Section 206AB of Income-Tax Act – Semantic Taxgen Pvt Ltd

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Section 206AB of Income-Tax Act

July 05, 2021
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                                                                  FREQUENTLY ASKED QUESTIONS

Ques 1: When will section 206AB made applicable?

Ans 1: Section 206AB is an insertion into Income-tax Act, 1961 (‘the Act’) using Finance Act, 2021 from 1 July 2021. Hence, with previous discussion, the compliance of such section is a mandate from 1 July 2021.

Ques 2: Is Section 206AB applicable for payments in relation to tax deduction at source (‘TDS’) under Section 194C, 194J, 194I 195 etc.?

Ans 2: True, excluding of some specific carve outs mentioned under Section 206AB, its applicability is for every other nature-based payment under various provisions of Chapter XVII-B which involve deduction of tax at source. The carve outs provided in the Section are provided below –

  • TDS on salary under section 192
  • TDS on withdrawal from EPF under section 192A
  • TDS on winning from lotteries, crossword puzzles, etc. under section 194B
  • TDS on winning from race horses under section 194BB
  • TDS on income in respect of investment in Securitization Trust under section 194LBC
  • TDS on cash withdrawal under section 194N

Ques 3: In case where payment to a specific vendor does not cross the basic thresholds as per section of chapter XVII0B, in such scenario what will be the applicability of section 206AB?

Ans 3: In the mentioned scenario, where the payment does not cross the basic thresholds required compliance of TDS under different Sections of Chapter XVII-B, provisions of Section 206AB are not applicable.

Ques 4: What are applicable TDS rates where section 206AB is a trigger?

Ans 4: Where Section 206AB is a trigger, the tax deduction will be higher of the following rates:

(a)Double the rate stated in the relevant provision of the Act;

(b)Double the rate or rates in force; or

(c)5%.

Though, where applicability of both the provision of this Section and Section 206AA exists (Section 206AA is to be equipped with PAN where TDS is deducted as per the provisions of Chapter XVII-B), the tax will be strictly deducted at the rates stated in section or Section 206AA, whatever is higher.

Ques 5: What is the threshold provided from a Tax deductor viewpoint for applicability of such Section?

Ans 5: There is no as such basic threshold stated for the applicability of this Section from a Tax deductor viewpoint. Hence, the compliance of the section is a mandate for every type of Tax deductors regardless of any threshold as to expenses, turnover etc.

Ques 6: What are the feasible ways the Tax deductors can make sure compliance of this section from 1 July 2021?

Ans 6: Provided that the Section is into the applicability from 1 July 2021, before the applicable date, it is relevant that the Tax deductors should make adequate arrangement thus to ensure the compliance of such Section. Tax deductors should get in touch with their respective Deductees in relation for attaining suitable declaration on compliance of filing of the Income-tax returns for applicable PYs. Such of this declaration can either be attained physically from the Deductees or with the help of online forms or with means of survey through survey Apps etc. It is important to note that the privacy of the data attained from the Tax deductees is properly maintained in whatsoever mode the data is acquired. Furthermore, as per the sensitivity of the data involved, the Tax deductees might not be interested in sharing the tax return acknowledgements etc. for such purpose.

Further, the Tax deductors can acquire enough indemnities while taking the declaration from the Tax deductees to cover the risks of non-compliance involved.

Ques 7: Once the Section 139(1) due date for FY 2020-21 expires should there be a separate declaration?

Ans 7: As of now, there is as such no instrument or platform available for the Tax deductors to identify the compliance of Income-tax return filing by the Deductees. In this view, it would be valuable if the Tax Department comes out with an online platform which delivers the required data for determining the applicability of Section 206AB in the event for the vendors. Though, in the non-existence of such platforms, it is necessary to opt for a top-up declaration/ confirmation of the vendors in regards to the status of filing of tax return for FY 2020-21.

Ques 8: What is the outcome in case the Tax deductee filed the tax return for either of the years from the PYs?

Ans 8: Such Deductee would not be called as “Specified person” as it defines that only when the Deductee has not filed the tax return for both the assessment years. In accordance to this, technically Section 206AB provisions is not applicable where the tax return is not filed for either of the years.

Ques 9: What if the Tax deductee filed the tax returns after the due date of filing return as per section 139(1) of the Act?

Ans 9: Tax deductee will be considered as a “Specified person” when no filing has been done of the tax returns for both the applicable PYs. As per the section 139(1), it is not said in the section that to be considered as a “Specified person”, the Tax deductee should have filed the tax return within the due date.

