In order to encourage taxpayers to file ITR and discourage non-filers of ITR, new provisions of the Income Tax Act will get applicable from 1st July 2021 under which TDS would get applicable at double rates for specified category of persons. These new provisions were announced in Budget 2021 vide introduction of Section 206AB and will get applicable from 1st July 2021.
Applicability of Provisions of Section 206AB
The provisions of newly introduced Section 206AB would only be applicable to those persons (including Individuals, Partnership Firms, LLP’s, Companies etc) who have not filed ITR for the past 2 consecutive years and the TDS Deducted in each of these past 2 consecutive years is more than Rs. 50,000.
If the above condition holds true, then the person making the payment to the person falling in the above category would be required to deduct TDS at Double the rate or 5% (whichever is higher).
The reason for introduction of this section is to encourage everyone (especially, those persons whose TDS has been deducted) to file their Income Tax Returns every year.
Non-applicability of this New Section
Apart from the above mentioned condition of more than Rs. 50,000 TDS Deduction and non-filing of ITR for 2 years, the provisions of this newly introduced section shall also not apply to Non-Residents who don’t have permanent establishment in India.
The provisions of this section shall also not apply where the payment is being made to a Resident Indian under any of the following sections:-
- Section 192: Payment of Salaries
- Section 192A: Withdrawal from Provident Fund
- Section 194B: Winning from Lottery
- Section 194BB: Winning from Horse Race
- Section 194LBC: Income in respect of Investment in Securitization Trust
- Section 194N: Cash Withdrawal in excess of specified limit
Thus, if the payment is being made under any of the above mentioned sections for the above mentioned purposes, this new section regarding double TDS would not apply. However, if the payment is being made for any other purpose, then the provisions of this section will get applicable.
For eg: Mr. X is a Salaried employee of ABC Ltd and earns Salary of Rs. 7,00,000. He has not filed his returns for the past 2 years. The TDS deducted on his income has been more than Rs. 50,000 each year for the past 2 years. In such a case as well, the provisions of Double TDS would not get applicable as the payment made by ABC Ltd to Mr. X is in the nature of Salary.
However, if the same Mr. X was providing consultancy services to ABC Ltd, the provisions of this section will get applicable in such a case and TDS at double the rates would get applicable. If Mr. X had filed his returns for the past 2 years, then the TDS deduction would have been @ 10% under Section 194J for professional consultancy services. However, as Mr. X has not filed his Income Tax Returns, therefore provisions of this section will get applicable and TDS would be deducted at 20% (Double the normal rate of 10% or 5% whichever is higher)
Therefore in this case where professional consultancy services have been provided by Mr. X, 20% of Rs. 7,00,000 i.e. Rs. 1,40,000 would be the TDS which would be deducted on the payment for architectural services. Mr. X would be able to claim credit of this double TDS while filing his income tax returns.
Practical Issues related to this Section
The provisions of this Section will only get applicable where the due date for filing of ITR under Section 139(1) has lapsed. The due date for filing of ITR under Section 139(1) for Financial Year 2020-21 has already been extended till 30th Sept. 2021 for Non-audit cases and till 31st Oct. 2021 for Audit cases.
Therefore, although officially this Section comes into force from 1st July 2021, the provisions of this section will not get applicable before 30th Sept 2021 as the due date for filing of ITR has not lapsed. Moreover, there is no mechanism as on date to verify whether a person whose TDS deducted was more than Rs. 50,000 in the past 2 years has filed his returns or not. The Income Tax Dept. should ideally create a framework on their portal which will help verify whether the person has filed ITR or not. In the absence of this framework, it is very difficult to practically implement this newly introduced section.