TDS/TCS on non filer of income-tax return at higher rate

Are you a Non-filer?

Yes, that is a question that will resonate in the ears of taxpayers post-July 2021, as tax deductors shall theoretically resort to a gatekeeper of income-tax return filing compliances. The Union Budget 2021 proposes to levy a higher rate of tax deducted at source (‘TDS’) and tax collected at source (‘TCS’) on non-filers of the income tax return. The prima facie, the intent of our government is to augment the discipline of filing income-tax returns amongst the taxpayers. Accordingly, if you are non-compliant in filing your income tax returns, be prepared to suffer steeper rates of TDS and TCS. A brief insight on this amendment and the looming questions surrounding its pragmatism are discussed in this article.

Proposed Amendment:

Insertion of new sections

As per the Finance Bill, 2021 it is proposed to insert two new sections 206AB and 206CCA in the Income Tax Act, 1961 (‘Act’) as special provisions providing for higher rates for TDS and TCS respectively, for the non-filers of the income tax return.

Specified Person (Non-Filer)

A specified person is a person:

  •  who has not filed the returns of income for both of the two previous years in which tax is required to be deducted or collected, as the case may be.

  •  whose aggregate of tax deducted at source and tax collected at source in his case is INR 50,000 or more in each of these two previous years.

However, a specified person shall not include a non-resident who does not have a permanent establishment in India.

Type of payments covered

The newly proposed sections would apply to any sum, income, or amount paid or payable or credited, by a person to a specified person.

Section 206AB shall not apply where the tax is required to be deducted under the following sections of the Act:

Higher Rates

The rate of TDS for such specified persons shall be higher of:

  •  twice the rate specified in the Act;

  •  twice the rates in force;

  •  rate of 5%

The rate of TCS for specified persons shall be higher of:

  •  twice the rate specified in the Act

  •  rate of 5%

Parallel sections in the Act

Section 206AA and 206CC of the Act are cognate sections that provide for higher rates of TDS and TCS in case the deductee does not furnish a Permanent Account Number (‘PAN’).

In view of the same, if this specified person additionally does not have a PAN, the TDS or TCS shall be higher than the rates prescribed in these parallel sections or stated above as per the new proposed sections.

Applicability

This amendment will take effect from 1st July 2021.

Analysis:

To understand the proposed amendment with the help of an example:

Consider, a resident individual who was required to file his income-tax return for the FY 2019-20 and FY 2020-21 but has been non-compliant. During FY 2021-22, his total income is below the basic exemption limit, but he has earned certain interest income on fixed deposits over the prescribed limit of INR 40,000. Further, he has not furnished a declaration in Form 15G seeking exemption from TDS for FY 2021-22. The bank is required to deduct tax at source under section 194A of the Act at the rate of 10%.

However, in light of the proposed section 206AB, the bank shall now deduct tax at source at a rate which is higher of:

  •  twice the rate specified in the Act – (twice the rate specified under Section 194A, i.e., 20%)

  •  twice the rates in force – 10 % (as per the Act or the applicable tax treaty in case non-residents)

  •  rate of 5%

Thus, the individual here would bear the brunt of a higher levy of TDS at the rate of 20%.

Challenges and points to contemplate:

The major challenge that emerges out of these proposed sections is the ability of the deductor to determine the following –

  •  whether the deductee/collected has filed its income tax return for the previous two years?

  •  whether the aggregate TDS and TCS in the previous two years more than INR 50,000?

  •  whether the deductee was in fact, mandatorily required to furnish its income tax return?

(For example deductees such as resident individuals having total income not exceeding the basic exemption limit or a non-resident earning only dividend, interest, royalty or fees for technical services from India as specified in section 115A of the Act)

Another challenge would be in cases where the due date of filing of return has not expired. What would the deductor do in such a scenario? Should he obtain a declaration from the deductee that the income-tax return will be filed within the prescribed due date? Will such declaration be admissible?

At times, it is also possible that the deductee/collectee might refrain from furnishing particulars of their income tax return with the deductors/clients.

As a result, the onus of gathering information from the deductee/collectee shall trammel the deductors from the ease of functioning and may impose additional compliances in terms of revision of e-TDS returns in case the information is retrieved belatedly from the deductee.

Nevertheless, it shall be imperative for the deductee/collectee to furnish proof of having filed the income tax return for the previous two years in order to avoid deduction at higher rates, thereby overall increasing the compliance burden.

Further, the inquisitional nature of these proposed sections raises concerns on whether the government wants to introduce certain additional rules for submitting a copy of the income-tax return (or quoting the ITR Acknowledgement Number) in coherence with the rules for mandatorily furnishing PAN information for certain transactions. Alternatively, those rules could also specify the furnishing of a declaration in a prescribed format confirming that the income tax returns have been filed for the previous two years.

The introduction of these sections clearly spells out the resolve of the government’s continued efforts to ensure income-tax return filing compliance.

Hence, do not be a non-filer!