As said, this, it seems that if the Deductee has filed the tax return after the due date of filing the return under Section 139(1), the Deductor will not be need to exercise the provisions of Section 206AB of the Act, in such situations as the requirement of filing of the tax return has been completed by the Tax deductee.

Ques 10: What if the Tax deductee has no liability to file the tax return as under the provisions of the Act and hence did not filed the returns for applicable PYs?

Ans 10: It is to be noted that Section 206AB does not give an exemption in any such cases. Despite that, the Tax deductors should not forget the threshold of INR 50,000 of TDS while deciding the applicability of Section 206AB in above case of Deductees.

Ques 11: Will the compliance be important if the tax deduction made by the Deductor is less than INR 50,000 in case of any particular Deductee for both the applicable PYs?

Ans 11: A Tax deductee will be called as a “Specified person” if the aggregate of TDS along with tax collected at source (‘TCS’) in this case is either INR 50,000 or more in both PYs. Hence, the aggregate of TDS / TCS will be calculated from the viewpoint of all the TDS/TCS available to the Tax deductee concerned (as reflected in the Form 26AS) and not from the point of view of the quantum of TDS / TCS made by the subject Tax deductor.

Ques 12: What if the TDS is not more than INR 50,000 in either of the two applicable PYs and the Tax deductee did not filed the tax returns for both the applicable PYs?

Ans 12: In the above situation, the Tax deductee cannot be called as a “Specified person” as the section needs the aggregate of TDS and TCS to be at least INR 50,000 or more in all of the applicable PYs.

Ques 13: Any relaxation for non-residents who are subject to TDS under section 195 of the Act?

Ans 13: Yes, any non-resident who is not having a “permanent establishment” (PE) in India is not confined to the applicability of Section 206AB.

Furthermore, it is to be noted that Section 206AB provides a comprising definition of PE for such purpose, which states that PE comprises of a fixed place for business with help of which the business of the enterprise can either wholly or partly be carried. Provided that the Section issues a definition for PE, the importance and pertinence of this definition in relation to relevance and applicability of the definitions characteristically stated for PE in the Double Taxation Avoidance Agreements might be a debatable matter in the near future. It is also important to include a reference of the PE contemplated/PE definition as under Section 206AB of Act on the PE related declarations that are basically gathered from the non-resident vendors for the purposes of withholding under Section 195 of the Act.

Ques 14: What can be the possible implications for non-compliance of Section 206AB?

Ans 14: The below mentioned implications might arise wherein a Tax deductor does not comply with the provisions of Section 206AB of the Act –

  • Classification as “assessee in default” as to of Section 201 of the Act
  • Interest as to Section 201(1A) of the Act
  • Penalty as to of Section 221 of the Act
  • Penalty as to Section 271C of the Act
  • When there is a short-deduction of tax due to trigger of Section 206AB, potentially disallowance of expense as to Section 40 of the Act
  • Disclosure in Clause 34 of Form 3CD

Ques 15: What is the importance of non-obstante clause under section 206AB?

Ans 15: The beginning of the section 206AB clause is with non-obstante clause, that overlooks every other provision of the Act. Section 206AB starts with a non-obstante clause overriding all other provisions of the Act. With this, the applicability of the clause will also be applied on the cases where the tax deductees attained lower TDS or NIL certificates from the Tax Office or even given a declaration as under section 197A of the Act etc.

Ques 16: What are the significant years for FY 2021-22 basis on the definition of “Specified person”?

Ans 16: In accordance with the definition of “Specified person” as persection 206AB, gives an imprintof the applicable Previous Years (‘PYs’) are taken into consideration for this purpose are the years which are instantly preceding the subject Previous Year (‘PY’) of which the due date for filing income-tax return as per Section 139(1) has expired.

On the above basis, starting from 1 July 2021, the timespan for filing Income-tax return as under section 139(1) is expired for both FY 2018-19 and 2019-20 and in case of each type of taxpayer and forthis the due date for FY 2020-21 is yet not expired. Hence, these two PYs that are FY 2018-19 and 2019-20 are important PYs for inspecting the applicability of Section 206AB from 1 July 2021.

Though, as soon as the time limit for filing the Income-tax return finishes for Financial Year (FY) 2020-21, the relevant PYs will be FY 2019-20 and 2020-21.

 

Disclaimer : The information contained in this article is intended solely for the dissemination of information and does not aim at solicitation of work. Though meticulous care has been taken but the author assumes no liability in respect of any loss/ damage incurred while acting on the information provided in this article. The author can be reached at sanjeev@semantictaxgen.in and can be called at +91-8126700005.

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