Understanding Section 206AB (of Income Tax Act, 1961)

Key Takeaways:

• Section 206AB (of Income Tax Act, 1961) applies to specified persons who have not filed their income tax returns in the two preceding Financial Years and where TDS/TCS is Rs. 50,000 or more.
• The tax shall be deducted at the higher of specified rates, including twice the rate specified in the relevant provision of the Act, twice the rate or rates in force, or at the rate of five per cent.
• Interaction with Section 206AA (of Income Tax Act, 1961): If the provisions of section 206AA (of Income Tax Act, 1961) are applicable to a specified person, the tax shall be deducted at the higher of the two rates provided in Section 206AB (of Income Tax Act, 1961) and in Section 206AA (of Income Tax Act, 1961).
• Filing a valid return of income for the assessment year during the financial year can remove a specified person’s name from the list of specified persons.
• Exclusions include non-residents without a permanent establishment in India and persons not required to furnish the return of income for the relevant assessment year and notified by the Central Government.

Synopsis:

The Section 206AB (of Income Tax Act, 1961), was introduced in the Finance Bill, 2021, to enforce the deduction of Tax Deducted at Source (TDS) at higher rates for specified persons who have not filed their income tax returns in the two preceding Financial Years and where TDS/TCS is Rs. 50,000 or more. This section is a special provision for deduction of TDS for non-filers of Income Tax Returns (ITR).

The key points and provisions of Section 206AB (of Income Tax Act, 1961):

Key Provisions of Section 206AB (of Income Tax Act, 1961):

1. Applicability: Section 206AB (of Income Tax Act, 1961) applies to any sum or income or amount paid, or payable or credited, by a person to a specified person, where tax is required to be deducted at source under the provisions of Chapter XVIIB, other than specific sections mentioned in the provision.

2. Higher TDS Rates: The tax shall be deducted at the higher of the following rates:

• Twice the rate specified in the relevant provision of the Act
• Twice the rate or rates in force
• At the rate of five per cent

3. Interaction with Section 206AA (of Income Tax Act, 1961): If the provisions of section 206AA (of Income Tax Act, 1961) are applicable to a specified person, the tax shall be deducted at the higher of the two rates provided in Section 206AB (of Income Tax Act, 1961) and in Section 206AA (of Income Tax Act, 1961).

4. Definition of Specified Person: A specified person is defined as a person who has not furnished the return of income for the assessment year relevant to the previous year immediately preceding the financial year in which tax is required to be deducted, and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in the said previous year.

5. Exclusions: The specified person does not include a non-resident who does not have a permanent establishment in India, or a person who is not required to furnish the return of income for the relevant assessment year and is notified by the Central Government in the Official Gazette.

6. Effect of Filing Valid Return: If a specified person files a valid return of income for the assessment year during the said financial year, his name would be removed from the list of specified persons.

Example:

Let’s consider an example where Mr. Om runs a mobile shop and TDS u/s 194R (of Income Tax Act, 1961) of Rs. 50,000 had been deducted by his vendors at the time of purchase for two years consecutively, and Mr. Om failed to file his ITR for the said two years within the time limit for furnishing return of income. In this case, section 206AB (of Income Tax Act, 1961) will become applicable to him, and the tax rate shall be higher of the rates specified in the relevant provision of the Act, twice the rate or rates in force, or the rate of 5%.

Conclusion:

It is important for taxpayers to file their ITR on time and also keep a watch over such specified persons who are liable for a higher rate of TDS. An online functionality is available on the Income Tax portal to check such specified persons. Deducting taxes and filing returns on time is necessary for avoiding intervention of such sections.

FAQ:

Q1: Who does Section 206AB (of Income Tax Act, 1961) apply to?

A1: Section 206AB (of Income Tax Act, 1961) applies to specified persons who have not filed their income tax returns in the two preceding Financial Years and where TDS/TCS is Rs. 50,000 or more.

Q2: What are the higher TDS rates specified in Section 206AB (of Income Tax Act, 1961)?

A2: The tax shall be deducted at the higher of specified rates, including twice the rate specified in the relevant provision of the Act, twice the rate or rates in force, or at the rate of five per cent.

Q3: How does filing a valid return of income affect a specified person’s status?

A3: Filing a valid return of income for the assessment year during the financial year can remove a specified person’s name from the list of specified persons.

Q4: Who are the exclusions under Section 206AB (of Income Tax Act, 1961)?

A4: Exclusions include non-residents without a permanent establishment in India and persons not required to furnish the return of income for the relevant assessment year and notified by the Central Government.