SECTION-WISE ANALYSIS OF THE FINANCE BILL, 2021- TDS/ TCS PERSPECTIVE
The Union Budget presented in the Parliament has proposed many key changes in the Income Tax Act. Specially, certain amendments have been brought in the TDS and TCS provisions of the Act. In this Article, we would analysis the changes that have been proposed in the TDS/ TCS provisions in the Income Tax Act.
Exempting requirement TDS on dividend payment to a Business Trust- Section 194
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Existing Provisions |
Amendment Proposed in the Section |
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Section-194 provides for deduction of TDS @ 10% on payment of dividends by an Indian company within India to a resident Indian who is an individual. However, no TDS is required if the amount of dividend does not exceed Rs. 5,000.
It is to be noted that in case of other than individual, there is no threshold limit. It means if Dividend is paid even Rs. 1, TDS is to be deducted.
Second Proviso of Section-194 states that no TDS is required where the dividend is paid to insurance companies or insurers. |
No changes have been prescribed in the rates of TDS or the threshold limit.
To give relief to Business Trusts, an amendment is proposed in second proviso of section 194 to provide that there will be no requirement to deduct TDS if such dividend is paid to a business trust as defined in clause (13A) of section 2 by a special purpose vehicle referred to in explanation to clause (23FC) of section 10.
The reasons for amendment are that the income of business trust is exempt from tax but due to earlier provisions, TDS was deductible on such exempted income also. |
Effective retrospectively from 1-4-2020 |
Exempting requirement of deducting TDS on interest paid by an infrastructure debt fund- Section 194A
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Existing Provisions |
Amendment Proposed in the Section |
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Section- 194A (1) provides for deduction of TDS @ 10% on interest other than interest on securities.
Section 194A (3) prescribes the exceptions where TDS need not be deducted under section 194A.
Clause (x) of sub-section (3) exempts TDS requirement on interest paid by infrastructure capital company or infrastructure capital fund or a public sector company or scheduled bank in relation to zero coupon bond |
Amendment in proposed in clause (x) of sub-section (3) to include infrastructure debt fund.
The effect of the amendment is that there will be no requirement of TDS deduction on payment of interest in relation to zero coupon bond issued by infrastructure debt fund |
Effective from 01-04-2021 |
Providing higher rate of TDS for non-filers of TDS under section 194-IB
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Existing Provisions |
Amendment Proposed in the Section |
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Sub-section (1) of Section 194-IB provides that any individual or HUF (other than those referred in section-194I), who pays a resident person any rent exceeding Rs. 50,000 per month shall deduct TDS @ 5%. Such TDS to be deducted at the time of crediting rent for the last month of previous year or last month of tenancy, whichever is earlier
Further, as per sub-section (4) of the section, if the PAN of the payee is not available, TDS shall be deducted as per section 206AA @ 20%. However, such deduction shall not exceed the rent payable for the last month of previous year/ last month of tenancy, as the case may be |
Amendment is proposed in sub-section (4) of section 194-IB to insert reference to new section 206AB along with section 206AA.
Section- 206AB has been inserted by this Finance Bill for prescribing special rate of TDS in case the payee is a non-filer of income tax return. This new section will affect the taxpayers in a tremendous manner and will cause undue compliance burden.
We will discuss section 206-AB in this article later. |
Effective from 01st July, 2021 |
Deduction in case of senior citizens with age of 75 years or more- Section 194P
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Section 139 of the Income Tax Act requires that every person being individual whose total income during the previous year exceeds the maximum amount not chargeable to income tax shall file his/her ITR on or before due date of filing ITR.
But filing of ITR might be a difficult job for senior citizens. Therefore, with a view to provide relaxation to senior citizens from requirement of filing ITR, a new section 194P is proposed to be inserted in the Income Tax Act. Section- 194P is applicable only to specified senior citizens.
According to Section 194P, the specified senior citizen shall not be required to file ITR if TDS has been already deducted under section 194P. Now, you will be curious to know what is specified senior citizen and how TDS will be deducted u/s 194P. Let’s read below: -
Who is a ‘Specified Senior Citizen”? A specified Senior Citizen is a senior citizen: -
How TDS will be deducted under section 194P? Once the declaration is furnished by the specified senior citizen to the bank, the bank will compute the income of such senior citizen on the basis of declaration after giving effect to deductions eligible under Chapter VI-A related to 80C/80CCC/80D/80G etc. and allowing rebate under section 87A of the Act and deduct TDS equal to tax computed on such income based on the tax rates in force.
Is section 194P really beneficial for senior citizens? This section will not reduce burden of senior citizens in any manner. At present, they are computing their income and submitting their details to a tax consultant for filing their ITR. To note further, almost all the incomes such as pension income and interest income will be now pre-filled in the ITR on the Income Tax Portal as stated by the Finance Minister. Also, the senior citizen will have to go to his bank and furnish a written declaration of his income which he was previously providing to his tax consultant. It will not reduce rigour of senior citizen in any manner. It would have been better if the Hon’ble FM would have been more generous to senior citizens in form of tax rebates.
This section is effective from 01-04-2021. |
TDS on purchase of goods- Section 194Q
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The Government had earlier introduced section 206C(1H) which provided for collection of tax at source (TCS) @ 0.1% (without PAN 1%) on receipt of consideration against sale of goods exceeding Rs. 50 Lakhs by a seller who was having turnover more than Rs. 10 crores in the preceding financial year.
