What is section 206AB where TDS is deducted at double rate for non-filers and for which declaration is being circulated by businesses

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Finance Act, 2021 had introduced section 206AB where higher TDS rate was suggested for people who matches both the condition i.e.

1. Those who have not filed Income tax return for 2 years and for which limit u/s 139(1) had expired which will include AY 2019-20 and AY 2020-21 for the relevant year as time limit for AY 2021-22 has still not expired. and
2. Those whose TDS/ TCS credit in the above 2 years is Rs. 50,000 or more in each financial year.

We have discussed about the provision in detail in our earlier post: Higher TDS rate for non-filers of Income tax return – Section 206AB – Taxontips

This section is not applicable on transaction with non-residents who don’t have PE in India.

The above mentioned section shall be applicable from 01.07.2021 and thus any TDS which needs to be deducted after that date, deductor needs to take care of the provision of section 206AB as well.

We had mentioned in our earlier post that the Income tax department shall provide a tool to check the applicability of this provision as has been provided for section 194N but it is 10th of June today and till date no tool has been provided on the new website of Income tax and with companies which take services from hundreds and thousands of service provider it will be difficult for them to check the applicability of all the vendors later.

Thus, many big companies have started sending a declaration form or a note to their suppliers asking them if they fall within the criteria of section 206AA or not and based on the declarations the companies are filtering their suppliers and applying TDS rate and they are even mentioning that if the supplier doesn’t respond within due time they shall deduct TDS at higher rate.

Hence, the declaration being circulated is an alternative method to the check the applicability of section 206AB and there is no statutory requirement to send such declarations and thus the language or requirement of all declarations are different.

However there are few confusions in the mind of taxpayers with regard to this section:

1. What to do if the company is not replying to the e-mail because of pandemic or any other reason?

It may happen that the supplier might have stopped it’s business due to pandemic and therefore not able to reply to the e-mail so what to do in such circumstance. Many companies are mentioning in their e-mail that in such cases they will deduct TDS at higher rate because the vendor will get it’s credit in the end and they will also not be at fault.

2. What documents one need to ask with the declaration?

Many Companies in their declaration are also asking for ITR acknowledgement from their supplier to ensure that Income tax return was filed. In our opinion many vendors/ suppliers won’t provide the same and it is also not advisable to provide the same as it contains financial information of the supplier and many people won’t be comfortable to share the same.

Hence, a supplier can just share their confirmation, ITR V acknowledgement number and date of filing to comply with the declaration and such there is no statutory liability to provide the same.

3. Do we need to check it again in the 3rd quarter?

As the section provides that the conditions of filing of return needs to be checked for the previous 2 years for which due date u/s 139(1) has expired and hence let’s say for companies the normal due date for filing Income tax return for FY 2020-21 is 30.11.2021 (after recent extension by CBDT) and hence if one deducts any TDS after 01.12.2021 he will have to again get confirmation from the supplier as now the previous 2 years would be FY 2019-20 and FY 2020-21.

In the end from the provisions of the section it can be seen that it is not just about non-filing of Income tax return but also about TDS being deducted/ TCS collected above Rs. 50,000 in both year and when both the conditions are fulfilled only then such higher rate of TDS will be applicable which will be a rare case and hence even if a person was not filing his return for last 2 years as his income was below taxable limit but if TDS was not deducted above the limit his TDS now won’t be deducted at a higher rate.

If you need sample format for the declaration to use for your company or your client you can drop your request in the Contact us Form by stating the subject as “Section 206AB declaration.”

Disclaimer: The views presented in the above article are personal views of our team and has no legal binding. For any legal opinion consult a tax professional.

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