from Section 206AB?
It’s important to note that the provisions of this section don’t apply to the following nature of payments:
- Section 192 – Salary
- Section 192A – Premature withdrawal of Employees Provident Fund (EPF)
- Section 194B – Winnings from any lottery, crossword puzzles or card games.
- Section 194BB – Winnings from horse races
- Section 194LBC – Income from investment in securitisation trust
- Section 194N – Cash withdrawals
- Non-residents who do not have a permanent establishment in India.
- Section 194-IA – Any consideration paid for the sale of an immovable property
- Section 194-IB – Rent payment above INR 50,000
- Section 194M – Payment for professional or contractual services exceeding INR 50 lakh
Who are exempted from Section 206CCA?
TCS not be collected at a higher amount from non-residents who do not have a fixed business place in India for carrying on their business.
Claim of TDS Credit deducted by the Employer but not paid to the Government