Overview
Section 206AB dealt with higher Tax Deducted at Source (TDS) and Section 206CCA with higher Tax Collected at Source (TCS). Both the provision are effective from 2021, to deduct TDS or collect TCS at higher rates from specified persons within the prescribed time.
Budget 2025 Update : Removal of Higher Rates
The budget 2025 has removed the provisions outlined in Sections 206AB and 206CCA of the Income Tax Act, which imposed elevated TDS and TCS rates on individuals who had not filed their income tax returns.
TDS Rate Under Section 206AB
Section 2026AB mandated that TDS ( Tax Deducted at Source ) be deducted at a higher rate for individuals and entities who had not filed their income tax returns for the preceding financial year. The rate was set at:
- twice the prescribed TDS rate or
- 5%, whichever was higher, incentivizing compliance through financial penalties.
Example
Suppose a contractor received a payment of ₹50 lakh and the applicable TDS rate was 1%.
For a non-filer covered under Section 206AB:
- Twice the prescribed rate (2*1%)= 2%
- Minimum prescribed higher rate = 5%
- If no PAN = 20%
Therefore, TDS had to be deducted at 5%, if PAN not provided then the rate is 20%.
TDS Rate Under Section 206CCA
Set similar provisions for TCS (Tax Collected at Source), requiring higher TCS rates for non-filers.
These provisions were introduced to encourage compliance among taxpayers, increasing the filing of income tax returns by imposing financial disincentives on those who failed to file.
What Happens If PAN Not Furnished?
If a person did not provide PAN, Sections 206AA and 206CC became applicable. In such cases, TDS or TCS could be deducted or collected at even higher rates at 20%, depending on the transaction.
Who is a Specified Person?
Here, a specified person is an individual or entity who:
- Had not filed the ITR for the relevant preceding financial year.
- The due date for filing the return has expired.
- The aggregate amount of TDS and TCS in that year was ₹50,000 or more.
Note: Non-residents without a permanent establishment in India were generally excluded from these provisions.
Rationale for Changes
The implementation of these sections in the Union Budget 2021 was intended to promote the prompt filing of income tax returns. Nonetheless, they unintentionally heightened the compliance challenges for businesses and financial institutions, complicating their ability to verify the filing status of deductees and collectees. Stakeholders raised concerns about the operational difficulties and potential errors that could result from these new requirements.
Businesses and financial institutions faced challenges in verifying the filing status of each deductee or collectee. The requirement to check the compliance status created an additional operational step that was not present before.
Impact on Compliance
By eliminating these higher rates, the government seeks to streamline tax compliance and ease administrative burdens for deductors and collectors, particularly aiding small businesses and individuals who struggled under these regulations. This decision underscores a broader commitment to creating a taxpayer-friendly environment and improving the ease of doing business in India.
With the elimination of higher rates, the compliance process becomes less complex. Deductors and collectors can focus on their core operations without being bogged down by the intricacies of verifying compliance statuses.
Small businesses, which often operate with limited resources, stand to benefit the most. They can redirect their attention and resources to growth and operational efficiency instead of extensive compliance checks and potential penalties.
Conclusion
Eliminating these provisions is an important advancement in easing compliance responsibilities and fostering a more streamlined operational environment for taxpayers in India.
These adjustments reflect the government's dedication to simplifying tax processes and cultivating a friendly atmosphere for taxpayers.
The abolition of elevated TDS/TCS rates for non-filers, along with the decriminalization of late TCS payments, represents a substantial move towards lowering the compliance burden and enhancing the ease of doing business in India.
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