With a view to ensure that the taxpayers who suffered on account of taxes withheld at source (TDS) or collected at source (TCS) file their income-tax returns (ITR), the Finance Act 2021 has inserted two new sections in the Income-tax Act, 1961 (IT Act) – section 206AB and section 206CCA. As per these sections, in respect of a specified person, higher TDS rate/TCS rate will be applicable. The chart below depicts the TDS/TCS rate which shall be applicable if the payment is to be made to a specified person:
TDS to be at higher of following:
- Twice the rate specified in the relevant provisions of the IT Act
- Twice the rate/rates in force
- At the rate of 5%
TCS to be at higher of the following:
- Twice the rate specified in the relevant provisions of the IT Act
- At the rate of 5%
A taxpayer shall be treated as a ‘specified person’ if following conditions are fulfilled:
- ITR is not filed for two immediately preceding years relevant to the year in which tax is required to be deducted or collected;
- The time limit of filing ITR prescribed under Section 139(1) of the IT Act is expired; and
- The aggregate of TDS and TCS exceeds INR 0.05mn in each of these preceding two years.
With the introduction of these provisions, the tax deductors/tax collectors are now required to undertake due diligence of satisfying himself that the deductee/collectee is a specified person or not. Taking cognisance of the hardship faced by the tax deductors/tax collectors and to reduce the compliance burden, recently, the Central Board of Direct Taxes (CBDT) issued circular2 providing for a new functionality ‘Compliance Check for Section 206AB and 206CA’. Subsequently, the Tax Department has issued FAQ3 as well as Quick Reference Guide4 for the benefit of tax deductors/collectors.
We, at BDO in India, have analysed and summarised the said circular and key aspects of the Guide and provided our comments on its impact hereunder:
1. What is the purpose of Compliance Check for Section 206AB and section 206CCA functionality?
This functionality enables tax deductors/collectors to verify if a person is a ‘Specified Person’ as defined in Section 206AB & 206CCA.
2. Where can one access this functionality?
This functionality is made available through the reporting portal of the Income-tax department. The same can be accessed at https://report.insight.gov.in.
3. Who can use this functionality?
This functionality is available to the Principal Officers of the registered TAN at the home page of Reporting Portal
4. Does this functionality permit bulk downloads?
Yes. Apart from providing feeding of single deductee’s / collectee’s Permanent Account Number (PAN), the functionality also has provision for multiple PANs.
5. Where the PANs are to be uploaded in bulk, is there any maximum limit?
The maximum limit to upload PAN in csv format is 10,000.
6. For Fiscal Year (FY) 2021-22, who will be covered in the list of specified person? And when will be this list prepared?
The list of specified persons would cover taxpayers who did not file ITR for both the FY 2018-19 and FY 2019-20 and having aggregate of TDS and TCS of INR 0.05mn or more in each of these two FYs. This list is prepared as on the start of FY 2021-22.
7. After list is generated at the start of the year, whether any new name would be added to the list in FY 2021-22?
During the FY 2021-22, no new names to be added in the list of the specified persons. Thus, the tax deductor and / or collector is not required to check the PANs of non-specified person during the FY.
8. Will the name of a taxpayer be removed from the list of specified person if it files a valid ITR (filed and verified) for FY 2018-19 and / or FY 2019-20 during the FY 2021-22? If yes, when will the name be removed?
Yes, such person’s name would be removed from the list of specified persons. This would be done on the date of filing of the valid ITR. The name deletion will happen on the date of filing of the valid ITR during FY 2021-22.
9. Due date for filing ITR for FY 2020-21 falls in FY 2021-22. Whether the name from the list of specified person be removed if a person files a valid ITR for FY 2020-21? If yes, when will the name be removed?
Taxpayer whose name is appearing in the list of specified person may be removed if he files the tax return of FY 2020-21 in FY 2021-22. This removal will happen either on the due date of filing ITR for FY 2020-21 or the date of actual filing of valid ITR, whichever is later.
10. What will happen if in the case of a specified person, the aggregate of TDS and TCS is less than INR 0.05 Mn in the FY 2020-21?
Such person’s name would be removed from the list of specified persons. This would be done on the first due date under section 139(1) of the IT Act falling in the FY 2021-22. For the FY 2021-22, this due date of 31 July 2021 has been extended to 30 September 2021.
11. What will be the impact of belated and / or revised TDS and TCS returns on the list of specified person?
Belated and revised TDS and TCS returns of the relevant FYs filed during the FY 2021-22 would also be considered for removing persons from the list of specified persons on a regular basis.
12. It appears that for a given FY, there is a possibility of a person getting out of the list and thereby getting outside the scope of section 206AB / section 206CCA of the IT Act. Hence, is the deductor / collector required to check the list?
Yes, the deductor / collector need to recheck the list of specified person at the time of making tax deduction or tax collection.
13. Following example will help understanding the functionality:
- Let us assume that a deductor has 10,000 vendors that he deals with. He can use the functionality in the bulk search mode and can get the result of all these 10,000 PANs at one go.
- Let us assume that the functionality has shown that out of these 10,000 PANs, 5 PANs are specified persons for the purposes of section 206AB and/or section 206CCA of the IT Act.
- Thus, with respect to 9,995 PANs, it is clear that they are not in the list of specified persons for that FY. Since no new name would be added in the list of specified persons during the FY, the deductor or collector can be assured that these 9,995 PANs would remain outside the list of specified persons during that FY.
- There are chances that the 5 PANs which are specified persons may move out of the list during the FY (due to various factors mentioned above). Hence, the deductor / collector need to recheck at the time of making tax deduction or tax collection.
To summarise, a fresh list would be drawn at the start of each FY and the above process would have to be repeated. For example, at the beginning of the FY 2022-23 a fresh list would be prepared with FYs 2019-20 and 2020-21 as the two relevant FYs. No new name would be added to the list of specified persons during the FY but names would be removed based on the above criteria.
This functionality will help the tax deductors/collectors to implement proper due diligence so that they do not contravene with the provision of section 206AB and / or section 206CCA of the IT Act. Having said this, it is imperative to note that as per the Circular, a person shall be treated as specified person if he has not filed the tax return of both the preceding years (i.e. FY 2018-19 and FY 2019-20 in respect of taxes to be withheld for FY 2021-22). However, on the plain reading of section 206AB and section 206CCA of the IT Act, a person is treated as a specified person if the person has not filed ITR for both of the two assessment years relevant to the two previous years which are immediately before the previous years in which the tax is required to be deducted/ collected.
Thus, there appears to be an anomaly in what is mentioned in the circular as well as the prima-facie interpretation of the section 206AB/section 206CCA of the IT Act.
Furthermore, the output generated from the utility also contains the status of PAN-Aadhar linking of the concerned PAN which will be also helpful to the deductor/collector and thereby decide whether the PAN is inactive or not.
Now, with the utility being in place and the deductor/collector can verify whether the concerned PAN is covered by section 206AB or section 206CCA of the IT Act, there may not be a need to obtain any declaration from the vendor. However, where the vendor is a non-resident, the taxpayer may still need to obtain an undertaking that there is no change in the status and that such vendor does not have a Permanent Establishment in India.
It is also imperative to note that as section 206AB of the IT Act provides for certain exceptions – viz., section 192, 192A, 194B, 194BB, 194LBC or 194N of the IT Act, the deductor need not undertake the exercise of verifying whether such deductee has filed its tax return or not.
1Section 206AB of the IT Act is applicable in all cases except cases falling under Section 192, 192A, 194B, 194BB, 194LBC, 194N of the IT Act.
2Circular No.11 of 2021, dated 21 June 2021