Unfolding Section 206AB and 206CCA of Income Tax Act 1961 which are effective from 1.7.2021
The IT authorities are constantly making an effort to bring valid assessments under the compliance umbrella. Because many people though liable to file an income tax return, avoid the compliance either due to lack of awareness/information and some due to willful negligence. Hence public at large view it as discrimination against sincere taxpayers. Because apparently neither there is any incentive for sincere taxpayers nor any instant disincentive for non-compliers. Through TDS provisions many such instances were noticed and tracked by the authorities. As a result, it paved way for devising a mechanism to bring such defaulters under the compliance umbrella by disincentivizing through deduction or collection of tax at a higher rate than normal.
Let us analyze the rationality behind the introduction of sections using an example of TDS
Assume Mr.X, a resident individual has got TDS deducted amounting to Rs. 50,000. Let us ascertain his total taxable income considering one of the highest and lowest rates applicable under different sections in TDS
Considering the highest rate to be 10%, his total taxable income comes to Rs.5,00,000 (Rs.50,000/10*100)
Considering the Lowest rate to be -1% his total income comes to Rs.50,00,000 (Rs.50,000/1*100)
Apparently in both the above said cases total taxable income is exceeding the basic exemption limit. Because in the absence of information gross total income itself is presumed as total taxable income. Now in the first instance, there can be again two scenarios:
· Income under other heads of income is present
In such cases unless he has enough deductions to bring down the taxable income below 5,00,000/- one will not get rebate u/s 87A, hence tax payable will be there. So, if one files the return, he will be able to assess his tax liability and then set it off with his available TDS credit. If TDS credit is in excess, claim a refund else discharge the liability.
· Income under other heads of income is not present
Unless one files the return and discloses his exact total taxable income after considering deductions not only the authorities will be able to take a call on what’s the tax liability and whether TDS credit is more than or less than liability but also the assessee will be deprived of the legitimate refund.
In both the scenarios the non-compliance of taxpayer is adversely affecting either authorities or taxpayer himself which needs further investigation to determine who is the one being adversely affected. But such instances will be very high in number. Hence looking into each and every such case wouldn’t be an ideal proposition considering cost and benefit factors. Hence a common procedure to curb this practice was the need of hour. In this regard, two new sections Section 206AB and Section 206CCA were introduced in the Finance Act 2021 which are effective from 01-07-2021 for a class of persons termed as Specified persons
Who is a Specified person?
A Specified person is
a. The one who has not filed income tax returns for the preceding two previous years, [i.e., for which due date for filing return u/s 139(1) (i.e., original return) has expired] relevant to the previous year in which TDS/TCS is required to be done AND
b. TDS and TCS done in each of those two preceding previous years are Rs.50,000/- or more
c. But excludes a non-resident, who doesn’t have permanent establishment
For example, if one wants to determine whether a taxpayer is considered as a specified person for PY 2021-22, the relevant preceding two previous years are 2019-20 and 2020-21
Let’s familiarise the categorization of Specified person with the help of a few examples
Mr. A, a resident individual not subject to a tax audit, has not filed return for PY 2019-20 and PY 2020-21 (Assuming there are no extensions of due dates of filing income tax return)
As on date
Amount of TDS done in each Previous year
Amount of TCS done in each Previous year
Whether Specified person
Yes or No
*Having permanent establishment in India
** Not having a permanent establishment in India
Case-1-Neither the time limit file return u/s 139(1) has not expired nor his TDS amount deducted in each year >=Rs.50,000 (Limit is not on the aggregate of both the years but for each year)
Case-2- The time limit file return u/s 139(1) has not expired and his aggregate of TDS and TCS amount deducted in PY 2019-20 >=Rs.50,000
Case-3-The time limit file return u/s 139(1) has not expired though his aggregate of TDS and TCS amount deducted in both the preceding years are >=Rs.50,000
Case-4-Both the conditions are satisfied. The due date to file return u/s 139(1) for both preceding years has expired and TDS done in both the preceding years individually is >=50,000/-
Case-5 The time limit file return u/s 139(1) has not expired though his aggregate of TDS and TCS amount deducted in both the preceding years are >=Rs.50,000. In spite of being a non-resident, he is not covered under exclusions as he is having a permanent establishment in India.
Case-6- The said person is covered under exclusions as he is a non-resident, not having a permanent establishment in India. Hence no need to check further criteria’s
Case-7- The time limit file return u/s 139(1) has expired and his aggregate of TDS and TCS amount deducted in both the preceding years are >=Rs.50,000. He is not covered under exclusions as he is a non-resident, having a permanent establishment in India.
Case-8- The time limit file return u/s 139(1) has expired and his aggregate of TDS and TCS amount deducted in both the preceding years are >=Rs.50,000 (i.e., In PY 2019-20 Rs.51,000 and in PY 2020-21 Rs.53,000).
Having understood the concept of a specified person, now Let us discuss each of the sections in detail
Section 206AB of Income Tax Act 1961 (Applicable to TDS cases)
The said provisions say that if a specified person for whom TDS needs to be done other than the exceptions mentioned below then the rate of tax applicable for deduction shall be higher of the following
a. Twice the rate mentioned under the relevant provision of Act
b. At twice the rates that are in force
c. At the rate of 5%
If the same case is also covered under section 206AA, dealing with non-furnishing of PAN details, the rates prescribed under both these sections need to be compared and the rate higher between them has to be considered.
