Income Tax

Understanding Section 206AB of Income Tax Act 1961

The Finance Minister in Budget 2021 introduced a special provision of TDS in the Income Tax Act 1961. A new section has been inserted, which shall be applicable from 1^st July 2021. The main objective behind inclusion of Section 206 AB is to ensure that taxpayers file their income tax return without fail. In this article, we shall take a look at the newly inserted Section 206AB of Income Tax Act, 1961.

An Overview of Section 206AB of Income Tax Act

This section has been inserted after Section 206AA vide Finance Act 2021^[1]. The provision of Section 206AB overrides all provisions of the IT Act 1961 as it begins with the non-obstante clause. The provisions of this section shall replace the applicability of TDS rate with a higher rate of TDS for those who have not filed income tax returns for previous two years despite the fact that the aggregate of tax deducted and collected is beyond 50000 rupees in each of those two previous years.

Thus Section 206AB mandates the person to deduct the tax at a higher rate to penalize the specified persons. Hence at the time of deducting TDS, a consideration to the provisions of this section is mandatory by the deductor.

Applicability of higher TDS rates under Section 206AB

A higher TDS rates shall apply on the deductees:

• Who hasn’t filed the income return for both of the two assessment years that are immediately before the previous year where the tax is to be deducted;
• Where the time limit to file tax return under Section 139(1) of the Act has expired for both assessment years;
• Where the TDS amount in each of the two assessment years is more than 50000 rupees.

It may be noted that all these conditions should be satisfied for the TDS deduction at higher rates.

Higher rates of TDS under Section 206AB

The TDS rates will be higher of the following:

• Twice the rate mentioned in the relevant provision of the Act, or;
• Twice the rate or rates in force, or;
• Rate of 5%.

Rates in force mean rates that are applicable at present.

For Instance- A deductee has failed to file the return of income for the AY- 2020-21. The TDS deducted under Section 194J shall be higher of-

• Twice the rate mentioned in the relevant provision of the Act- 20%;
• Twice the rates in force- 20%;
• 5%

Eventually, TDS will be deducted at 20%.

Exclusions from Section 206AB of Income Tax Act 1961

The provision of TDS deduction at higher rate will not apply on the following:

• Section 192- TDS on salary;
• Section 194A- TDS on premature withdrawal of EPF;
• Section 194B- TDS on winnings from lottery;
• Section 194BB- TDS on winning from horse race;
• Section 194LBC- TDS by securitization trust;
• Section 194N- TDS on withdrawal of cash;
• Non-resident not having permanent establishment in India.

In case of PAN not furnished by the deductee

The TDS will be deducted at higher of-

• Rates according to this section or;
• Rates according to Section 206AA of the Income Tax Act 1961.

Challenges of the newly inserted section (Section 206AB of Income Tax Act)

Three significant challenges emerge out of this section. The challenges relate to the ability of the deductor to determine that:

• Whether the deductee has filed its income tax return for the previous two years;
• Whether the TDS aggregate in the previous two years is more than 50000 rupees;
• Whether the deductee mandatorily required to furnish its income tax return.

Another challenge would be faced in situations where the due date of filing the return hasn’t expired. What would a deductor do in such cases?

It could also be a possibility that the deductee may refrain from furnishing the particulars of their income tax return with the deductors. Thus the onus of collecting information from the deductee can trammel the deductors from functioning with ease and can impose an additional burden.

Nevertheless, it would be mandatory for the deductee to provide the proof of having filed the income return for the previous two years to avoid deduction at higher rates, and this can increase the overall compliance burden.

Conclusion

Therefore for application of this section, a declaration should be obtained from the deductee that he has filed the return of income for the previous two assessment years, where limit under section 139(1) is expired, or the TDS amount is not equal or more than 50000 rupees in case of non-filing of return. For considering the TDS deduction rate in the FY 2021-22, from July 1, 2021, onwards, income tax return and the TDS amount of the AY 2020-21 and AY 2019-20 will be considered.  However, more clarification would be required from the government to understand Section 206AB of Income Tax Act better.

Read our article: How to Register on TDS TRACES Website?