Introduction to Section 206AB:
Section 206AB of the Income Tax Act is a recent amendment introduced by the Finance Act, 2021. Moreover, this section aims to ensure timely and proper deduction of tax at source (TDS) by providing for a higher rate of TDS on payments made to specified persons. Furthermore, specified persons are those who have not filed their income tax returns for the relevant AY preceding the financial year. Additionally, this amendment targets individuals whose aggregate amount of TDS is Rs 50,000 or more. Ultimately, the purpose of this amendment is to discourage tax defaulters from evading taxes and promote compliance with tax laws.
Key Provisions of Section 206AB:
As per the provisions of Section 206AB, the rate of TDS applicable on payments made to the specified person shall be higher than the following:
- Twice the normal rate as specified or in force as per the relevant provisions of the Income Tax Act, or
- 5%, if no rate is specified under the relevant provisions of the Income Tax Act.
In a recent circular, the Central Board of Direct Taxes (CBDT) has specifically instructed tax deductors to apply the provisions of Section 206AB solely to specified persons. This directive applies when the deduction of tax deducted at source (TDS) occurs under specific provisions. This is to ensure the sections are applied to defaulters and not to genuine taxpayers who have not filed their income tax returns due to genuine reasons.
Who is A ‘Specified Person’ as per Section 206AB?
Under Section 206AB, the term ‘specified person’ pertains to an individual who meets two criteria. Firstly, they have not filed their income tax returns for the assessment year (AY) corresponding to the previous year (PY) before the financial year in which the deduction of income tax is obligatory. Secondly, their total amount of tax deducted at source (TDS) is Rs 50,000 or more.
Note:
However, it’s important to note that Section 206AB does not apply to two specific categories:
- Non-residents who do not have a permanent establishment (PE) in India.
- Individuals who are not required to file an income tax return (ITR) for a specific assessment year (AY). This exemption is applicable if the person is notified by the Central Government in the Official Gazette.
Guidelines for Tax Deductors and Tax Collectors
The CBDT has issued guidelines for tax deductors and collectors to ensure proper compliance with the provisions of Section 206AB. These guidelines are as follows:
- Identify the specified persons who are eligible for higher TDS rates as per the provisions of Section 206AB. The list of specified persons will be made available on the income tax department’s website.
- Ensure that they have the necessary information and evidence to determine whether the specified person is a defaulter or a genuine taxpayer who has not filed returns due to genuine reasons. Such as verifying the ITRs filed by him last year, examining the reasons for the non-filing of returns, etc.
- Deductors must ensure the deduction of TDS at the higher rate specified in Section 206AB. This higher rate should be applied to all forms of payments made to specified persons. This shall be including salaries, professional fees, interest, rent, and more.
- Ensure that they comply with the provisions of Section 206AB.
Conclusion
Section 206AB of the Income Tax Act is a significant step towards ensuring compliance with tax laws and discouraging tax evasion. It aims to identify and penalize defaulters who do not file their income tax returns and evade taxes. However, it is important for tax deductors and collectors to exercise caution while implementing the provisions of Section 206AB to ensure that genuine taxpayers are not penalized. Compliance with the provisions of Section 206AB is essential to avoid penalties and interest under the Income Tax Act. Therefore, tax deductors and collectors must ensure that they identify specified persons who are eligible for higher TDS rates. Furthermore, they must comply with the guidelines issued by the CBDT as well.
Our legal consultants at Sorting Tax Advisory Services can help you understand the applications and implications of Section 206AB. Contact us today.
FAQs:
Q: Who is considered a non-filer under Section 206AB of the Income Tax Act?
Answer. A non-filer refers to an individual who, in the context of income tax, has not filed their income tax returns for the assessment year (AY) corresponding to the previous year (PY) prior to the financial year in which the deduction of income tax is mandatory. Additionally, the aggregate of TDS and TCS in their case amounts to INR 50,000 or more in the concerned financial year.
Q: Are there any exceptions to the applicability of Section 206AB?
Answer. Yes, Section 206AB does not apply to certain payments. Some examples include salary, winnings from lottery or crossword puzzles, winnings from horse races, income from investment in securitization trusts, and income from foreign companies.
Q: How can a deductor determine if a deductee is a non-filer under Section 206AB?
Answer. The deductor can check out the e-filing portal of the IT Department to verify if a deductee is a non-filer. The deductor needs to provide the deductee’s PAN, and the portal will indicate if the deductee is a non-filer subject to higher TDS rates under Section 206AB.
