TDS/TCS on non-filer at a higher rate of tax

New Law for higher TDS rate

Section 206AB of the Income Tax Act is recently introduced vide the Finance Act, 2021. Under section 206AB of the Act on any sum or income or the amount paid, or payable or credited, by a person (herein referred to as deductee) to a “specified person” who has not filed the returns of income for both of the 2 Assessment Years relevant to the 2 Previous Years which are immediately before the Previous year in which tax is required to be deducted or collected, as the case may be.

Further conditions which need to be checked are:

  • The time limit for filing tax returns under sub-section (1) of Section 139 of the Act has expired for both these assessment years.

  • The aggregate of tax deducted at source and tax collected at source in his case is Rs.50,000 or more in each of these two previous years.

  • The specified person shall not include a non-resident who does not have a permanent establishment in India.

  • Also, 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.

How would the ITR Filing be checked (for applicability of Section 206AB)?

It is expected that the Government would provide a new utility on it is Income Tax Software wherein a deductor /collector, on entering the PAN of the buyer/seller, would get the details of his ITR Filing.

However, as a prudent practice, the assessee should keep a copy of the supplier’s ITR for the preceding two Financial Years as a confirmation to accordingly deduct/ collect TDS/TCS as per the applicable rate.

This provision might be an additional burden on the taxpayer; however, it is an additional step taken by the Government to catch people who do not file their ITRs even when their tax has been deducted/collected and is shown in 26AS.

Therefore, given the above provisions, if any user falling under the purview of Section 194Q(if you are a buyer of goods) or Section 206(1H)(if you are a seller of goods), in either case, from 1st July 2021, user need to check whether the counterparty has filed its ITR or not for the preceding 2 Financial Years (i.e. since the applicability is from 1st July 2021 Financial Year 2019-20 & 2020-21) and if the aggregate of TDS/TCS is Rs.50,000 or more in each of the preceding 2 Financial Years, then TDS/TCS shall be charged at a higher rate u/s 206AB.(except for in Section192, 192A, 194B, 194BB, 194LBC or 194N of the Act).

Applicability of Section 206AA and 206CCA

The new 206AB and Section 206CCA has been inserted after Section 206AA and Section 206CC respectively of the Act which provides for the higher rate of TDS/TCS for non-furnishing of PAN (Permanent Account Number)

  • Section 206AA: This section is applicable in the case where the person fails to furnish the PAN,

  • Section 206AB: This section is applicable in the case where the person fails to file two years return.

Under the respective section the person who is responsible for deducting/collecting the tax, as the case may be, is required to apply the tax rate at the higher of the following:

Tax is required to be deducted - 206AA- Fail to submit PAN

Tax is required to be Deducted-206AB- Fail to file two years return

(i) at the rate specified in the relevant provision of this Act.

(i) at twice the rate specified in the relevant provision of the Act; or

(ii) at the rate or rates in force; or

(ii) at twice the rate or rates in force; or

(iii) at the rate of 20%.

(iii) at the rate of 5%.

  • Section 206CC: This section is applicable in the case where the person fails to furnish the PAN.

  • Section 206 CCA: This section is applicable in a case where the person fails to file two years return.

Under the respective section the person who is responsible for collecting the tax, as the case may be, is required to apply the tax rate at the higher of the following:

Tax is required to be collected - 206CC -Fail to submit PAN

Tax is required to be collected-206CCA - Fail to file two years return.

i) at twice the rate specified in the relevant provision of the Act; or

(i) at twice the rate specified in the relevant provision of the Act; or

(iii) at the rate of 5%.

(iii) at the rate of 5%.

Further, sub-section (2) of section 206AB provides that where both the section 206AA and 206AB are applicable i.e. the specified person has not submitted the PAN as well as not filed the return; the tax shall be deducted at the higher rate amongst both the sections i.e. TDS is required to be deducted at the higher rates amongst section 206AA and 206AB.

