Solution to a higher rate on TDS on account of non-furnishing of returns

Higher TDS on account of non-furnishing of Income Tax Returns A Problem that can be resolved

Introduction

In another attempt to convince the taxpayers to file their Income Tax Returns or ITR, the Central Board of Direct Taxes or the CBDT has introduced Section 206AB and 206 CCA of the Income Tax Act, 1961. The said sections prescribe for a higher rate of Tax Deduction at Source (TDS) and/or Tax Collection at Source (TCS) on incomes, other than income from salary and some other specified cases.

Section 206AB mandates a higher rate of deduction of tax in specified cases viz.:

  • A person who has not filed the IT return for two previous years; and
  • The time limit to file IT return u/s 139(1) has lapsed;
  • A person whose total tax deducted in each of the previous two years exceeds INR 50,000.

Section 206AB is not applicable to TDS deducted under section 192, 192A, 194B, 194BB, 194LBC, 194N of the Income Tax Act, 1961.

The higher rate of tax as prescribed is higher of:

  • Twice the rate as prescribed by the relevant provision;
  • Twice the rate in force;
  • Five percent

Similarly, Section 206CCA mandates higher rate of collection of tax in case of non-filers of IT return similar to Section 206AB. Further, the higher rate of tax as prescribed in this case is:

  • Twice the rate as prescribed by the relevant provision;
  • Five percent

You can read our blog to get a deeper understanding of the provisions.

How to determine if you are liable to deduct or collect TDS/TCS at higher rate?

The Income Tax department understood the challenges associated with the above provisions. Primary one being that how would a deductor/collector determine if they are liable to deduct or collect TDS/TCS at a higher rate than prescribed by the law. To resolve this issue the Income tax department launched an online and offline utility where a taxpayer, basis the PAN number could search whether a specified person has filed the IT return for the previous period or not.

While the online utility helps to check the compliance status of a taxpayer one by one; the offline utility can be used for a bulk verification of PAN numbers. The link to access these utilities.

Therefore, any deductor or collector while deducting TDS or collecting TCS of an eligible person can verify if any of the parties that they are dealing with, fall in the purview of Section 206AB or 206CCA of IT Act, 1961.

Moreover, to make things even simpler, the IT department has also compiled a list of taxpayers or specified persons who have not filed ITR of the previous year i.e., for 2018-19 and 2019-20. This list has the status as at the beginning of financial year 2021-22. Therefore, all taxpayers who form a part of such list of specified persons can be checked to see if a taxpayer is dealing with any of the persons mentioned on that list.

How can you remove your name from the list of specified persons?

The Circular issued by the Income Tax department which contains the names of specified persons also mentions that in order to remove your name from the list, you need to file the ITR for FY 2018-19 and FY 2019-20 during FY 2021-22. Notably, the due date to file ITR for FY 2018-19 was 30 November 2020 and for FY 2019-20 was 10 January 2021.  

Further, it is also recommended that the ITR for FY 2020-21, the due date for which is 30 September 2021 should be filed within the timeline. Once the ITR is filed and verified, the name of the person would be removed from the defaulters list. An important point to be borne in mind here is that the return not only needs to be filed, it has to be verified also to have it considered for the said purpose. 

Conclusion

While the Income Tax Department has taken the initiative to provide a status of filing returns to the taxpayers, it remains to be seen how updated will that be once the IT return due date for FY 2020-21 is over. Another issue that may come up is can the taxpayers go back and filed the returns for FY 2018-19 and FY 2019-20 when the due dates of the same have lapsed? Ideally not, because the IT system get locked after the passage of due date. Therefore, unless a taxpayer receives a notice u/s 143 of the IT Act, 1961, from the IT department to file the returns, the same cannot be done; thus, hindering the ability of the taxpayer to regularize his compliance status.

Moreover, the new portal of the Income Tax department has been in the news for all wrong reasons. The question here is whether a taxpayer would have to bear the brunt of the system not working and offer higher TDS on account of non-furnishing of returns merely due to technical glitch? The issue here is not higher rate of TDS/TCS as the same is available as credit or refund to a taxpayer; however, the working capital of any taxpayer will be severely be impacted if double TDS/TCS is deducted or collected. In the times of Covid, when a taxpayer expects stimulus/relaxations from the Government, can such steps be considered as too harsh on the part of the Government? A question, that remains to be answered for all!

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