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Section 206AB of Income Tax Act: Understanding Higher TDS/TCS Rates for Non-Compliant Taxpayers – Example Included

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Section 206AB of the Income Tax Act, 1961 was introduced in the Union Budget 2021-22 as a special provision to ensure that the non-compliant taxpayers do not receive any beneficial provisions under the Income Tax Act. This provision is applicable for the TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) purposes. In this blog, we will discuss the key features of Section 206AB along with an example.

Key features of Section 206AB:

  1. Applicability: The section is applicable to both resident and non-resident taxpayers who have not filed their income tax returns (ITR) for the past two years and whose total tax deducted or collected at source exceeds Rs. 50,000 in each of these two years.
  2. Higher rate of TDS/TCS: If a non-compliant taxpayer falls under the purview of Section 206AB, the TDS/TCS rate applicable to them will be higher of the following: a. Twice the rate specified under the relevant provision of the Income Tax Act, or b. Twice the rate or rates in force, i.e., the rate prescribed in the Finance Act.
  3. Exemptions: The higher rate of TDS/TCS under Section 206AB will not be applicable if the non-compliant taxpayer has filed their ITR for the past two years and the total tax deducted or collected at source in each of these two years is less than Rs. 50,000.
  4. Validity: The provisions of Section 206AB will be applicable from 1st July 2021 and will be effective until 31st March 2023.

Example: Suppose Mr. X is a resident taxpayer who has not filed his ITR for the financial year 2019-20 and 2020-21, and the total tax deducted at source in each of these two years is Rs. 75,000. Mr. X is therefore a non-compliant taxpayer under Section 206AB.

If Mr. X receives a payment of Rs. 1,00,000 on which TDS is applicable, the TDS rate applicable to him will be higher of the following: a. Twice the rate specified under the relevant provision of the Income Tax Act, or b. Twice the rate or rates in force, i.e., the rate prescribed in the Finance Act.

Suppose the TDS rate under the relevant provision of the Income Tax Act is 10% and the TDS rate prescribed in the Finance Act is 7.5%. In this case, the higher of the two rates will be twice the rate prescribed in the Finance Act, i.e., 15%.

Therefore, the TDS applicable to Mr. X on the payment of Rs. 1,00,000 will be Rs. 15,000 (15% of Rs. 1,00,000), instead of the normal TDS rate of 10%.

  1. Compliance with other provisions: It is important to note that compliance with Section 206AB does not absolve the taxpayer from compliance with other provisions of the Income Tax Act. Therefore, the taxpayer must ensure that they comply with all other provisions of the Act, including filing their ITRs on time, paying taxes on time, and complying with TDS and TCS provisions.
  2. Applicability to certain taxpayers: Section 206AB also applies to certain categories of taxpayers, such as non-resident taxpayers who do not have a permanent establishment in India and taxpayers whose income is subject to special rates of tax under Section 115AD, 115BAA, 115BAB, or 115JC.
  3. Consequences of non-compliance: Non-compliance with Section 206AB can result in higher TDS or TCS rates, which can impact the cash flow of the taxpayer. In addition, non-compliance can lead to penalties and interest charges under the Income Tax Act.
  4. Exemption for certain payments: Certain payments made to non-compliant taxpayers may be exempt from the provisions of Section 206AB. For example, payments made for the purchase of goods or services for personal use are exempt from the provisions of Section 206AB.
  5. Impact on small taxpayers: Section 206AB may have a disproportionate impact on small taxpayers, who may not have the resources to comply with the provisions of the Act. However, the exemption for payments made for personal use can provide some relief to such taxpayers.
  6. Need for compliance: Compliance with the provisions of Section 206AB is essential for the smooth functioning of the tax system. Non-compliance can lead to revenue losses for the government and can also impact the overall tax compliance culture in the country.

Conclusion:

Section 206AB is an important provision of the Income Tax Act, which aims to ensure compliance with the Act by non-compliant taxpayers. It is important for taxpayers to comply with the provisions of Section 206AB to avoid the higher rates of TDS/TCS and other penalties under the Act.

Read more useful content:

Frequently Asked Questions (FAQs)

Q. What is Section 206AB of the Income Tax Act?
Section 206AB is a special provision introduced in the Union Budget 2021-22 to ensure that non-compliant taxpayers do not receive any beneficial provisions under the Income Tax Act. It is applicable for the TDS and TCS purposes.

Q. Who is covered under Section 206AB?
Section 206AB is applicable to both resident and non-resident taxpayers who have not filed their ITRs for the past two years and whose total tax deducted or collected at source exceeds Rs. 50,000 in each of these two years.

Q. What is the higher rate of TDS/TCS under Section 206AB?
If a non-compliant taxpayer falls under the purview of Section 206AB, the TDS/TCS rate applicable to them will be higher of the following:
a. Twice the rate specified under the relevant provision of the Income Tax Act, or
b. Twice the rate or rates in force, i.e., the rate prescribed in the Finance Act.

Q. Is there an exemption under Section 206AB?
Yes, the higher rate of TDS/TCS under Section 206AB will not be applicable if the non-compliant taxpayer has filed their ITRs for the past two years and the total tax deducted or collected at source in each of these two years is less than Rs. 50,000.

Q. When is Section 206AB applicable?
The provisions of Section 206AB are applicable from 1st July 2021 and will be effective until 31st March 2023.

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