Section 206AB of the Income Tax Act: An Overview
The Indian government has been implementing several measures to tackle tax evasion and increase compliance with the tax laws of the country. Section 206AB of the Income Tax Act is one such measure that aims to ensure that taxpayers fulfill their tax obligations. In this blog, we will discuss the salient features of section 206AB, its applicability, and its impact on taxpayers.
What is Section 206AB of the Income Tax Act?
Section 206AB of the Income Tax Act was introduced in the Union Budget 2021 with the objective of increasing compliance with tax laws. This section applies to individuals who have not filed their income tax returns (ITR) for the previous two years, and whose tax deducted at source (TDS) or tax collected at source (TCS) exceeds a certain threshold.
Threshold Limit for Applicability of Section 206AB
The threshold limit for the applicability of section 206AB varies depending on the type of taxpayer. For individuals and Hindu Undivided Families (HUFs), the threshold limit is Rs. 50,000 or more in each of the previous two years for which the ITR was due. For companies, firms, limited liability partnerships, and other entities, the threshold limit is Rs. 1 lakh or more in each of the previous two years for which the ITR was due.
Provisions of Section 206AB
Under section 206AB, the tax deductor or collector is required to deduct tax at a higher rate, which is twice the prescribed rate or 5%, whichever is higher. This higher rate of TDS or TCS will be applicable from 1st July 2021 and will remain in force until 31st March 2024.
Exceptions to Section 206AB
There are a few exceptions to the provisions of section 206AB. These include cases where the TDS or TCS has been deducted or collected at a higher rate under any other provisions of the Income Tax Act, or where the taxpayer has filed their ITR for the previous two years and has a valid exemption certificate issued by the Income Tax Department.
Impact of Section 206AB on Taxpayers
Section 206AB will have a significant impact on taxpayers who have not filed their ITR for the previous two years and whose TDS or TCS exceeds the threshold limit. The higher rate of TDS or TCS will increase the tax burden on these taxpayers, and they will be incentivized to file their ITRs to avoid the higher deduction or collection of taxes at source.
The rationale behind Section 206AB
The main objective of Section 206AB is to encourage taxpayers to file their ITRs on time and ensure that the government receives accurate information about the income earned by individuals and entities. This will help the government in improving tax collections and reducing tax evasion. The provision of higher TDS/TCS rates is a deterrent for taxpayers who have been avoiding their tax obligations.
Implications for Tax Deductors and Collectors
Under Section 206AB, tax deductors and collectors have an important role to play. They are required to check whether the taxpayer falls under the purview of Section 206AB before deducting or collecting tax. The tax deductor or collector should verify the PAN of the taxpayer through the Income Tax Department’s e-filing portal or the TIN-NSDL website to determine if the taxpayer is non-filer or non-compliant.
If the taxpayer is non-compliant, the tax deductor or collector must deduct or collect TDS/TCS at twice the prescribed rate or 5%, whichever is higher. If the tax deductor or collector fails to comply with these provisions, they may be liable for penalties under the Income Tax Act.
Exceptions to the Provision
As mentioned earlier, there are certain exceptions to Section 206AB. Taxpayers who have already been subject to higher TDS/TCS rates under any other provision of the Income Tax Act will not be affected by Section 206AB. Additionally, taxpayers who have filed their ITRs for the previous two years and have a valid exemption certificate issued by the Income Tax Department are also exempt from this provision.
Impact on Small and Medium-Sized Enterprises
Section 206AB of the Income Tax Act may have a significant impact on small and medium-sized enterprises (SMEs) that have not filed their ITRs for the previous two years and whose TDS/TCS exceeds the threshold limit. These businesses may face a higher tax burden, which could affect their cash flow and financial stability.
To avoid the higher TDS/TCS rates, SMEs must ensure that they file their ITRs on time and comply with the provisions of the Income Tax Act. They may also seek professional help from tax experts to ensure that their tax compliance is up-to-date and that they are not subject to higher TDS/TCS rates.
Impact on Individuals
Individual taxpayers who have not filed their ITRs for the previous two years and whose TDS/TCS exceeds the threshold limit will also be affected by Section 206AB. They may face a higher tax burden, which could affect their financial planning and budgeting.
To avoid the higher TDS/TCS rates, individuals must ensure that they file their ITRs on time and comply with the provisions of the Income Tax Act. They may also seek professional help from tax experts to ensure that their tax compliance is up-to-date and that they are not subject to higher TDS/TCS rates.
Conclusion
Section 206AB of the Income Tax Act is a step towards increasing compliance with tax laws in the country. It imposes a higher rate of TDS or TCS on taxpayers who have not filed their ITRs for the previous two years and whose TDS or TCS exceeds the threshold limit. Taxpayers who fall under the purview of this section must ensure that they file their ITRs to avoid the higher deduction or collection of taxes at source.
Read more useful content:
- section 234e of income tax act
- section 286 of income tax act
- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
What is Section 206AB of the Income Tax Act?
Section 206AB of the Income Tax Act is a provision that imposes a higher TDS/TCS rate on taxpayers who have not filed their income tax returns (ITRs) for the previous two years and whose TDS/TCS exceeds a specified limit.
What is the purpose of Section 206AB?
The purpose of Section 206AB is to encourage taxpayers to file their ITRs on time and ensure that the government receives accurate information about the income earned by individuals and entities. This will help the government in improving tax collections and reducing tax evasion.
Who is affected by Section 206AB?
Taxpayers who have not filed their ITRs for the previous two years and whose TDS/TCS exceeds a specified limit are affected by Section 206AB. Tax deductors and collectors also have an important role to play in ensuring compliance with this provision.
What is the higher TDS/TCS rate imposed under Section 206AB?
The higher TDS/TCS rate imposed under Section 206AB is twice the prescribed rate or 5%, whichever is higher.
Are there any exceptions to Section 206AB?
Yes, there are certain exceptions to Section 206AB. Taxpayers who have already been subject to higher TDS/TCS rates under any other provision of the Income Tax Act will not be affected by Section 206AB. Additionally, taxpayers who have filed their ITRs for the previous two years and have a valid exemption certificate issued by the Income Tax Department are also exempt from this provision.
When does Section 206AB come into effect?
Section 206AB comes into effect from July 1, 2021.
How can taxpayers check if they are non-filers or non-compliant under Section 206AB?
Taxpayers can check if they are non-filers or non-compliant under Section 206AB by verifying their PAN through the Income Tax Department’s e-filing portal or the TIN-NSDL website.
What is the penalty for non-compliance with Section 206AB?
Tax deductors and collectors who fail to comply with the provisions of Section 206AB may be liable for penalties under the Income Tax Act.
What is the impact of Section 206AB on small and medium-sized enterprises?
Section 206AB may have a significant impact on small and medium-sized enterprises (SMEs) that have not filed their ITRs for the previous two years and whose TDS/TCS exceeds the threshold limit. These businesses may face a higher tax burden, which could affect their cash flow and financial stability.
How can taxpayers avoid the higher TDS/TCS rates under Section 206AB?
Taxpayers can avoid the higher TDS/TCS rates under Section 206AB by ensuring that they file their ITRs on time and comply with the provisions of the Income Tax Act. They may also seek professional help from tax experts to ensure that their tax compliance is up-to-date and that they are not subject to higher TDS/TCS rates.
