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TDS Calculation: Rs 1 lakh Tax Deducted At Source on Rs 20 lakh cash payment to non-filers – New rule explained

TDS Payment Rules 2021 (Section '206AB (I) Explained): The Finance Act 2021 recently cleared by the Parliament has introduced a "Special provision for deduction of tax at source for non-filers of income-tax return."

New TDS rule for non filers explained.

TDS Payment Rules 2021: There is more penalty in store for non-filers in the new Financial Year starting from April 1 ( Thursday). The Finance Act 2021 recently cleared by the Parliament has introduced a “Special provision for deduction of tax at source for non-filers of income-tax return.” As per the special provision, a new section ‘206AB (I) has been inserted after section 206AA of the Income Tax Act. The new section specifies the rate at which TDS will be deducted on cash payment to non-filers. The new rule would come into effect from July 1, 2021. The TDS rate would be higher of the following three:

1. At twice the rate specified in the relevant provision of the Income Tax Act; or

2. At twice the rate or rates in force; or

3. At the rate of five per cent.

Example: Supposing a case where point number 3 is applicable, a cash payment of Rs 20 lakh to a non-filer would attract the TDS of Rs 1 lakh (which is 5% of Rs 10 lakh). If 5% is not higher then this non-filer would have to pay the double he/she would have paid at the specified rate.

The new rule would apply to non-filers who have paid TDS or TCS of Rs 50,000 or more in the last two years but not filed the Income Tax Return (ITR).

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In case the provisions of Section 206AA is applicable to a specified person, then in addition to the provision of this section, the tax shall be deducted at higher of the two rates provided in this section and in section 206AA, according to the Finance Act.

Who is the specified person?

According to the Finance Act, the specified person mentioned in the new section is “a person who has not filed the returns of income for both of the two assessment years relevant to the two previous years immediately prior to the previous year in which tax is required to be deducted, for which the time limit of filing return of income under sub-section (1) of section 139 has expired; and the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in each of

these two previous years.”

This definition of the “specified person” in the new section does not include a non-resident who does not have a permanent establishment in India.

Why new section?

Explaining the rationale for the new section, Budget Memorandum 2021 said Section 206AA of the Act provides for a higher rate of TDS for non-furnishing of PAN. Similarly, section 206CC of the Act provides for a higher rate of TCS for non-furnishing of PAN. However, the Budget document noted, “while these provisions have served their purpose in ensuring obtaining and furnishing of PAN by various person, there is need to have similar provisions to ensure filing of return of income by those person who have suffered a reasonable amount of TDS/TCS.”

“Hence, it is proposed to insert a new section 206AB in the Act as a special provision providing for higher rate for TDS for the non-filers of income-tax return. Similarly it is proposed to insert a section 206CCA in the Act as a special provision for providing for higher rate of TCS for non-filers of income-tax return,” the Budget Memorandum said.

The new section would “apply on any sum or income or amount paid, or payable or credited, by a person (herein referred to as deductee) to a specified person. This section shall not apply where the tax is required to be deducted under sections 192, 192A, 194B, 194BB, 194LBC or 194N of the Act,” it added.

What is Section 206AA?

Section 206AA provides for TDS on payments made to non-residents as well as residents who do not possess a PAN. It was introduced in FY 2010-11 mandating every taxpayer receiving a taxable income to furnish PAN to the payer of the income.

What is Section 194N?

Section 194N provides for TDS on cash withdrawal above Rs 20 lakh by the taxpaer who has not filed his/her return for three years. According to this section, a 2% TDS shall be deducted on withdrawal above Rs 20 lakh.

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