Income Tax Return filing: ITR non-filers may be subject to higher rate of TDS

Updated: Feb 03, 2021 12:42 PM

The new provisions of Section 206AB/ Section 206CCA are applicable on all non-salary payments, except certain very limited specific provisions where TDS is required to be deduced on winnings from lottery, winnings from horse races, income from investment in securitisation trust or TDS on cash withdrawals from banks (introduced last year).

In absence of furnishing such evidence, the customers would have no choice but to deduct TDS at double the normal rate of TDS, with a minimum 5% rate.

By Shailesh Kumar

WHILE THE GOVERNMENT has presented a brave expansionary budget, proposing massive increase in expenditure under various heads, it has continued its efforts to increase taxpayers/ tax filers base and introduced several provisions to improve tax compliance.

TDS at higher rate

One of such provisions, introduced in the Budget is Section 206AB in Income Tax Act, which provides that now customers/ payers will need to deduct higher rate of TDS (as high as twice the normal rate, subject to minimum 5% TDS rate) from their vendors, if such vendors have not filed their ITR for two consecutive years immediately preceding the relevant financial year, for which due date for filing the ITR is already expired and aggregate amount of TDS/ TCS for such vendor in each of these two years is at least Rs 50,000. Similar provision is introduced as Section 206CCA, for the TCS.

The new provisions of Section 206AB/ Section 206CCA are applicable on all non-salary payments, except certain very limited specific provisions where TDS is required to be deduced on winnings from lottery, winnings from horse races, income from investment in securitisation trust or TDS on cash withdrawals from banks (introduced last year). The implications of these new provisions could be significant, as all contractors, freelancers, professionals, brokers, agents, etc., would now be required to furnish evidence of having filed ITR for earlier years to their customers in order to avail normal rate of TDS. In absence of furnishing such evidence, the customers would have no choice but to deduct TDS at double the normal rate of TDS, with a minimum 5% rate.

Increase in compliance burden

This may increase compliance burden of all the payers significantly, to collect necessary evidence from their vendors, regarding ITR filed by them for earlier years. Many vendors may not even wish to share details of their ITR with their customers. In such a case, either the vendor will have to suffer higher TDS or commercially the cost of extra TDS may need to be borne by the customer. Thus, practically, the new provisions will certainly increase the compliance burden for the taxpayers. It may be noted that non-residents, not having a permanent establishment in India are spared from this provision and therefore, NRIs having no presence in India but entitled to receive non-salary income from India may not be affected by this provision.

The intention of the government appears to be in making customers themselves force their vendors to comply with income tax provisions and file their ITR and its determination to increase income tax compliance. However, it may create a significant compliance burden for taxpayers having a large number of vendors, to whom such provisions would apply. We will need to wait and see how industry reacts to this provision and complies with the same.

The writer is partner, Nangia & Co LLP

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