Table of Contents
- Introduction
- What Were Sections 206AB and 206CCA?
- Why Were These Sections Introduced?
- Problems Faced by Taxpayers and Deductors
- Omission of Sections 206AB and 206CCA – Effective April 1, 2025
- Implications for TDS and TCS Compliance
- Comparison: Before vs After the Omission
- Who Benefits the Most?
- What Should Deductors Do Now?
- FAQs
- Conclusion
Introduction
In a welcome move for businesses and tax deductors, the Finance Ministry has omitted Sections 206AB and 206CCA of the Income Tax Act, 1961, with effect from 1st April 2025. These sections were known for causing compliance headaches due to the requirement of deducting or collecting tax at a higher rate for non-filers of income tax returns (ITRs).
Let’s understand the significance of this change and how it simplifies TDS and TCS compliance.
What Were Sections 206AB and 206CCA?
These two sections were introduced in Finance Act 2021 to strengthen tax compliance by penalizing non-filers.
- Section 206AB: Mandated a higher TDS rate for certain specified persons who hadn’t filed ITRs for the last two financial years and had aggregate TDS/TCS of ₹50,000 or more in each year.
- Section 206CCA: Similar to 206AB, but applicable to TCS (Tax Collected at Source).
TDS/TCS Rates under these Sections:
- Deduction/Collection was required at twice the applicable rate or 5%, whichever was higher.
- This applied in addition to PAN non-availability consequences under Section 206AA/206CC.
Why Were These Sections Introduced?
The government introduced these sections to:
- Widen the tax base,
- Discourage tax evasion,
- Encourage timely filing of ITRs.
While the objective was noble, the execution posed numerous practical difficulties for businesses.
Problems Faced by Taxpayers and Deductors
1. Complex Compliance Checks
- Deductors had to constantly verify whether vendors or customers were “specified persons.”
- This required frequent downloads and verifications from the Income Tax Compliance Portal.
2. Mismatch Errors
- Even compliant taxpayers were sometimes wrongly classified due to data lag or mismatch in PAN linkage.
3. Software and System Upgrades
- Companies had to modify ERP or TDS software to accommodate these checks and higher rate calculations.
4. Vendor Disputes
- Higher deductions led to disputes with vendors, especially small businesses unaware of such rules.
Omission of Sections 206AB and 206CCA – Effective April 1, 2025
As per the Income-tax (Eighth Amendment) Rules, 2025, the government has officially omitted Sections 206AB and 206CCA, citing the need to reduce the compliance burden on taxpayers and streamline TDS/TCS processes.
This move is in line with the government’s larger agenda of simplification and digitization of tax laws under the proposed Income-tax Bill, 2025.
Implications for TDS and TCS Compliance
No More Higher Deduction for Non-Filers
TDS and TCS will now be deducted at normal applicable rates, even if the payee has not filed ITRs.
No Need to Check Compliance Portal
Deductors are now relieved from maintaining a check on whether a person is a “specified person” under the old rules.
Reduced Vendor Conflicts
With uniform rates, vendors won’t dispute TDS deductions due to unknown non-filing issues.
Comparison: Before vs After the Omission
| Aspect | Before (FY 2024-25) | After (FY 2025-26) |
|---|---|---|
| Compliance Check | Required for every PAN | Not Required |
| TDS/TCS Rate | Higher for non-filers | Normal rate |
| Portal Lookup | Needed weekly/monthly | Not needed |
| Risk of Error | High | Reduced |
| Operational Load | Significant | Minimal |
Who Benefits the Most?
- MSMEs and Startups – Less burden to track ITR status of vendors/customers.
- Large Corporates – Simplified ERP processing for bulk vendor payments.
- CA & Tax Professionals – Reduced client queries and portal verifications.
- Government Agencies & PSUs – Streamlined deduction and reduced compliance audit risks.
What Should Deductors Do Now?
- Update TDS Software
- Ensure that software doesn’t flag higher deduction under 206AB/206CCA anymore.
- Communicate to Vendors
- Let vendors know that from FY 2025-26, only the normal TDS/TCS rate will apply.
- Review Internal SOPs
- Remove redundant checks related to ITR filing status from SOPs.
FAQs
Q1. Will PAN non-availability still result in higher TDS?
Yes. Section 206AA (for TDS) and 206CC (for TCS) are still applicable. If PAN is not available, 20% or higher rates may still apply.
Q2. What happens to defaults made under 206AB/206CCA for FY 2024-25?
Those provisions continue to apply for earlier years. Past defaults must still be reconciled and rectified.
Q3. Are any new compliance rules replacing these sections?
No immediate replacement has been introduced, but broader digitized compliance under the new tax bill is expected.
Conclusion
The omission of Sections 206AB and 206CCA is a major relief for taxpayers and deductors alike. It marks a step forward in the government’s commitment to simplify the tax compliance regime while leveraging other means like AI-powered assessments and return processing for enforcement.
This move reduces redundant checks, fosters ease of doing business, and strengthens trust in India’s tax ecosystem. Keep an eye on further reforms under the proposed Income-tax Bill, 2025, as more such simplifications may follow.
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