Now, the Government has extended the scope of TDS levy by inserting a new section 194Q which provides for TDS on levy of TDS @ 0.1% on a purchase transaction exceeding Rs. 50 Lakhs in a year. However, the responsibility to deduct TDS under this section will be only on those persons whose turnover is exceeding Rs. 10 crores. This limit has been prescribed to reduce compliance burden on small taxpayers.
Section 194Q is applicable on any person who is a buyer of goods whose turnover or sales during immediately preceding financial year exceeds Rs. 10 Crores. Section provides that if such buyer makes purchase from any resident (seller) during the year of value or aggregate value exceeding Rs. 50 Lakhs, then such buyer shall deduct TDS @ 0.1% (5% if PAN is not provided) at the time of credit to the account of seller or at the time of payment, whichever is earlier
Cases where TDS not deductible u/s 194Q In the following two cases, TDS is not required to be deducted u/s 194Q: -
This means that if TDS/TCS is required to be complied under any other provision of this Act, then TDS shall not be deductible under section 194Q. But there is one exception to this. If any transaction is liable for TCS under section 206C(1H) and also TDS under this section, then on such transaction, only TDS shall be deducted under this section.
Further, The CBDT has been empowered to issue guidelines for removing difficulty in giving effect to the provisions of this section. Every guideline issued by CBDT shall be laid before each house of parliament and shall be binding on tax authorities and the person liable to deduct tax.
It should also be noted that if PAN of the seller is not available, TDS shall be deducted @ 5%. For this purpose, second proviso to sub-section (1) of section 206AA has been inserted.
The above section is applicable w.e.f. 01st July, 2021. |
Amendment in provision concerning withholding tax on payment made to FIIs- Section 196D: -
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Section 196D of the Act provides for deduction of tax on income derived by FIIs from securities as referred to in clause (a) of sub-section (1) of section 115AD of the Act. Such deduction is made @ 20%.
To rationalise the provision by allowing the benefit of agreements u/s 90 or 90A of the Act while deducting TDS on payments to FIIs, a proviso is proposed to be inserted in section 196D (1).
The proposed amendment provides that in case of a payee (FIIs) to whom an agreement referred u/s 90(1) or 90A(1) applies and such payee has furnished the tax residency certificate referred to in section 90(4)/ 90(4A) of the Act, then the tax shall be deducted at the rate of 20% or rates provided in such agreement, whichever is lower.
The amendment is effective from 1st April, 2021. |
Higher rate of TDS u/s 194Q where PAN is not furnished by the payee- Section 206AA
Section 206AA of the Income Tax Act provides that where the deductee fails to furnish his PAN to deductor, the deductor shall deduct TDS at the higher of the following rates: -
- At the rate specified in the relevant provision of this Act; or
- At the rate in force; or
- 20%
First Proviso to section 206AA (1) prescribes rate of 5% instead of 20% in case deduction is made u/s 194-O.
Another proviso is proposed to be inserted after first proviso which states that where TDS is required to be deducted u/s 194Q and PAN of the deductee is not available, TDS shall be deducted @ 5% instead of 20%. The amendment is effective from 01-07-2021.
Higher rates of TDS/ TCS for non-filers of ITR- New section inserted 206AB/ 206CCA
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Higher rates of TDS for non-filers of ITR- Section 206AB |
Higher rates of TCS for non-filers of ITR- Section 206CCA |
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Section-206AA of the Income Tax Act provides for higher rates of TDS, if the deductee fails to furnish PAN to the deductor. But this section in no way obliges the deductee to file the ITR. So, to ensure ITR filing, a new section 206AB has been inserted for non-filers of ITR.
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Section 206CC of the Income Tax Act provides for higher rate of TCS (5%), if PAN is not furnished by the buyer. A new section 206CCA has been proposed to be inserted for non-filers of ITR. The purpose of section 206AB and 206CCA is similar. |
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Section 206AB & 206CCA are applicable in case of a specified person. So, it is important to understand the meaning of ‘Specified Person’.
‘Specified Person’ means a person: -
Note: - Specified person shall not include a non-resident who does not have a permanent establishment in India. The expression “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. |
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Section 206AB shall be applicable where TDS is to be deducted in case of a specified person under Chapter XVIIB except section 192, 192A, 194B, 194BB, 194LBC, 194N of the Act. |
Section 206CCA shall be applicable where TCS is collectible in case of a specified person under Chapter XVII-BB of the Income Tax Act. |
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Rates of TDS u/s 206AB: - Higher of the following: -
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Rates of TCS u/s 206CCA: - Higher of the following: -
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If the provision of section 206AA is also applicable to specified person in addition to this section, TDS shall be at the rate higher of rates u/s 206AA & 206AB.
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If the provision of section 206CC of the Act are also applicable to a specified person, TCS shall be at the rate higher of rates u/s 206CC & 206CCA |
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These sections will come into effect from 1st July, 2021. |
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Author’s note: -
Insertion of new sections 206AB and 206CCA has cast additional compliance burden upon the assessee. Earlier, the assessee used to only ask for PAN of the deductee/ collectee. If PAN was not available TDS/TCS was made at a higher rate. But now from 1st July, 2021, the assessee will also need to check whether such person has filed its ITR or not for last 2 financial years. Further, he also needs to check whether TDS/TCS amount in such 2 years was Rs. 50,000 or more.
So, after insertion of these two sections, you should be very careful while deducting TDS or collecting TCS. Be prepared to ask the party for the copy of their ITR and also Form 26AS to comply section 206AB & 206CCA. There is no rationale behind these sections. The Government is merely casting additional responsibility upon the assessee which was undoubtedly an obligation of the Government to ensure that the ITR is filed by the person in whose case TDS is deducted or TCS is collected.
