Section 206AB of the Income Tax Act deals with the deduction of tax at source (TDS) at a higher rate for non-filers of income tax returns. It aims to encourage taxpayers to file their returns and comply with tax laws.

Here’s a breakdown of the key points:

Applicability:

• Applies to payments made under Chapter XVIIB of the Income Tax Act, excluding sections 192, 192A, 194B, 194BB, 194LBC, and 194N.
• Applicable only to “specified persons” who meet the following criteria:
  • Haven’t filed income tax returns for the two assessment years immediately preceding the previous year.
  • Aggregate TDS and TCS in each of the previous years was Rs. 50,000 or more.
  • Non-residents with no permanent establishment in India are excluded.

Higher TDS Rates:

• TDS is deducted at the higher of the following rates:
  • Twice the rate specified in the relevant section of the Act.
  • Twice the rate or rates in force.
  • 5%

Additional Provisions:

• If section 206AA also applies (for non-furnishing of PAN), the higher income tax rate between sections 206AB and 206AA is deducted.
• No higher TDS under section 206AB for specific income tax transactions like virtual digital assets (VDAs) for certain taxpayers.

Key Takeaways:

• Section 206AB discourages non-compliance with tax filing.
• It encourages taxpayers to file returns to avoid higher TDS deductions.
• Understanding the applicability and calculation of higher TDS rates is crucial for both deductors and non-filers.

It’s important income tax to remember that this is a simplified explanation. For a nuanced understanding, consulting a tax professional is always recommended.

 EXAMPLE

Example of Section 206AB with specific state India

Scenario:

Ramya, a resident of Chennai, India, has not filed her income tax return for the previous financial year. She receives a Understanding the applicability and calculation of higher TDS rates is crucial for both deductors and non-filers. Payment of Rs. 50,000 from her employer, XYZ Company, located in Mumbai, Maharashtra.

Application of Section 206AB:

Since Ramya has not filed her income tax return for the previous financial year, she becomes a “specified person” as per Section 206AB of the Income Tax Act. This section mandates the deduction of TDS (tax deducted at source) at a higher rate for payments made to such individuals.

Determining the applicable TDS rate:

There are two possible TDS rates under Section 206AB:

1. 20%: This is the default rate applicable when a specified person does not provide their PAN (Permanent Account Number) to the deduct or.
2. Rate as per the relevant section: This refers to the usual TDS rate prescribed for the specific type of income tax.

In Ramya’s case, since she has provided her PAN to XYZ Company, the applicable TDS rate will be the rate prescribed for salary income Understanding the applicability and calculation of higher TDS rates is crucial for both income tax deductors and non-filers. under Section 192A of the Income Tax Act. This rate depends on Ramya’s tax slab, which can be determined based on her income and other factors.

For example, assuming Ramya Understanding the applicability and calculation of higher TDS rates is crucial income tax for both deductors and non-filers. falls in the 20% tax slab, the usual TDS rate for salary income would be 20%. Since this is the same as the default rate under Section 206AB, XYZ Company will deduct TDS at 20%.

TDS deduction and challan payment:

XYZ Company will deduct Rs. 10,000 (20% of Rs. 50,000) as TDS from Ramya’s salary and deposit it with the income tax government within the prescribed time limit. They will also provide Ramya with a Form 16A, reflecting the TDS deducted.

Ramya’s responsibility:

Ramya should file her income tax return for the previous financial year at the earliest. While filing her return, she will claim credit income tax for the TDS deducted by XYZ Company. If she has paid more tax than she is liable for, she will receive a refund from the government income tax.

Key Points to Remember:

• Section 206AB applies to individuals’ income tax who have not filed their income tax return for the previous financial year.
• The TDS rate under this section is either 20% or the rate prescribed for the specific type of income, whichever is higher.
• The deduct or (in this case, XYZ Company) is income tax responsible for deducting and depositing the TDS with the government.
• The non-filer (Ramya) is responsible for filing their income tax return and claiming credit for the TDS deducted.

Additional Considerations:

• The specific state of the payer or the payee does not affect the applicability of Section 206AB.
• This is a simplified example, and the actual income tax TDS liability may vary depending on the specific circumstances. It is recommended to consult a tax professional for personalized advic

•  FAQ QUESTIONS

 Q: What is Section 206AB of the Income Tax Act?

A: Section 206AB deals with the deduction of tax at income tax source (TDS) or collection of tax at source (TCS) at a higher rate when a payment is made to a “specified person.” A specified person is one who has not filed their income tax return for the previous assessment year.

Q: What is the higher rate of TDS/TCS under Section 206AB?

A: The higher rate of TDS/TCS under Section income tax 206AB is 20%. However, if the applicable rate under the relevant provision is higher than 20%, then that rate will be applied.

Q: What happens if a specified person does not provide their PAN?

A: If a specified person income tax does not provide their PAN, the tax shall be collected at 20% or the rate applicable as per the relevant section, whichever is higher.

Q: Who are considered “specified persons” under Section 206AB?

A: The following are considered “specified persons” under Section 206AB:

• Individuals (including resident and non-resident)
• Hindu Undivided Families (HUFs)
• Firms
• Association of Persons (AOPs)
• Bodies of Individuals (BOIs)
• Local authorities

Q: What types of payments are covered under Section 206AB?

A: Section 206AB applies to various types of payments, including:

• Salaries and wages
• Rent
• Commission
• Interest
• Professional fees
• Fees for technical services
• Payment in connection with the purchase of goods
• Payment in connection with the transfer of immovable property

Q: Are there any exceptions to Section 206AB?

A: Yes, there are a few exceptions to Section 206AB income tax. Some of the exceptions include:

• Payments made to government departments
• Payments made to specified institutions like public charitable trusts
• Payments made to individuals whose income tax is exempt from tax
• Payments made to non-residents who are not liable to file income tax returns in India

Q: What happens if a specified person files their income tax return after TDS/TCS is deducted at a higher rate?

A: If a specified person files their income tax return after TDS/TCS is deducted at a higher rate, they can claim a refund of the excess tax deducted. They can do this by filing their income tax return and claiming the refund in Schedule TR-3.

CASE LAWS

Section 206AB:

• This section mandates Tax income tax Deducted at Source (TDS) at higher rates for “specified persons” who have not filed their income tax returns for the last two years.
• The higher TDS rate is either double the regular rate or 5%, whichever is higher.
• This provision applies to payments like rent, professional fees, contract payments, etc.
• Additionally, if a specified person doesn’ income tax t provide their PAN, the tax shall be deducted at 20% or the applicable rate, whichever is higher.

Potential Case Law Considerations:

• Interpretation of “Specified Person”: Disputes income tax may arise regarding the definition of “specified person” and whether it encompasses specific categories of taxpayers.
• Application to Non-Residents: The section income tax excludes non-residents without a permanent establishment in India. However, clarity might be needed on defining “non-resident” and its applicability to specific situations.
• Taxpayer Rights: Cases could emerge challenging the legality and fairness of imposing higher TDS solely based on non-filing of returns, potentially violating taxpayer rights.
• Procedural Issues: Disputes income tax may arise regarding the implementation of the section, such as the timing of deducting TDS, documentation requirements, and dispute resolution mechanisms.

Current Legal Landscape:

• Given the recent introduction of the section, there are limited judicial pronouncements.
• However, some preliminary rulings have upheld the validity of Section 206AB, emphasizing its role in encouraging timely income tax return filing and improving compliance.

Future Developments:

• As time progresses and more disputes arise, we can expect more case laws to develop and provide greater clarity on the interpretation and application of Section 206AB.