Sections 206AB and 206CCA are significant provisions introduced in the Income Tax Act, 1961 to ensure the deduction of higher rates of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) in certain cases where the recipient has not filed their Income Tax Returns (ITRs) for the past two years and the TDS/TCS deduction is above a specified threshold limit.

Section 206AB

Section 206AB mandates higher rates of TDS for specified non-filers. This provision came into effect from July 1, 2021, and applies to various payments including interest, dividend, professional fees, royalty, brokerage, commission, etc., exceeding Rs. 50,000 in a financial year. If the recipient has not filed their ITR for the past two years and the aggregate TDS deducted in each of those two years is Rs. 50,000 or more, the higher TDS rate prescribed under this section will be applicable.

The rates of TDS under Section 206AB are usually twice the standard rate or rates as specified in the Income Tax Act, whichever is higher. However, there are exceptions where higher rates are not applicable, such as when the TDS is required to be deducted under sections 192, 192A, 194B, 194BB, 194LBC, or 194N.

Section 206CCA

Section 206CCA is analogous to Section 206AB but pertains to Tax Collected at Source (TCS). It mandates higher rates of TCS on specified non-filers who receive certain payments exceeding Rs. 50,000. This section also became effective from July 1, 2021, and applies to the collection of TCS on sale of goods, rental income, etc., where the recipient has not filed their ITR for the previous two years and the TCS collected each year is Rs. 50,000 or more.

Similar to Section 206AB, Section 206CCA also prescribes higher TCS rates, which are generally twice the specified rate or the rates in the Income Tax Act, whichever is higher.

Implications and Compliance

Businesses and individuals responsible for deducting TDS or collecting TCS need to diligently verify the compliance status of their payees and consider the implications of Sections 206AB and 206CCA. It becomes crucial to ensure proper due diligence and documentation regarding the filing of ITRs by recipients to avoid the application of higher TDS or TCS rates.

Non-filers falling under the ambit of these sections can face increased tax deductions or collections, making it essential for recipients to regularly file their income tax returns to avoid such higher deductions or collections.

Conclusion

Sections 206AB and 206CCA of the Income Tax Act, 1961 aim to encourage compliance with tax filing obligations by imposing higher TDS and TCS rates on non-filers of income tax returns. These provisions emphasize the importance of regular tax compliance and filing, urging taxpayers to fulfill their responsibilities to avoid increased taxation on their transactions.

It's imperative for both payers and recipients to stay informed about these provisions to ensure adherence to the prescribed rules and regulations while conducting transactions subject to TDS and TCS.