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Tax Deduction or Collection at Source For Not Filing of Income Tax Return

Updated on:  

08 min read

A new section is introduced in the Finance Bill, 2021 for deduction and collection of tax at source at higher rates if an amount is paid or payable to the specified person who did not file the income tax return. Section 206AB for TDS is inserted after section 206AA of the income tax act. The latter provides for deduction of TDS at higher rates for non-furnishing of Permanent Account Number (PAN). Similarly, section 206CCA for TCS is inserted after section 206CC of the income tax act. 

Let us know more about it:

What is section 206AB and 206CCA

Section 206AB provides a tax deduction at source (TDS) at rates higher than those prescribed in the Act while making payments or collections to those who have not filed their income tax return.
Similarly, section 206CCA provides a collection of tax at source (TCS) on amounts received from the buyers at rates higher than specified in the Act.

Applicable for Which Type of Transactions

The nature of the transaction on which a higher amount of TDS/TCS shall be deducted can be any transaction such as contract payments, professional charges, rent etc., but excluding the below nature of payments:

  • Salary
  • Premature withdrawal of EPF
  • Winnings from any lottery or card games or crossword puzzles  
  • Income with respect to investment in securitisation trust
  • Winnings from any horse races
  • TDS on cash withdrawals

When You Should Deduct or Collect Tax at Source at Higher Rates

The tax is required to be deducted/collected at source at rates higher than prescribed in the Act, if the transaction is incurred with the person who satisfies the following conditions:

  • The person not file the income tax return for both of the previous two Financial Years (FYs) immediately before the FY in which tax is required to be deducted,
  • where the income tax return (not belated return) filing due date is expired and
  • The total amount of deduction and collection of tax (TDS and TCS) is Rs.50,000 or more in each of these two previous years.

Note: It does not apply to a non-resident who does not have a permanent establishment in India. Permanent establishment for this purpose includes a fixed place of business where the enterprise’s business is carried out wholly or partially.

Rate of TDS or TCS

TDS

If the taxpayer falls under all the above conditions then tax shall be deducted at source (TDS) at higher of below rates:

  • Twice at the rates prescribed in the relevant provisions of the Income Tax Act.
  • At the rate or rates in force, i.e., the rate prescribed in the Finance Act
  • At five per cent.

In addition to non-filing of income tax return, if the specified person does not furnish PAN, then tax shall be deducted or collected at 20 per cent or rates applicable as per this section, whichever is higher.

TCS

The tax shall be collected at source (TCS) on higher of the following:

Twice at the rates prescribed in the relevant provisions of the Income Tax Act.

  • At the rate or rates in force, i.e., the rate prescribed in the Finance Act
  • At five per cent.

In addition to non-filing of income tax return, if the specified person does not furnish PAN, then tax shall be deducted or collected at 20 per cent or rates applicable as per this section, whichever is higher.



Illustration

A company makes a contract payment of Rs.80 lakhs to Mr P. The tax is deductible at 1%. But Mr P did not file his IT return for both the years and the due date of filing the return has expired.

Hence, when the company deducts tax in the FY 2020-21 and learns that the payee has not filed his ITR for the last two years, the TDS should be deducted at higher of the following: 

  • Twice the rate prescribed in the Act, i.e. 2% (twice of 1%), or
  • 5%

Hence, the tax should be deducted at the rate of 5%.

Further, if PAN is not furnished, then TDS shall be deducted at the rate of 20%, which is higher than 5%

Related articles

1. Section 206AB & 206CCA of Income Tax 

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