Introduction
The Indian Government in the last few years has been actively trying to formalize the economy by adopting various measures. The intent behind such measures is to widen the tax base and eliminate the cash or the parallel economy. Various steps are being taken in both the GST domain and the direct tax domain so as bring the unregistered/ inactive taxpayers into the tax ecosystem. Under GST one such major step was taken by introducing the condition of availing input tax credit only when the supplier makes the tax payment and furnishes GST return. Similar steps have been taken in the direct tax sphere. The new Tax Deduction at Source (TDS) provisions introduced in the recent past is an indication of the same.
TDS New Updates
Section 206AA of the Income Tax Act, 1961 (IT Act) was introduced a few years back. This section enabled the taxpayers to deduct tax at source at a higher rate in case of deductee not having a PAN. Similarly, Section 206CC of the ITC Act enables a taxpayer to collect tax (TCS) at a higher rate for non-availability of PAN.
After these provisions were introduced for taxpayers without PAN, the Government has vide Union Budget 2021, introduced similar provisions for taxpayers who have not filed IT returns even though their tax is deducted or collected at source. These provisions are:
- 206AB: This TDS provision prescribes a higher rate of deduction of tax in the case of specified persons. The specified person, in this case, could be:
- A person who has not filed the IT return for two previous years; and
- The time limit to file IT return u/s 139(1) has lapsed; and
- Total aggregate tax deducted or collected at source in his case in each of these previous two years exceeds INR 50,000.
- Furthermore, the specified person shall not include Non-Resident having permanent establishment outside India.
The higher rate of tax prescribed in this case is higher of the following:
- Twice the rate as prescribed by the relevant provision; or
- Twice the rate in force; or
- Five percent.
The exceptions to Section 206AB are TDS deducted u/s 192, 192A, 194B, 194BB, 194LBC or, 194N of the IT Act. Moreover, in case a person has not furnished PAN and has also not filed IT returns for the previous two years i.e. applicability of both Sections 206AA and 206AB are instigated, the TDS rate to be deducted would be the rate higher of rates prescribed u/s 206AA and 206AB.
2. 206CCA: This TCS provision prescribes a higher rate of collection of tax in the case of non-filers of IT returns. This provision would be applicable to any tax collected from a specified person. The specified person is similar to the one mentioned in Section 206AB above.
The higher rate of tax prescribed in this case is higher of the following:
- Twice the rate as prescribed by the relevant provision; or
- Five percent.
In case a person has not furnished PAN and has also not filed IT returns for the previous two years i.e. applicability of both Sections 206CC and 206CCA is instigated, the TCS to be collected would be the rate higher of rates prescribed u/s 206CC and 206CCA.
Issues in TDS compliance in light of new TDS provisions
The newly inserted sections 206AB and 206CCA are still to be tested on the grounds as it comes into effect from 1st July 2021. However, it is anticipated that these sections would be onerous on the compliant assesses. After these provisions are implemented, not only would the taxpayers be required to obtain PAN from the other parties, they would also have to check if the other party has furnished its IT returns for the previous two years and whether they cross the section prescribed tax deducted and collected source limit of INR 50,000 in aggregate.
The non-compliance provisions are also stringent and provide for higher interest and penalty along with prosecuting in some cases.
How can technology help
With compliances becoming even more onerous on a day-to-day basis, the businesses face challenges in terms of the time and effort of their tax teams being averted towards such compliances. As a result, the tax team spends more time in regular and mundane activities which can be easily avoided with the help of technology.
Cygnet has developed BoTs which assists the organization in complying with TDS provisions. The PAN no. and acknowledgment no. of IT return can be entered in bulk for all vendors. The BoT basis is such that the information would fetch the IT return status of the vendor from the Government website and inform the organization of such status. Basis the status, the organization can then go ahead and deduct TDS at normal rates or higher rates as the case may be.
When it comes to TDS provisions, businesses are using technology in their 26AS reconciliations. 26AS is an automated form of tax credit that is generated annually for a specific PAN. It apprises the taxpayer of the tax credits that are available to them basis their TDS deducted. However, the challenge that the organizations face is the invoice-wise reconciliation of TDS deducted. RPA tool coupled with managed services is helpful in an invoice-wise reconciliation of TDS credit. Moreover, the solution also helps in cases where only a few entries in an invoice are liable for TDS deduction This ensures streamlined book entries and accurate book-keeping.
Conclusion
By the recent provisions and amendments to the law, it is clear that the Government is looking to adopt a stringent regulatory and compliance approach which will result in lesser tax evasion and frauds. Therefore, the businesses need to ensure that they are ready for such provisions and regulations. Technology has become an important part of becoming compliant. The more the businesses rely on technology, the better equipped they would become for handling rigorous tax compliances.
Komal Vithalani
Content Writer
Komal Vithalani, a Chartered Accountant and Commerce graduate, is a dedicated professional committed to delivering value with years of expertise in navigating the complexities of indirect tax laws. Her practical excellence includes managing perplexed litigations, dispensing tactical tax advice, conducting thorough compliance checks, supervising audits, and crafting articulate and insightful content. At Cygnet, Komal seamlessly blends her profound understanding of tax regulations with cutting-edge tax technology. Leveraging her competence, she adeptly transforms complex tax tech jargon into concise, impactful, and engaging content. This not only aids readers in comprehending tax-related topics with enlightening clarity but also ensures the delivery of narratives that resonate broadly.
