Section 206AB and 206CCA of the Income Tax Act: Understanding the Higher Rates of TDS/TCS for Non-Compliant Individuals.

March 15, 2023

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Table of Contents

Introduction

Section 206AB and 206CCA of the Income Tax Act, 1961, were introduced by the Finance Act 2021. These provisions were brought into effect from 1st July 2021 to ensure that individuals who have not filed their income tax returns or have not disclosed their transactions are not able to evade taxes by not complying with their tax obligations.

Section 206AB – TDS at higher rates for non-filers of income tax return

The primary objective of section 206AB is to ensure that individuals who have not filed their income tax returns for the previous two years are not able to evade taxes by not complying with their tax obligations. This provision mandates that if an individual has not filed his/her income tax return for the previous two years and if the tax deducted at source (TDS) is to be made on payments made to him/her, then such TDS will be made at a higher rate than the rate prescribed under the Income Tax Act.

Higher rate of TDS under section 206AB

The higher rate of TDS under section 206AB is as follows:

Twice the rate specified in the relevant provision of the Income Tax Act, or
Twice the rate or rates in force, or
The rate of 5%, whichever is higher.

Applicability of section 206AB

Section 206AB is applicable to all types of deductors, i.e., individuals, HUFs, firms, companies, etc. However, the provision is not applicable in the following cases:

If the tax deducted or collected at source is under section 192, 192A, 194B, 194BB, 194LBC, or 194N of the Income Tax Act.
If the tax deducted or collected at source is on payments made to a non-resident.
If the tax deducted or collected at source is on payments made to a resident who is not required to file an income tax return.

Section 206CCA – TCS at higher rates for non-filers of income tax return

Section 206CCA is similar to section 206AB, but it applies to tax collected at source (TCS) instead of TDS. This provision mandates that if an individual has not filed his/her income tax return for the previous two years and if tax is to be collected at source (TCS) on payments made to him/her, then such TCS will be made at a higher rate than the rate prescribed under the Income Tax Act.

Higher rate of TCS under section 206CCA

The higher rate of TCS under section 206CCA is as follows:

Twice the rate specified in the relevant provision of the Income Tax Act, or
Twice the rate or rates in force, or
The rate of 5%, whichever is higher.

Applicability of section 206CCA

Section 206CCA is applicable to all types of collectors, i.e., individuals, HUFs, firms, companies, etc. However, the provision is not applicable in the following cases:

If the tax collected at source is under section 206C(1) or 206C(1H) of the Income Tax Act.
If the tax collected at source is on payments made to a non-resident.
If the tax collected at source is on payments made to a resident who is not required to file an income tax return.

Section 206AB and 206CCA have been introduced to encourage compliance with tax obligations and discourage non-compliance. These provisions act as a deterrent for non-filers of income tax returns or individuals who have not disclosed their transactions. By mandating a higher rate of TDS and TCS, these provisions aim to ensure that the government receives the due taxes.

While the provisions have been introduced to promote compliance, they also create a burden on the deductors and collectors who have to ensure that they comply with the provisions. The higher rates of TDS and TCS can also impact the cash flow of the individuals who are subject to these provisions. Therefore, it is important for individuals to ensure that they comply with their tax obligations and file their income tax returns on time.

The provisions have certain exceptions, and it is essential for individuals to understand these exceptions to determine if they are subject to the higher rates of TDS and TCS. For instance, the provisions are not applicable if the tax deducted or collected at source is on payments made to a non-resident. Similarly, if the tax deducted or collected at source is on payments made to a resident who is not required to file an income tax return, the provisions are not applicable.

Apart from ensuring tax compliance, the provisions of section 206AB and 206CCA also aim to reduce the burden on the tax administration. Non-filers of income tax returns and individuals who do not disclose their transactions lead to a significant loss of revenue for the government, and the tax administration has to spend resources to identify such individuals and recover the due taxes.

By mandating a higher rate of TDS and TCS, these provisions encourage individuals to comply with their tax obligations, which reduces the burden on the tax administration. The government can use these resources to focus on other important areas such as infrastructure development, healthcare, and education.

Moreover, these provisions can also help in promoting a culture of tax compliance in the country. When individuals see that there are consequences for non-compliance, they are more likely to comply with their tax obligations. This can lead to a more equitable tax system, where all individuals contribute to the growth and development of the country.

Conclusion

In conclusion, section 206AB and 206CCA are important provisions that not only ensure tax compliance but also reduce the burden on the tax administration and promote a culture of tax compliance. It is important for individuals to understand these provisions and comply with their tax obligations to avoid the higher rates of TDS and TCS. By doing so, they can contribute to the growth and development of the country and help build a more equitable tax system.

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Frequently Asked Questions (FAQs)

What is section 206AB of the Income Tax Act?
Section 206AB of the Income Tax Act mandates a higher rate of tax deduction at source (TDS) for non-filers of income tax returns.

What is section 206CCA of the Income Tax Act?
Section 206CCA of the Income Tax Act mandates a higher rate of tax collection at source (TCS) for non-filers of income tax returns.

What is the rate of TDS/TCS under section 206AB/206CCA?
The rate of TDS/TCS under section 206AB/206CCA is twice the rate specified in the relevant provisions of the Income Tax Act or twice the rate specified in the relevant tax treaty, whichever is higher.

When does section 206AB/206CCA apply?
Section 206AB/206CCA applies to transactions where the tax is required to be deducted or collected at source on or after July 1, 2021.

Are there any exceptions to section 206AB/206CCA?
Yes, section 206AB/206CCA does not apply if the tax deducted or collected at source is on payments made to a non-resident or if the tax deducted or collected at source is on payments made to a resident who is not required to file an income tax return.

Do section 206AB/206CCA apply to all types of income?
No, section 206AB/206CCA only apply to certain types of income, such as salary, interest, commission, rent, professional fees, etc.

Is it possible to get relief from the higher rates of TDS/TCS under section 206AB/206CCA?
Yes, individuals can get relief from the higher rates of TDS/TCS under section 206AB/206CCA if they have filed their income tax returns for the past two assessment years and their tax liability is more than Rs. 50,000.

How can individuals claim relief from the higher rates of TDS/TCS under section 206AB/206CCA?
Individuals can claim relief from the higher rates of TDS/TCS under section 206AB/206CCA by filing Form No. 12BBA to the deductor/collector.

Can individuals still file income tax returns after the due date and avoid the higher rates of TDS/TCS under section 206AB/206CCA?
Yes, individuals can still file income tax returns after the due date and avoid the higher rates of TDS/TCS under section 206AB/206CCA if they file the returns before the end of the relevant assessment year.

Can individuals who have paid the higher rates of TDS/TCS under section 206AB/206CCA claim a refund?
Yes, individuals who have paid the higher rates of TDS/TCS under section 206AB/206CCA can claim a refund if their actual tax liability is lower than the TDS/TCS deducted/collected.