Direct Tax Alert - CBDT updates ‘Compliance Check functionality’ for section 206AB and section 206CCA

Background

The Finance Act, 2021 had inserted Section 206AB and section 206CCA in the Income-tax Act, 1961 (IT Act) with effect from 1 July 2021. These provisions provide for higher tax withholding (TDS) / tax collection (TCS) in respect of certain specified taxpayers. Subsequently, the Central Board of Direct Taxes (CBDT) issued a circular¹ providing for a functionality ‘Compliance Check for Section 206AB and 206CCA’ that can be used by the person who is doing TDS / TCS to check whether the deductee / collectee comes within the specified person or not. Please click here to read our alert on this circular. The Finance Act, 2022 has made amendments to the definition of a specified person for both these provisions. In view of these amendments, recently, the CBDT has issued another circular² to incorporate these amendments by updating the earlier Compliance Check functionality.

We, at BDO in India, have analysed and summarised the said circular and provided our comments on its impact hereunder:

What is the change in the process and logic of compliance check functionality?

The changes made in the functionality are to give effect to the amendment made by the Finance Act, 2022. The below chart tabulates the difference between the old and new functionality (i.e. between Circular 11/2021 and Circular 10/2022).

Old functionality (i.e., Circular 11/2021) Fiscal Year (FY) 2021-22	New functionality (i.e., Circular 10/2022) FY 2022-23
The list of specified persons would cover taxpayers who: (a) did not file ITR for both the FY 2018-19 and FY 2019-20. (b) have an aggregate of TDS and TCS of INR 0.05mn or more in each of these two FYs.	The list* of specified persons would cover taxpayers who: (a) did not file ITR for FY 2020-21. (b) have an aggregate of TDS and TCS of INR 0.05mn or more in FY 2020-21.
Section 206AB of the IT Act is not applicable to tax to be deducted under sections 192, 192A, 194B, 194BB, 194LBC, and 194N of the IT Act.	In addition to the already existing provision, section 206AB of the IT Act is not applicable to tax to be deducted under sections 194-IA, 194-IB, 194M, and 194S of the IT Act.

* At the beginning of FY 2022-23, a fresh list would be prepared with FY 2020-21 as the relevant year. The remaining process and logic of the functionality with respect to the removal of the specified person remain the same as contained in Circular 11/2021.

Can this functionality be used to check whether a non-resident taxpayer is a specified person or not?

The CBDT has re-iterated that the provisos of section 206AB and section 206CCA of the IT Act shall not include a non-resident who does not have a Permanent Establishment (PE) in India. Since the functionality does not have the visibility of non-residents having a PE in India, there is the likelihood that non-residents having PE in India may not be reflected in the list so generated. Hence, CBDT has suggested that the tax deductors / collectors are expected to carry out necessary due diligence in respect of non-residents about the applicability of section 206AB and section 206CCA of the IT Act.

Can a deductor / collector seek additional documents from the deductee / collectee (being residents) to satisfy itself that they are not covered by section 206AB / section 206CCA of the IT Act?

The CBDT has observed that despite providing user-friendly functionality, some tax deductors/ collectors are asking deductee/collectee to produce evidence of their return of income. The CBDT has clarified that this functionality has been developed to ease the compliance burden for tax deductors /  collectors. Hence, it has requested tax deductors /  collectors to make a note of this circular and use this compliance check functionality, as asking for evidence defeats the purpose of this functionality.     

BDO comments

With the amendment made by the Finance Act, 2022, a change in functionality was expected. Bringing out this amendment in a timely manner should be welcomed by many. The CBDT has also taken cognisance of the fact that even after the functionality is in place, the taxpayers are asking for evidence to satisfy itself that the deductee / collectee is not the specified person. It has requested such a deductor / collector to make use of this functionality. Also, where any deductor/collector insists to provide evidence (such as a copy of the return of income etc.) from a resident deductee / collectee, such resident deductee / collectee should highlight this circular to substantiate that there is no requirement of submitting any additional documents apart from providing PAN number. Having said this, the tax deductor / collectee are required to take due care when dealing with non-resident as this functionality does not cover non-resident. They should continue to seek evidence to substantiate that such deductee / collectee is a non-resident who does not have a PE in India.

 

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