Income Tax

Compliance checks for Sections 206AB and 206CCA – A new functionality introduced by CBDT

Initially, the Budget 2021 included a provision requiring non-filers of income tax returns for the previous two financial years to pay higher TCS and TDS rates if their tax deduction was Rs 50,000 or greater in each of those two years. For this provision, the Finance Act of 2021 added two new sections 206AB and 206CCA to the Income-tax Act of 1961, which are meant to take effect from July 1, 2021. The ‘Specified Persons,’ as defined in the new sections, are subject to a higher TDS/TCS rate under these sections.

In light of the foregoing, the Income Tax Department has implemented a new functionality called ‘Compliance Checks for Sections 206AB and 206CCA,’ which allows tax deductors and collectors to determine if a person is a ‘Specified Person’ as defined by sections 206AB and 206CCA. The Income-tax Department’s Reporting Portal provides access to this functionality.

Under Sections 206AB and 206CCA

In the case of certain non-filers or for certain specified persons, these sections require a higher rate of tax deduction or collection. The higher rate is either twice the prescribed rate or 5%, whichever is greater.

The Income Tax Act defines a specified person as follows:

1. For the preceding two financial years, the individual has not filed an income tax return (ITR). The two financial years refer to those whose ITR submission deadline has expired under section 139(1).
2. And the total of TDS and TCS for each of these two financial years is Rs. 50,000 or greater.

If the deductee or the collectee meets both of the above-mentioned criteria, the tax deductor or collector is required to deduct or collect tax at double the prescribed rate in the Act, or 5%, whichever is higher.

Why was the new functionality needed?

To implement these two provisions, namely sections 206AB and 206CCA, the tax deductor or collector was required to perform due diligence by ascertaining whether the deductee or collectee is a specified person. This would have imposed an additional compliance burden on the tax deductor/collector.

As a result, during the financial year 2021-22, the deductor or the collector must confirm that whether the deductee or the collectee has filed their ITR returns for the FY 2018-19 and FY 2019-20 (the ITR filing deadline under section 139(1) has passed). Moreover, the aggregate amount of TDS and TCS during these two financial years is also to be checked.

Therefore, the income tax department created a compliance check tool to assist tax deductors and collectors in complying with these two new sections of the Income Tax Act, 206AB and 206CCA.

Compliance Checks for Sections 206AB and 206CCA

CBDT’s Circular No. 11 of 2021, dated June 21, 2021, and explains the theory behind the functionality. The circular was released to introduce and specify the nature and use of the new functionality.

The tax deductors and collectors must register through TAN on the Income-tax Department’s Reporting Portal in order to use the “Compliance Checks for Sections 206AB and 206CCA” functionality. Such reporting portal can be accessed from this link: https://report.insight.gov.in/reporting-webapp/portal/homePage

Deductors and collectors can check a single PAN or multiple PANs at the same time from the new functionality. In other words, the tax deductor/collector can use this functionality to feed a single PAN (PAN search) or numerous PANs (bulk search) of the deductee or collectee and receive a response therefrom if the deductee/collectee is a specified person. The response to a PAN Search will be displayed on the screen and can be downloaded in PDF format. Similarly, the response for Bulk Search would be in the form of a downloaded file that could be saved for future reference.

To alleviate the burden of checking PANs repeatedly, the income tax department clarifies that PAN(s) checked during the fiscal year and marked as non-specified do not need to be re-checked. There will be no additions to the list of specified persons once it is prepared at the start of the fiscal year.

However, there is a possibility that the specified individuals may be removed from the list during the fiscal year. As a result, re-checking will be required when making tax deductions or collecting taxes for these (specified person) PANs (s).

For example, suppose the TDS deductor verified 10 PANs of deductees at the start of the fiscal year using a bulk search facility. And it has been determined that two out of ten deductees are specified persons. So, when deducting taxes, the deductor must re-check the PAN of two specified persons if they are removed from the list of specified persons.