Setup for TDS /TCS at a higher rate for non-filer of return

The user has two options to handle this scenario:

  • Define additional threshold definition for specific TDS/TCS type

  • Create additional withholding tax code and withholding tax group for specific TDS/TCS type

The recommended approach would be “Define additional threshold definition” for non-filers.

Define threshold definition

(for TDS type Rent)

  1. Go to Tax > Set up > Withholding tax > Threshold definitions 

  2. Select New

    1. Name: Rent

    2. Description: Rent-194 I

Create additional threshold definition for non-filing of return:

  1. Click on New

    1. Name: Rent RNF

    2. Description: Rent-194I return not filed.

  2. Click on Threshold designer Rent > New > General.

Define the first slab

  1. Fill date range effective from (4\1\2021) - effective to (3\31\2022),

  2. Define threshold Lower Limit (0.00) , Upper limit (2,40,000).

  3. Select Calculation > Type > cumulative (Final level (Yes))

Define the second slab

  1. Click on New > General > Define slab.

    1. Date range: effective from(4\1\2021), Effective to(3\31\2022),

    2. Threshold Lower Limit (2,40,000.00), Upper limit (0.00).

    3. Type: cumulative (Final level (Yes)).

  2. Close the form.

Define threshold definition for non-filing of return:

Define the first slab

  1. Click on Threshold designer > Rent RNF

  2. Click on New > General 

    1. Date range: Effective from(4\1\2021), Effective to(3\31\2022),

    2. Threshold limit: Lower Limit (0.00) ,upper limit (2,40,000)

    3. Type > cumulative (Final level (Yes))

Define the second slab

  1. Click on Threshold designer >Rent RNF > New > General.

    1. Date range: Effective from(4\1\2021), Effective to(3\31\2022),

    2. Threshold limit: Lower Limit (240000.00),Upper limit (0.00)

    3. Type > cumulative (Final level (Yes)).

  2. Close the form.

Create withholding Tax component group for Rent:

  1. Go to Tax > Set up > Withholding tax component groups.

  2. Select New >Tax type (TDS) > Withholding tax component group (Rent)

  3. Under General

    1. Status (Resident),

    2. Section code (94 I)

  4. Close the form.

Create Withholding Tax component for Rent:

  1. Go to Tax > Set up > Withholding tax component

  2. C​​​​lick on New 

    1.  Tax type (TDS)

    2. Withholding tax component (Rent)

    3. Withholding tax component group (Rent)

    4. Description (Rent)

Create withholding tax code for Rent:

  1. Go to Tax > Withholding tax codes >

  2. Select New 

    1. Withholding tax code (Rent 194 I)

    2. Withholding tax name (Rent new law)

    3. Currency (INR)

    4. Main account (202122)

    5. Settlement period (TDS)

    6. Tax type (TDS)

    7. Apply Threshold (Yes)

    8. Withholding tax component (Rent).

  3. Click on Threshold references.

  4. Click on New

    Note: It is better to create a separate group for vendors, those who have not filed the return for the last two years and attach this group to such vendor.

