A new section was introduced in the Finance Bill, 2021 for deduction and collection of tax at source at higher rates if an amount is paid or payable to the specified person who did not file the income tax return. Section 206AB for TDS is inserted after section 206AA of the income tax act. The latter provides for deduction of TDS at higher rates for non-furnishing of Permanent Account Number (PAN).
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What is section 206AB
Section 206AB provides a tax deduction at source (TDS) at rates higher than those prescribed in the Act while making payments or collections to those who have not filed their income tax return.
The nature of the transaction on which a higher amount of TDS shall be deducted can be any transaction such as classic Buy Order/Sell Order or EZ Buy Order & Sell Order for specific crypto assets., but excluding the below nature of payments:
As per Union Budget 2022, this provision is further not applicable for a tax deduction on the below nature of transactions-
Transfer of virtual digital assets (Section 194S) to an individual or HUF, whose gross turnover from business is less than Rs 1 crore or gross receipts from the profession are less than Rs 50 lakhs during the immediately preceding financial year, or the individual/HUF has no income under the head ‘income from business or profession’.
When Tax will be Deducted at Source at Higher Rates
The tax is required to be deducted at source at rates higher than prescribed in the Act if the transaction is incurred with the person who satisfies the following conditions:
- The person does not file the income tax return for the financial year (before Budget 2022, two FY) immediately preceding the FY in which tax is required to be deducted,
- where the income tax return (not belated return) filing due date is expired and
- The total amount of deduction and collection of tax (TDS and TCS) is Rs.50,000 or more in each of these two previous years.
Note: It does not apply to a non-resident who does not have a permanent establishment in India. Permanent establishment for this purpose includes a fixed place of business where the enterprise’s business is carried out wholly or partially.
If the taxpayer falls under all the above conditions then tax shall be deducted at source (TDS) at higher of below rates:
- Twice at the rates prescribed in the relevant provisions of the Income Tax Act.
- At the rate or rates in force, i.e., the rate prescribed in the Finance Act
- At five percent.
In addition to non-filing of income tax return, if the specified person does not furnish PAN, then tax shall be deducted or collected at 20 percent or rates applicable as per this section, whichever is higher.
A company makes a crypto investment of Rs.80 lakhs. The tax is deductible at 1%. But Company did not file his IT return for both the years and the due date of filing the return has expired.
Hence, when the company tax is deducted on the exchange learns that the company has not filed its ITR for the last two years, the TDS should be deducted at higher of the following:
- Twice the rate prescribed in the Act, i.e. 2% (twice 1%), or
Hence, the tax should be deducted at the rate of 5%.
Further, if PAN is not furnished, then TDS shall be deducted at the rate of 20%, which is higher than 5%.