Logic of functionality

The logic of the functionality is as under:

1. As of the beginning of the financial year 2021-22, a list of specified persons is generated, using the previous years – 2018-19 and 2019-20 as the two relevant previous years. The names of taxpayers who did not file a return of income for both the 2019-20 and 2020-21 assessment years and had an aggregate of TDS and TCS of fifty thousand rupees or more in each of the two prior years are included on this list.
2. There will be no new names added to the list of specified persons in the fiscal year 2021-22. This is a taxpayer-friendly provision that relieves tax deductors and collectors of the hassle of checking PANs of non-specified persons multiple times during the fiscal year.
3. If any specified individual submits a valid (filed & verified) return of income for the assessment year 2019-20 or 2020-21 during the financial year 2021-22, his name will be removed from the list of specified persons. This would happen on the date of filing a legitimate income tax return for the fiscal year 2021-22.
4. If any specified individual files a valid return of income for the assessment year 2021-22 (filed and validated), his name will be removed from the list of specified persons. This will be done on the due date for filing the A.Y. 2021-22 income tax return or the date of actual filing of a legitimate return (filed & validated), whichever comes later.
5. If a specified person’s total TDS and TCS for the previous fiscal year 2020-21 is less than fifty thousand rupees, his name will be removed from the list of specified persons. This would be done in the financial year 2021-22, on the first due date under sub-section (1) of section 139 of the Income Tax Act. This due date of 31” July 2021 has been extended to 30th September 2021 (and 31^st December 2021) for the financial year 2021-22.
6. For regular removal of persons from the list of designated or specified persons, belated and revised TCS & TDS returns of the relevant financial years filed during the financial year 2021-22 shall also be considered.

Checking of compliances by TDS Deductor or TCS Collector

The deductor or collector may check the PAN in the functionality at the start of the financial year, but he is not compelled to check the PAN of a non-specified individual during that financial year.

For understanding, assume that a deductor has 10,000 vendors with whom he does business. He can use the functionality in bulk search mode to obtain the results for all 10,000 PANs at once. Suppose that the functionality has revealed that 5 of the 10,000 PANs are designated as specified persons for the purposes of sections 206AB and 206CCA of the Income Tax Act. Now, it is evident that the remaining 9,995 PANs are not on the list of specified persons for that particular fiscal year.

Because no new names will be added to the list of specified persons during the financial year, the deductor or collector can be confident that these 9,995 PANs will remain outside the list of specified persons for that particular year. As a result, during that financial year, the deductor or collector does not need to examine these 9,995 PANs again. However, there is a possibility that during the financial year, the 5 PANs of designated or specified persons may shift off of the list (may come out of the purview of specified persons), necessitating a recheck at the time of tax deduction or tax collection.

At the start of each fiscal year, the list would be redrawn, and the procedure would have to be repeated. For example, at the start of the fiscal year 2022-23, a new list would be created, with the previous years of 2019-20 and 2020-21 serving as the two relevant preceding years. Then, no new names would be added to the list of specified persons during the financial year, and only the name(s) would be removed (if any) based on the logic described above.

Furthermore, the specified persons shall not include a non-resident who does not have a permanent establishment in India, according to the provisos of sections 206AB & 206CCA of the Act. If a specified person is established by the above-mentioned functionality, tax deductors and collectors are expected to perform the necessary due diligence on him in order to consider him non-specified if he falls under these provisions.

Conclusion

Businesses need to make hundreds of TDS payments on average. Furthermore, it is nearly impossible to manually check each TDS/TCS payment to see if the deductee or collectee is a defaulter of Sections 206AB & 206CCA.

To address this issue, the Income Tax Portal has launched an online ‘compliance check functionality’ for sections 206AB and 206CCA to assist deductors and collectors in identifying the ‘specified person.’

The Notification has made it easier for tax deductors and collectors by requiring them to check the PAN in the functionality at the start of the financial year rather than checking the PAN of the non-specified individual again during that financial year. Therefore, the government has reaffirmed its commitment to reducing the compliance burdens on taxpayers with this new feature.

The CBDT’s circular on the functionality of compliance checks for Sections 206AB and 206CCA is attached below:

circular_11_2021

Read our article:Understanding Section 206AB of Income Tax Act 1961