Who Are Considered Specified Persons Under Section 206AB of Income Tax Act?

The section 206AB of Income Tax Act was added to the tax law to promote better tax administration and ensure that individuals and businesses file their income tax returns on a regular basis. This section provides for a higher rate of TDS (Tax Deducted at Source) for such individuals who do not file their returns in time. The tax department is simply reminding everyone that non-compliance with tax responsibility can be a liability. 

For Indian businesses, particularly in cases of liquidation handling multiple vendors or freelancers, who does qualify as a “specified person” under this section is important to avoid parting with an unanticipated tax obligation or penalty.

Understanding Section 206AB of Income Tax Act

The section 206AB of Income Tax Act became effective from 1st July 2021 pursuant to Finance Act, 2021. “The main function of this provision is to ensure that the tax ecosystem works with all sides sharing the cost and doing so promptly.” It requires the deductors to use a higher TDS rate for payments to select “specified persons” who have not filed their income tax returns.

What does this mean for businesses?

In other words, before taking TDS, businesses need to ensure that the recipient (a vendor, contractor or consultant) has submitted his or her returns. If not then they are obliged to deduct TDS at a higher rate with our accounting software, generally double the normal rate or 5% whichever is higher.

Who Are Considered “Specified Persons”?

“Specified person” under Section 206AB of Income Tax Act is a person who does not meet some compliance and conditions. Let’s break it down clearly:

A specified person includes:

• Individuals or non-individuals who did not file their income tax return for the previous financial year relevant to the relevant assessment year, and

• Individuals with the TDS and TCS deductions being more than Rs. 50,000 in the immediate preceding year.

• Any non-exempt employees of the Central Government (such non-residents are not exempted),

Who are NOT specified persons?

• Individuals are not required to submit income tax reports under legislation.

• Non-residents who do not have a permanent establishment in India.

• Taxpayers who have already submitted their return and are in a comparable position of compliance for the relevant year in the Section 206ab of income tax act.

Example:

Let’s assume your company has paid Rs. 10 Lacs to a vendor last year, from which TDS Rs. 1 Lac was deducted. If the vendor has not submitted a declaration of income tax for the financial year, then he or she would become a “specified person.” The TDS rate will now be applicable at a higher rate, and you need to pay TDS when you make the next payment.

How Does This Section Impact TDS and Compliance?

1. Higher TDS Rates

The TDS rate for particular persons will be:

• Twice the normal TDS rate, or

• 5%, whichever is higher.

This means that a business that pays someone Rs. 1,00,000 at a TDS rate of less than 1% who didn’t have to file with the HMRC in the past, must now deduct Rs. 5,000 from it instead of Rs. 1,000.

2. Additional Compliance Burden

Businesses need to verify the tax status of each payer prior to each payment. This is a tedious process when done manually.

3. Real-World Business Scenarios

• A freelancer who did not file their return last year could have more TDS being taken.

• If you have records in compliance, then a supplier who has not put in place updated contractual requirements may be delayed in having their payment honoured until they have been confirmed as TDS compliant.

• SME businesses that make numerous vendor payments may need automation to help efficiently monitor compliance.

This is where our tool such as GST billing software is useful. The platform assists businesses to manage the TDS Deductions automatically by care ensuring that the payments are tracked while keeping the compliance records up to date.

Verifying Specified Persons – Step-by-Step

How businesses can verify a vendor or payee:

• Go to the Income Tax Compliance Portal.

• Implement the “Specified Person under Section 206AB & 206CCA” search option.

• Enter the PAN of the recipient.

• The system immediately tells them if they are a given person.

Why regular checks matter?

The status of specified persons is dynamic in nature as they file or not file returns. Hence, it is a good idea to check before each major remittance. Tools such as MargBooks software make this process easier by keeping a digital history record of the vendors and their history of tax compliance.

Role of Automation and Software in Staying Compliant

Manually following up on every vendor’s return status may be tricky and time-consuming. Automation helps make sure that you don’t get non-compliant without spending hours and hours checking in on every detail.

• Tracks TDS based on the auto history of the transaction. TDS deduction is done automatically according to the history of transactions by TDS.

• Real-time identification of high-risk or “specified” vendors.

• Synchronizes with financial reports to get ready for quarterly filings.

• Provides a centralized dashboard for accountants so that they can seamlessly manage multiple clients

For small and medium businesses, efficient accounting software would assist not only in filing returns but would also assist in successfully keeping TDS and compliance reports updated across all accounts in Section 206ab of income tax act.

How Indian Businesses Manage It?

Later integrated with a GST billing software, businesses can ensure invoicing and tax records are synchronized so that both income tax and GST are accounted for together with minimal chances for human error and last-minute stress during audits.

Suppose a manufacturing company located in Pune deals with ten vendors. Two of them failed to submit their return of taxes last year. When the finance staff makes payments, their system automatically identifies their PAN status as ‘specified persons.’

The team uses MargBooks software to set the TDS rate to auto adjust itself to 5% for this vendors, and to generate detailed compliance reporting. This allows ensuring the business is on the right side of the law and that there is transparency on the vendor relationships.

Conclusion

The section 206AB of Income Tax Act is a lot more than just a rule penalizing non-payers- it is the push for creating a disciplined tax ecosystem in India. Companies should be responsible in ensuring vendor compliance, ensuring higher TDS rates where necessary and keeping proper records. With the digital tools such as MargBooks software, this process can be made faster, easier, and less error-prone. 

By enabling a combination of functionality of both accounting software and automated compliance tracking, Indian SMEs can spend less time on paperwork and more on growing their business. Ultimately, being compliance, under section 206AB of Income Tax Act, is not a legal liability, it’s a mark of a financially responsible business.