Section 206CCA of the Income Tax Act: Higher TCS for Non-Filers
Section 206CCA of the Income Tax Act, 1961, introduced by the Finance Act, 2021, and effective from July 1, 2021, is a special provision that mandates the collection of Tax Collected at Source (TCS) at a higher rate. This higher rate is applicable when sums are received from certain "specified persons." The primary goal of this section is to enhance tax compliance by imposing stricter collection norms on individuals and entities who have not filed their Income Tax Returns (ITRs) for past years, despite having a significant history of TDS or TCS.
Who is a "Specified Person" under Section 206CCA?
For the purpose of Section 206CCA, a "specified person" is defined based on the following cumulative conditions:
- They have not filed the Income Tax Returns (ITRs) for both of the two assessment years relevant to the two previous years immediately prior to the financial year in which tax is required to be collected.
- The due date for filing the ITRs under sub-section (1) of Section 139 (excluding belated or revised returns) for these two previous years has already expired.
- The aggregate of TDS and TCS in each of these two previous years is INR 50,000 or more.
Exclusions from "Specified Person"
The definition of a "specified person" under Section 206CCA does not include:
- A non-resident who does not have a Permanent Establishment (PE) in India.
- Any person who is not required to file the return of income for the assessment year relevant to the previous year, as may be notified by the Central Government.
Higher TCS Rate under Section 206CCA
If a sum is received from a "specified person" where TCS is applicable, the tax must be collected at the **higher** of the following two rates:
- Twice the rate specified in the relevant provision of the Income Tax Act (e.g., if the normal TCS rate is 1%, it becomes 2%).
- 5%.
Interplay with Section 206CC (Non-furnishing of PAN):
If both Section 206CCA (non-filing of ITR) and Section 206CC (non-furnishing of PAN) are applicable to a "specified person," the TCS will be collected at the **highest** of the rates prescribed under 206CCA and 206CC. This typically means the rate will be 20% or higher, as per Section 206CC.
Compliance Check Functionality for Collectors
To assist collectors in identifying "specified persons," the Income Tax Department has provided a "Compliance Check Functionality" on its e-filing portal. By simply entering the PAN of the person from whom TCS is to be collected, the collector can ascertain if they fall under the "specified person" category. This significantly streamlines the due diligence process for compliance.
Section 206AB: Corresponding TDS Provision
Section 206AB is the counterpart to 206CCA for Tax Deducted at Source (TDS). It mandates higher TDS rates for "specified persons" on certain payments. The definition of "specified person" and the higher rates are identical to those in Section 206CCA, emphasizing a consistent approach to non-filers across both TDS and TCS regimes.
Responsibilities of the Collector
Businesses and individuals responsible for collecting tax under Section 206CCA must adhere to the following compliance steps:
- Identify "Specified Persons": Utilize the Compliance Check Functionality on the Income Tax portal to determine if the person from whom TCS is to be collected is a "specified person."
- Apply Higher Rates: Collect TCS at the higher of the rates prescribed under Section 206CCA.
- Comply with Regular TCS Procedures: This includes timely deposit of the collected tax to the Central Government, filing quarterly TCS returns, and issuing TCS certificates.
Impact on the Payee (Specified Person)
For a "specified person," the consequence of not filing ITRs and having significant TDS/TCS history is the deduction/collection of tax at a higher rate. While this impacts their immediate cash flow, they can claim the higher TCS credit when they eventually file their Income Tax Return. This provision acts as a strong deterrent against non-ITR filing.
Future Outlook: Proposed Omission of Section 206CCA
Important Update: The Union Budget 2023 proposed the omission of both Sections 206AB and 206CCA, with effect from April 1, 2025. This legislative change is intended to ease the compliance burden on deductors and collectors and simplify the overall tax framework. Consequently, for financial years beginning on or after April 1, 2025, these special provisions for higher TDS/TCS on non-filers may no longer be applicable.
Conclusion
Section 206CCA played a crucial role in the government's strategy to promote tax compliance and track high-value transactions, especially concerning individuals and entities who have historically defaulted on filing their Income Tax Returns. It placed a clear responsibility on collectors to identify such "specified persons" and apply the mandated higher TCS rates. The proposed omission of this section from April 1, 2025, signifies a move towards simplifying tax laws and potentially reducing administrative overhead for businesses, while the overall emphasis on compliance remains a key objective of the Indian tax system.