    1. Account type (Vendor)

    2. Account code (Group)

    3. Account or group (60)

    4. Threshold (Rent RNF).

  5. Click on New

    1. Account type (Vendor)

    2. Account code (All) 

    3. Account or group (Blank)

    4. Threshold (Rent)

  6. Click on Threshold designer.

  7. Select line with threshold “Rent RNF” > Tax value 

  8. Click on New > PAN status (Not available)

    1. Calculate previously non taxed (Yes)

    2. Calculate tax (Yes)

    3. Include turn over base (Yes)

    4. Value (0.00)

  9. Click on New > PAN status (Received)

    1. Calculate previously non taxed (Yes)

    2. Calculate tax (Yes)

    3. Include turn over base (Yes)

    4. Value (0.00).

  10. Select the cumulative second line > Tax value.

  11. Click on New > PAN status (Not available)

    1. Calculate previously nontaxed (Yes)

    2. Calculate tax (Yes)

    3. Include turn over base (Yes)

    4. Value (20.00)

  12. Click on New > PAN status (Received)

    1. Calculate previously nontaxed (Yes)

    2. Calculate tax (Yes)

    3. Include turn over base (Yes)

    4. Value (20.00)

  13. Close the form.

  14. Click on New 

    1. Account type (Vendor)

    2. Account code (All)

    3. Threshold (Rent)

  15. Click on Threshold designer.

  16. Select the cumulative first line > Tax value.

  17. Click on New PAN status (Not available)

    1. Calculate previously nontaxed (Yes) 

    2. Calculate tax (Yes)

    3. Include turn over base (Yes)

    4. Value (0.00)

  18. Click on New > PAN status (Received) 

    1. Calculate previously nontaxed (Yes)

    2. Calculate tax (Yes)

    3. Include turn over base (Yes)

    4. Value (0.00)

  19. Close the form.

  20. Select the cumulative second line >Tax value.

  21. Click on New > PAN status (Not available) 

    1. Calculate previously non taxed (Yes)

    2. Calculate tax (Yes)

    3. Include turn over base (Yes)

    4. Value (20.00)

  22. Click on New > PAN status (Received) 

    1. Calculate previously non taxed (Yes)

    2. Calculate tax (Yes)

    3. Include turn over base (Yes)

    4. Value (10.00)

  23. Close the form.

  24. Go to Tax > Indirect taxes > Withholding tax > Withholding tax groups

  25. Click on New 

    1. Withholding tax group (Rent 194 I)

    2. Description (Rent 194 I New law)

    3. Tax type (TDS).

Create Withholding Tax Group “Rent 194 I”

  1. Go to Tax >Withholding Tax > Withholding tax code

  2. Create new withholding tax group “Rent 194 I”

  3. Add > Withholding tax code “Rent 194 I”.

  4. Click on Designer.

  5. Click on New 

    1. Tax code (rent 194 I)

  6. Close the form.

Attach withholding Tax group to vendor account:

  1. Go to Accounts payable 

  2. Select INMF-000005 

    1. ​​​​​​​Group (60)

    2. Invoice and delivery 

      1. Withholding Tax (Yes)

      2. TDS group (Rent 194 I)

Update PAN information for a vendor:

  1. Go to Tax information

    1. ​​​​​​​ PAN status (Received) 

    2. Number (AUNPP6767E)

  2. Close the form.

Post two Scenario

The vendor has not filed the return for the last two years:

The normal Tax rate for Rent (company) – 10%

As per the new provision Higher of the below rate should apply:

  • Twice of specified rate i.e., 20%

  • The rate of 5%:

The vendor has filed the return for the last two years.

Scenario -1: The vendor has not filed the last two years return and provided PAN information

Create and post Invoice Journal

  1. Go to Accounts payable > Invoices > Vendor invoice journal

  2. Click on New 

    1. ​​​​​​​Account type (Vendor)

    2. Account (INMF-000005)

    3. Invoice (IN-8)

    4. Credit (250000.00), 

    5. Offset account type (Ledger)

    6. Offset account (600120)

  3. Click on withholding tax.

It is observed withholding tax is getting calculated as per the set-up Percent (20.0). for this vendor as expected because a vendor has not filed the return for the last two years.

Scenario -2: The vendor has filed the last two years' return and also provides PAN information.

Create and post Invoice Journal

  1. Go to Accounts payable > Invoices > Vendor invoice journal

  2. Click on New 

    1. Account type (Vendor)

    2. Account (INMF-000001)

    3. Invoice (IN-06)

    4. Credit (250000.00)

    5. Offset account type (Ledger)

    6. Offset account (600150)

  3. Click on withholding tax.

It is observed withholding tax is getting calculated as per the set-up Percent (10.0).

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