Higher Rate of TDS and TCS for Non-Filers of Income-Tax Return

Sections 206AB and 206CCA of the Income Tax Act, 1961, introduced a higher rate of tax deduction at source (TDS) and tax collection at source (TCS) for specified persons who have not filed their income-tax returns. The provision is intended to strengthen tax compliance and requires deductors and collectors to verify the return-filing status of relevant deductees or payees. From a broader taxation advisory perspective, this amendment has practical implications for businesses managing vendor payments, customer collections, and withholding tax compliance.

When do Sections 206AB and 206CCA apply?

Under these provisions, every person responsible for deducting or collecting tax must evaluate whether the deductee or collectee falls within the category of a specified person. In simple terms, the check applies where the amount of TDS or TCS under section 194Q and section 206C(1H), respectively, was INR 50,000 or more in each of the two previous years, and the person has not filed income-tax returns for the relevant assessment years.

This makes return-filing status an important compliance checkpoint. For businesses handling regular withholding obligations, aligning this review with a robust direct tax compliance process helps reduce exposure to short-deduction or short-collection risks.

What is the higher rate of TDS or TCS for non-filers?

Where the specified person has not filed returns for the applicable assessment years, tax is required to be deducted or collected at the higher of the following rates:

• Twice the rate specified in the relevant provision of the Income-tax Act, or
• Twice the rate or rates in force, or
• 5 percent.

Accordingly, the law creates a higher withholding burden for non-filers and places additional responsibility on deductors and collectors to determine the correct rate before processing transactions.

Exception for certain non-residents

The above requirement does not apply to a non-resident who does not have a permanent establishment in India. This carve-out is important, as it limits the scope of the provision in cross-border cases where the non-resident does not have a taxable business presence in India.

Cases where Section 206AB does not apply

Section 206AB does not apply where tax is required to be deducted under the following sections:

These exclusions clarify that the higher TDS mechanism for non-filers is not universal across all withholding sections. Therefore, applicability must be evaluated carefully based on the underlying transaction and the relevant charging provision.

Interplay with Sections 206AA and 206CC

Sections 206AA and 206CC are related provisions that prescribe a higher rate of TDS or TCS where the deductee or collectee does not furnish a Permanent Account Number (PAN). Where a specified person covered under section 206AB does not provide PAN, the rate of TDS will be the higher of the rates prescribed under sections 206AA and 206AB. Similarly, where a specified person covered under section 206CCA does not furnish PAN, the rate of TCS will be the higher of the rates prescribed under sections 206CC and 206CCA.

In practice, this means businesses should not assess non-filing status in isolation. PAN availability and the applicable withholding provision must also be reviewed together, particularly in cases involving repetitive payments, procurement transactions, and broader corporate tax services compliance requirements.

Effective date

This amendment took effect from 1 July 2021. Since then, taxpayers responsible for TDS and TCS compliance have been required to build return-filing validation into their withholding review process to ensure accurate deduction and collection.

Article contributed by:

Himanshu Suryan Manager – Direct Tax

MBG Corporate Services

Additional Resources

• Applicability of Section 194Q of the Income Tax Act, 1961
• CBDT clarificatory guidelines for TDS on purchases
• New guidelines on tax deduction at source under Section 194-O
• Extension of time limits for compliances of Income Tax
• Direct Tax Alert: Extension of various income-tax due dates by CBDT