1. Overview
- Introduced: Finance Act 2021 (effective from 1st July 2021) .
- Purpose: Encourage tax compliance by imposing higher TDS rateson individuals/businesses who fail to file income tax returns (ITRs) despite significant TDS/TCS deductions.
- Budget 2025 Update: Proposed for omission(effective 1st April 2025) to reduce compliance burdens.
2. Key Provisions
A. Applicability
- Applies to “Specified Persons”:
- Non-filers: Failed to file ITR for both of the last two financial years(e.g., FY 2023-24 and FY 2022-23 for deductions in FY 2024-25).
- Threshold: Aggregate TDS/TCS in eachof those years was ₹50,000 or more.
- Transactions Covered:
- Rent, professional fees, contractor payments, interest (excluding salaries, EPF withdrawals, lottery winnings, etc.).
B. Exemptions
- Payments Excluded:
- Salaries (Section 192)
- EPF withdrawals (Section 192A)
- Lottery/horse race winnings (Sections 194B, 194BB)
- Cash withdrawals (Section 194N)
- Non-residents withouta permanent establishment in India.
C. TDS Rates
- Higher of:
- Twice the normal rateunder the relevant section, or
- 5%.
- PAN Not Provided: TDS defaults to 20%(as per Section 206AA).
Example:
- Normal TDS on professional fees (Section 194J): 10%
- Under Section 206AB: 20%(2×10%) or 5% → 20% applies.
3. Compliance & Penalties
- Deductor’s Duty:
- Verify non-filer status using the ITD’s compliance check tool(bulk PAN search).
- Deduct higher TDS and report in Form 26Q/27Q.
- Consequences for Default:
- Disallowance of expenses(Section 40(a)(ia)) if TDS not deducted.
- Interest/Penalties: 1% monthly interest for late deduction; ₹10,000–₹1 lakh for incorrect filings.
4. Recent Changes & Relief Measures
- Budget 2023: Excluded non-residents without PEand individuals not required to file ITR from “specified persons”.
- Budget 2025: Proposed removal of Section 206ABto simplify compliance.
5. Practical Implications
- For Deductors:
- Maintain records of payees’ ITR status.
- Use the TRACES portalfor corrections.
- For Payees:
- File pending ITRs to avoid higher TDS.
- Reconcile TDS credits via Form 26AS/AIS.
Pro Tip: NRIs without Indian business income are exempt but must submit Tax Residency Certificates (TRCs) to avoid higher TDS.
