Section 206AB of the Income Tax Act: Higher TDS for Non-Filers
Section 206AB of the Income Tax Act, 1961, introduced by the Finance Act, 2021, and effective from July 1, 2021, is a special provision that mandates the deduction of Tax Deducted at Source (TDS) at a higher rate when payments are made to certain "specified persons." Its primary objective is to enhance tax compliance by incentivizing taxpayers who have not filed their Income Tax Returns (ITRs) for past years, despite having significant TDS or Tax Collected at Source (TCS) credit.
Who is a "Specified Person" under Section 206AB?
For the purpose of Section 206AB, a "specified person" is defined as an individual or entity who meets the following criteria:
- They have not filed the Income Tax Returns (ITRs) for both of the two assessment years relevant to the two previous years immediately prior to the financial year in which tax is required to be deducted or collected.
- The due date for filing the ITRs under sub-section (1) of Section 139 (excluding belated or revised returns) for these two previous years has already expired.
- The aggregate of TDS and TCS in each of these two previous years is INR 50,000 or more.
Exclusions from "Specified Person"
The definition of a "specified person" does not include:
- A non-resident who does not have a Permanent Establishment (PE) in India.
- Any person who is not required to file the return of income for the assessment year relevant to the previous year, as may be notified by the Central Government.
Applicability and Exclusions of Payments
Section 206AB applies to nearly all types of payments from which TDS is deductible under Chapter XVIIB of the Income Tax Act, with some specific exclusions. The intent is to cover a broad range of transactions to promote compliance.
Transactions NOT covered by Section 206AB
The higher TDS rates under Section 206AB generally do not apply to the following types of payments:
- Salary payments (Section 192)
- Payment of accumulated balance of EPF (Section 192A)
- Winnings from lottery or crossword puzzle (Section 194B)
- Winnings from horse race (Section 194BB)
- Income from securitisation trust (Section 194LBC)
- Cash withdrawals (Section 194N)
- Sale of immovable property (Section 194-IA)
- Rent paid by individuals/HUFs exceeding INR 50,000 (Section 194-IB)
- Payments by certain individuals/HUFs for contractual work/professional fees (Section 194M)
Higher TDS/TCS Rate under Section 206AB
If a payment is made to a "specified person," the tax must be deducted at the **higher** of the following two rates:
- Twice the rate specified in the relevant provision of the Income Tax Act (e.g., if the normal rate is 10%, it becomes 20%).
- 5%.
Interplay with Section 206AA (Non-furnishing of PAN):
If both Section 206AB (non-filing of ITR) and Section 206AA (non-furnishing of PAN) are applicable to a "specified person," the TDS will be deducted at the **highest** of the rates prescribed under 206AB and 206AA. This usually means the rate will be 20% or higher, as per Section 206AA.
Compliance Check Functionality for Deductors
To ease the burden on deductors/collectors, the Income Tax Department provides a "Compliance Check Functionality" on its e-filing portal. This tool allows a deductor/collector to ascertain whether a person is a "specified person" by simply entering their PAN. The functionality returns a result indicating if the person is a "specified person" or not, simplifying the due diligence process.
Section 206CCA: Corresponding TCS Provision
Similar to Section 206AB for TDS, Section 206CCA mandates the collection of Tax Collected at Source (TCS) at higher rates from "specified persons" on receipt of sums. The definition of "specified person" and the higher rates (twice the normal rate or 5%, whichever is higher) are analogous to Section 206AB.
Impact on the Payee (Specified Person)
A "specified person" will have a higher amount of tax deducted or collected from their income. While this might affect their cash flow, they can claim the higher TDS/TCS credit when filing their Income Tax Return. This provision serves as a strong incentive for individuals and entities to ensure timely ITR filing to avoid the increased tax deduction/collection burden.
Future Outlook: Proposed Omission of Section 206AB
Important Update: The Budget 2023 proposed the omission of Sections 206AB and 206CCA, effective from April 1, 2025. This aims to reduce the compliance burden on deductors/collectors and streamline tax procedures. Therefore, for financial years starting on or after April 1, 2025, these provisions may no longer be applicable.
Conclusion
Section 206AB, along with Section 206CCA, was a strategic move by the government to enforce tax compliance among non-filers. It places a significant responsibility on deductors/collectors to identify "specified persons" and apply the correct higher rates. While these sections were instrumental in encouraging regular ITR filing, their proposed omission from April 1, 2025, indicates a shift towards simplifying the tax law and reducing compliance complexities for businesses.