Tax Talk: Is it possible for tax deductors to verify if payee has filed ITR in last 2 years?

If the specified person is subject to higher rates of TDS/TCS on account of non-furnishing of PAN, in addition to non-filing of ITR, the tax shall be deducted at higher of the rates specified above or 20%.

The elementary problem in the Indian taxation system is the small number of income tax payers against the large number of income generating residents. Although tax authorities acknowledge the need to educate taxpayers of their obligations, introduction of strict tax provisions is sometimes required to push greater compliance.

For instance, Section 206AA and 206CC of Income Tax Act provide for higher rates of TDS and TCS for non-furnishing of PAN. These provisions ensured that a valid PAN is furnished by taxpayers deriving income from various sources. The government, vide Budget 2021,introduced new provisions under Section 206AB/206CCA that prescribe a double rate of TDS/TCS for those, who despite having a reasonable amount of TDS accruing, do not file income tax returns.

Newly introduced provisions
The newly introduced provisions that come into force with effect from July 1, 2021, provide that in case of a “specified person” (i.e. a person who has not filed the returns of income for last two financial years or aggregate of TDS/TCS is Rs 50,000 or more in each of these two financial years), tax shall be deducted/ collected at twice the rate prescribed or 5%, whichever is higher, on the amount paid or payable to such person.

The new provisions are stipulated to be applicable to all payments in the nature of interest, professional service fees, rent, etc. However, certain payments have explicitly been kept out of the ambit of the new rules. It has been directed the new law shall not apply where tax is required to be deducted on salary payment (Section 192), accumulated balance of EPF (Section 192A), winnings from lotteries or crossword puzzles or card games (Section 192B), winnings from horse races (Section 192BB), income from investment in securitization trust (Section 194LBC) or cash withdrawals in excess of specified limits (Section 194N).

If the specified person is subject to higher rates of TDS/TCS on account of non-furnishing of PAN, in addition to non-filing of ITR, the tax shall be deducted at higher of the rates specified above or 20%.

Difficulties likely for taxpayers
The introduction of above provisions may have the effect of making income tax return filing mandatory even for those taxpayers who are otherwise not required to file the same. Such individuals include taxpayers from lower-income groups or senior citizens, who have passive income like interest and dividend, but their total income does not exceed the basic exemption limit, requiring submission of return. Normally, Form 15G/ 15H is filed by such taxpayers, so as to secure an exemption from TDS on their income. Now, if such persons inadvertently forget to file the same, then they may be subject to TDS at double the rates normally applicable.

With the introduction of the new provisions, compliance burden has increased for deductors. They shall have to check whether payee has filed ITR during the preceding two years, for which time limit of filing has expired. Further, they will have to ascertain whether the aggregate of TDS and TCS in each of the two years is Rs 50,000 or more.

In the absence of a proper portal/ mechanism to check deductee compliance, deductors may find it difficult to conform to the new legal provisions. Until the government finds a way out, deductors may ask for declarations/ ITR acknowledgement/ Form 26ASto verify whether or not the deductee falls in the purview of the new law.

The writer is director, Nangia Andersen LLP. With inputs from Vasudha Arora