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Introduction:

New provisions were incorporated into the Finance Bill of 2021, mandating higher rates of TDS (tax deducted at source) or TCS (tax collected at source) for payments to specified individuals who have not filed their income tax returns.

Section 206AB of the Finance Act 2021 was introduced as a new provision aimed at enhancing the deduction of TDS (Tax Deducted at Source) Prior to the introduction of Section 206 AB Section 206AA, mandated higher tax deductions for individuals failing to furnish PAN to the TDS deductor. Let’s delve into a detailed exploration of Section 206AB of the Income Tax Act.

Section 206AB:

Section 206 AB mandates improvement of TDS deduction as prescribed under any relevant section of the Income Tax Act, though only to certain taxpayers. As per Section 206AB of the Income Tax Act, the TDS rate for transactions with vendors who have not filed Income Tax Return (ITR) for the last two financial years will be double or 5%, whichever is higher each , given the TDS amount for each of those years is Rs. 50,000 or more.

TDS under the section 206AB: 

• If payment is made to a specified person as outlined above, tax shall be deducted at source (TDS) at the higher of the following rates:
• Twice the rate stipulated in either the Income Tax Act or the Finance Act, or
• 5%
• Further, if the nominee fails to produce PAN along with his non-submission of income tax returns, the tax deduction shall be 20% or the appropriate rate as per section, whichever is higher.

Applicability of the section 206AB:

According to Section 206 AB, an elevated TDS rate applies to various transactions, encompassing but not restricted to rent, contract payments, and professional charges. Nonetheless, specific exclusions exist based on the nature of the payment.

Non-Applicability of Section 206AB:

• Salary under Section 192.
• Premature withdrawal of EPF  by Section 192A.
• Winnings from lotteries, card games, or crossword puzzles are covered under Section 194B.
• Profits from horse race winnings fall within the purview of Section 194BB.
• Income related to investments in securitization trusts is regulated by Section 194LBC.
• Cash withdrawals are governed by Section 194N.
• Consideration paid for the sale of immovable property is covered under Section 194-IA.
• Rent above Rs 50,000 paid to the landlord is determined through Section 194-IB.
• Payment for contractual or professional services exceeding Rs 50 lakh is regulated by Section 194M.

Exceptions to the Section 206AB:

• There are exceptions in this section. The rules under section 206 AB do not apply in the following cases.
• In cases where the tax deductor is a statutory body, institution, or authority established by or under any Central, State, or Provincial Act, or a public sector company, the provisions of Section 206AB do not apply.
• When the tax deductor is the Central Government, State Government, or any local authority, Section 206AB does not apply.
• In cases where the tax deductor is an individual or HUF, and the transaction does not necessitate the deduction of tax at source under the provisions of the Act, Section 206AB does not apply.
• In cases where the taxpayer is not obliged to obtain a Tax Deduction Collection Account Number (TAN) under the provisions of the Act, section 206AB does not apply.

Non-compliant taxpayer under Section 206AB:

A non-compliant taxpayer is defined as an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), Firm, or Company who has not filed the income tax return for the preceding two assessment years, and for which the due date of filing has expired and the aggregate of tax deducted at source and tax collected at source is Rs. 50,000 or more in each of these two years.

Additionally, a non-compliant taxpayer is defined as a failure to file an income tax return two years prior to an assessment, where the due date has passed, and an understatement of accumulated gross income account under section 115BBE of the Act for deduction of tax at source. 50,000 or more in each of these two years.

Impact of the  Section 206AB:

• Section 206 AB is expected to have a significant impact on tax compliance and revenue collection in India. By introducing improved TDS rates for non-compliant taxpayers, the section aims to encourage timely filing of tax returns and prompt payment of taxes
• This holds particular significance for small taxpayers, who might have previously hesitated to file their tax returns or settle their taxes owing to reasons like limited awareness, financial constraints, or challenges in navigating complex tax regulations.
• However, it is important to recognize that Section 206 AB is only one of many measures taken by the government to increase tax compliance and curb tax evasion. Taxpayers still have a duty to comply with all tax laws and other obligations, and failure to do so may result in penalties and legal consequences.

Final Word :

Section 206 AB of the Income Tax Act was introduced to bring in higher rates of TDS levy and deduction. These policies cover services including rent, labor costs and contract costs.