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In order to penalize those who don’t file income tax returns (ITRs) despite being liable to, the government has proposed new provisions in Union Budget 2021. Under the proposed Section 206AB, in cases where a person is required to deduct (deductor) tax deducted at source (TDS) while making a payment to another person, he will be liable to deduct TDS at a higher rate in case the person receiving the payment (deductee) has not filed ITR for the previous two years.

There are certain conditions under which TDS will be deducted at a higher rate. However, in the absence of a mechanism where deductors can check if TDS needs to be deducted at a higher rate, they may face difficulty in doing so. Let’s understand the issues and some probable solutions suggested by experts.

As per the proposal, TDS will be deducted at twice the applicable rate as per the Income Tax Act or 5%, whichever is higher in case the person hasn’t filed ITR for the past two years (and the time limit for filing the ITR is also over) and a TDS of more than 50,000 was deducted in each of the past two years from that person. So, the deductor will have to ensure that both these conditions are fulfilled.

For example, in case you are making a payment to a contractor, you are liable to deduct TDS at the rate of 1%. In case the contractor hasn’t filed the ITR for the past two years and TDS of more than 50,000 was collected in each of the two years, then you will have to deduct TDS at the rate of 5% instead of 1%. In case you are paying rent of more than 50,000 per month, you are liable to deduct TDS at the rate of 5%. In case the person receiving rent has not filed ITR for the past two years and 50,000 TDS was deducted from him in each of the past two years, you will be required to deduct TDS at 10%.

The basic idea is to make more people file ITRs. The TDS so deducted can be claimed by the deductee against the overall tax liability by filing the ITR. By introducing higher TDS limits, the government wants more people to file ITRs to claim the TDS paid.

There are existing provisions under which TDS needs to be deducted at a higher rate in case of non-furnishing of permanent account number (PAN). But it has been seen that these provisions have ensured that more people get PAN cards but tax filing has not gone up. With the introduction of these provisions, it is anticipated that more people will file ITRs.

Under the provisions, the onus of deducting and submitting the TDS lies with the deductor. There are penalties in case of default. “The deductor can be held liable for the amount of tax he fails to withhold within prescribed time limits. Failure to deduct tax also attracts simple interest at the rate of 1% per month of the tax and may result in penalty equal to the amount of the tax required to be deducted," said Gouri Puri, partner, Shardul Amarchand Mangaldas & Co.

However, in the absence of a mechanism or platform, it will be challenging for the deductor to check whether the person from whom TDS needs to be deducted meets the two conditions or not. Experts say that the deductor can ask for declarations or use the ITR acknowledgement to check if the person has filed the ITR or not.

“The deductor may take the e-filing acknowledgement number of the receiver of the payment and verify the return filing status of such persons on the I-T department’s e-filing portal. Where the specified person does not furnish such details, TDS should be deducted at a higher rate in accordance with the new rules," said Sandeep Jhunjhunwala, partner, Nangia Andersen LLP.

However, Vikash Mittal, a Delhi-based chartered accountant, says collecting documents may become difficult for the deductor and may enforce additional compliance burden. “Even for the government, it will be difficult to identify cases where TDS is deducted at a lesser rate or not deducted in the absence of a proper mechanism," added Mittal.

A proper platform is needed to check the other condition under which the deductor is required to ensure that in the past two years, TDS of 50,000 or more was deducted from the person.

There is Form 26AS, which gives details about the TDS paid, but people may not share the same. “Form 26AS is available to a taxpayer i.e. deductee. It may contain details of other income, which the deductee may not share with the deductor," said Sandeep Sehgal, director, taxes and regulatory, AKM Global, a consulting firm.

Also, there is no clarity with respect to what happens in case the person from whom TDS needs to be deducted was not eligible to file tax return in the past two years.

“Where the specified persons are not eligible for filing ITRs in the prior years such as newly incorporated companies or individuals having income below the basic exemption limit, the dedu-ctor may take necessary declaration from such specified persons that they were not required to file ITRs in the past two years. However, this approach should be clarified by the authorities to ensure that the deductor is not considered at fault," said Jhunjhunwala.

The provisions are to be implemented from 1 July.

“The government said it will put a mechanism in place whereby the deductor can input PAN of the receiver in the web portal and will get to know whether the receiver has filed ITR or not," said Neeru Ahuja, partner, Deloitte India.

It will be good if the tax department comes out with a platform or utility that can help the deductor to comply with the provisions for its smooth implementation.

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