Introduction
The Income Tax Act of 1961 has introduced several provisions to ensure tax compliance and widen the tax base in India. One such provision is Section 206AB, which mandates higher Tax Deduction at Source (TDS) rates for certain non-filers of income tax returns. This blog post delves into the details of Section 206AB, its applicability, and its impact on businesses and individuals.
Applicability
Section 206AB is applicable to payments or credits made to specified persons who have not filed their income tax returns for the preceding two financial years and have an aggregate TDS/TCS (Tax Collected at Source) of ₹50,000 or more in each of those two years.
Higher TDS Rates
For specified persons, the TDS rate will be the higher of the following:
- Twice the rate specified in the relevant provision of the Act.
- Twice the rate or rates in force.
- 5%.
Specified Persons
A specified person is someone who satisfies the following criteria:
- Has not filed their income tax returns for the preceding two financial years for which the due date of filing the return of income under sub-section (1) of Section 139 has expired.
- The aggregate amount of tax deducted at source and tax collected at source in their case is ₹50,000 or more in each of these two previous years.
Exceptions
Section 206AB does not apply to:
- Non-residents who do not have a permanent establishment in India.
- Deductees who are not subject to higher TDS rates under this section.
Purpose
The primary objective of Section 206AB is to encourage timely filing of income tax returns and ensure tax compliance by penalizing habitual defaulters with higher TDS rates.
Example
If a person, Mr. X, has not filed his income tax returns for the previous two years and the TDS/TCS in each year exceeds ₹50,000, then any payments to Mr. X will attract TDS at the higher rates specified under Section 206AB.
Impact on Businesses
Businesses need to verify the compliance status of their vendors and deductees to ensure the correct application of TDS rates. This requires additional due diligence and might involve checking the return filing status of the payees.
Compliance
To comply with Section 206AB, deductors can use the utility provided by the Income Tax Department to verify the return filing status of the specified persons.
Conclusion
Section 206AB, along with Section 206CCA (which deals with higher TCS rates for non-filers), reflects the government's intent to widen the tax base and improve tax compliance in the country. By understanding and adhering to these provisions, businesses and individuals can ensure they remain compliant with the latest tax regulations.