Finance Act 2021 | Did you Know? Certain Taxpayers Have to Pay Double Tax w.e.f 1st July 2021

Did you know the fact that certain taxpayers may have to pay double TDS from July?

Check what Finance Act 2021 says

There are certain rules about to change from July 1, 2021 in accordance with the announcements made in the Union Budget and as per Finance Act 2021. One of the important changes that will come into effect from next month is related to your income tax returns filing. From July 1, you may have to pay double Tax Deducted Source (TDS) in case you have failed to file your ITR for the last two years.

So let us understand above changes

After section 206AA of the Income-tax Act, the following section shall be inserted with effect from the 1st day of July, 2021, namely:

'206AB. (1) Notwithstanding anything contained in any other provisions of this Act, where tax is required to be deducted at source under the provisions of Chapter XVIIB, other than sections 192, 192A, 194B, 194BB, 194LBC or 194N on any sum or income or amount paid, or payable or credited, by a person (hereafter referred to as deductee) to a specified person, the tax shall be deducted at the higher of the following rates, namely:

Special provision for deduction of tax at source for non-filers of income-tax return

(i) at twice the rate specified in the relevant provision of the Act; or
(ii) at twice the rate or rates in force; or
(iii) at the rate of five per cent.

Earlier, keeping Covid 19 situation in mind, the government had extended the deadlines to file income tax returns for the financial year 2021. As per the revised deadline, the last date of filing TDS for the fourth quarter of FY 2020-21 has been extended to June 30 from May 31.

Introduction

The Finance Minister in Budget 2021 introduced a special provision of TDS in the Income Tax Act 1961. A new section has been inserted, which shall be applicable from 1^st July 2021 (Section 206AB of Income Tax Act, 1961.)

Objective of this Section

The main objective behind the inclusion of Section 206 AB is to ensure that taxpayers file their income tax return without fail.

In this article, we shall take a discuss the newly inserted Section 206AB of Income Tax Act, 1961.

Overview of above Section

The provision of Section 206AB overrides all provisions of the IT Act 1961 as it begins with the non-obstante clause (Notwithstanding anything contained in any other provisions of this Act).

The provisions of this section shall replace the applicability of TDS rate with a higher rate of TDS for those who have not filed income tax returns for the previous two years despite the fact that the aggregate of tax deducted and collected is beyond 50000 rupees in each of those two previous years.

Thus Section 206AB mandates the person to deduct the tax at a higher rate to penalize the specified persons. Hence at the time of deducting TDS, consideration of the provisions of this section is mandatory by the deductor.

Applicability of Section

A higher TDS rates shall apply on the deductees

• Who hasn’t filed the income return for both of the two assessment years that are immediately before the previous year where the tax is to be deducted;
• Where the time limit to file ITR under Section 139 of the Act has expired for both assessment years;
• Where the TDS amount in each of the two assessment years is more than 50000 rupees.

Higher rate of TDS

The TDS rates will be higher of the following

(i) at twice the rate specified in the relevant provision of the Act; or
(ii) at twice the rate or rates in force; or
(iii) at the rate of five percent.

Example -

If a company pays a professional services provided by A and it is liable to deduct 10% TDS on the payment to the professional, it has to go and check on the portal whether A has filed its last 2 ITRs or not.

If A has not filed last 2 ITRs and the total TDS deducted from A is more than Rs 50,000  then the company has to deduct TDS under Section 194J shall be higher of the following-

• Twice the rate mentioned in the relevant provision of the Act- 20%;
• Twice the rates in force- 20%;
• 5%

Eventually, TDS will be deducted at 20%.

Non Applicability of Section

The provision of TDS deduction at higher rate will not apply on the following

• Section 192- TDS on salary;
• Section 194A- TDS on premature withdrawal of EPF;
• Section 194B- TDS on winnings from lottery;
• Section 194BB- TDS on winning from horse race;
• Section 194LBC- TDS by securitization trust;
• Section 194N- TDS on withdrawal of cash;
• Non-resident not having permanent establishment in India.

Conclusion

Deductor has to determine that: four important facts

1. Whether the deductee has filed its income tax return for the previous two years
2. Whether the TDS aggregate in the previous two years is more than 50000 rupees.
3. Whether the deductee mandatorily required to furnish its income tax return.
4. Whether due date of filing the return hasn’t expired

Therefore, it would be mandatory for the deductee to provide the proof of having filed the income return for the previous two years to avoid deduction at higher rates, and this can increase the overall compliance burden.

Declaration should be obtained from the deductee that he has filed the return of income for the previous two assessment years, where limit under section 139(1) is expired, or the TDS amount is not equal or more than 50000 rupees in case of non-filing of return.