Exceptions-Sections excluded from the applicability of the section:
TDS on Salary
TDS on Premature withdrawal from EPF
TDS on Lottery
TDS on Horse Riding
TDS on Income in respect of investment in securitization trust
TDS on cash withdrawal in excess of Rs. 1 crore
Suppose Mr. Karan has to deduct TDS under section 194JB to Mr. Sharan, who is a specified person. Then the applicable rate for deduction of tax is higher of below three rates:
a. Twice the rate mentioned in relevant provisions (TDS rate for 194JB-10%) So 2*10%= 20%
b. At twice the rates that are in force (Assuming that effective rates as 75% of original rate as per act due to pandemic) 2*7.5%=15%
Hence the applicable rate of TDS in the given case would be 20%
Relevant extract of section 206AB for Income tax Act 1961 - Source: Income tax website- Tax Laws & Rules > Acts > Income-tax Act, 1961 (incometaxindia.gov.in)
Section 206CCA of Income Tax Act 1961 (Applicable to TCS cases)
This section provides TCS rate applicable for specified persons as higher of the below
a. Twice the rate specified in the relevant provisions of the Act
b. At the rate of 5%
In cases covered under section 206CC of non-quoting of PAN, the higher of the rate between rates prescribed under both the provisions, shall be considered as applicable.
Relevant extract of section 206CCA for Income tax Act 1961 - Source: Income tax website- Tax Laws & Rules > Acts > Income-tax Act, 1961 (incometaxindia.gov.in)
Facilitation measures-Compliance check functionality
Unless the IT authorities provide such information it’s highly impossible for tax deductors or collectors to gather information from each person whether such person is a specified person or not as per the provisions of Act and then determine rate of tax applicable for him/her for deducting/collecting tax. Hence the Director General of Income Tax systems is identified as specified income tax authority who is responsible to provide such information on need basis to the tax deductors/ collectors. To materialise the same a new functionality called “Compliance Check for Section 206AB and 206CCA” has been released by Income tax Authority through https://report.insight.gov.in
Let us understand the steps involved in getting registered in this portal Notification 01 of 2021 dt.22.06.2021
1. Tax deductors/Collectors has to login in their e-filing portal
2. Under Pending actions Tab select option Reporting portal. The page redirects to the reporting portal
3. Select appropriate compliance check form based on whether tax deductor/collector
4. Need to provide details of principal officer under Add principal officer option (the principal officer will be authorized person to use the compliance check functionality
5. On successfully submitting the registration request, an email notification is triggered to the principal officer along with the login credentials and ITDREIN (Income Tax Department Reporting Entity Identification Number)
6. Using the login credentials, the principal officer can login to the Reporting portal. The link to the functionality of compliance check is made available in the home page of Reporting portal itself.
Two modes of getting information of specified persons
1. PAN Search mode
i. Select PAN search tab of compliance check functionality
ii. Enter a valid PAN and given captcha
Then output fields provided are as below:
· Current financial year
· PAN (as provided)
· Masked name as per PAN
· PAN allotment date
· Aadhar and PAN link status
· Whether Specified person or not “Yes” or “No”
2. Bulk search mode
i. Select Bulk search tab of compliance check functionality
ii. Click on Download csv template option
iii. Enter the PAN’s in the .csv template for which Specified person status is required (Max limit of 10000 in a single file)
iv. Click on Upload csv. Browse the csv template prepared and upload. Once completed, the file status appears as “uploaded”.
v. Once the system completes processing the file the status of file changes to “Available”
vi. Download the output csv file. Then the file status changes as “Downloaded”
vii. The file will be available for download only for 24hours after which status automatically changes to “Expired”
viii. The fields in the output file are same as mentioned in PAN search mode
Tax deductors and Collectors can get the complete information in form of guide and FAQ’s on said aspects by accessing Resource section of Reporting portal
Impact on the tax deductors and collectors
Tax deducting/collecting entities deal with hundreds of deductees and collectees every day. Whenever any such provision is introduced, it’s conventional that smaller entities would perform such activities manually due to lesser number of transactions. But the larger entities would prefer to automate such process by putting certain logic in their ERP/applications so as to avoid non-compliance or possibility of clerical errors. In order to automate the said process, firstly the entity has to identify the specified persons from the large pool of deductees and collectees with the aid of compliance check functionality tool. But a specified person in one previous year, might not be a specified person in another year or within same previous year as the status gets updated on real time basis with any further compliance process initiated by the deductee/collectee. As a result, verifying status of each deductee/ collectee is not a one-time activity but an activity to be performed repetitively. So, one can conclude that the status of specified person is not static and is inherently uncertain. Besides as on date, there is no possibility that this step could be automated or integrated with regular accounting or ERP software. Because the information of specified person is real time and available exclusively on the reporting portal. Secondly suppose a person is identified as a specified person, then the logic of determining rate of tax, is also complicated. Because one of the variables in criteria of Section 206AB says twice the rate in force has to be considered for comparison. Hence, it’s given that along with the standard rates applicable for each TDS section, one should also update their applications/systems with rate in force to determine accurate rate of tax applicable in each case. Due to such multiple dynamic aspects’ automation is an unlikely proposition. Owing to such complexities, handling this huge compliance manually is likely to be prone to error whether done in house or outsourced. On top of that, it would contribute to the increased cost of process besides consumption of more time and human resources.
Therefore, the tax deductor and collectors have to bear in mind that an additional compliance has been delegated to them, which they are expected to carry out effectively. Suppose they fail to distinguish specified persons and deduct/collect tax at regular rates, they will be subject to same interest provisions which are applicable for short deduction/collections currently. In order to avoid such undesired consequences, the responsible persons should take necessary actions to educate the concerned persons involved in the process about the changes in provisions of the Act, corresponding changes to be implemented in the execution of work to align with changes and timely initiation of registration process with Reporting portal to enable timely verification of status of specified persons which would facilitate compliances within due date.