Few specified payments under the provision of the Income Tax Act are required to deduct tax at source. However, TDS provisions bound every payer to deduct taxes at the rates set in the applicable sections of the Income Tax Act.
In all circumstances, the recipient is required to furnish their PAN to the person making the payment. However, it may happen that the recipient would have PAN. In such a scenario, the payer has to adopt Section 206AA and deduct tax at a higher rate for the recipient.
Section 206AA came into force from FY 2010-11. Section 206AA expects every taxpayer who receives taxable income to provide their PAN to the payer of such income. This section applies to both the resident as well as non-resident recipients. Payments in the case of residents would include salary, rent, professional receipts, contractual receipts, etc. In the case of a non-resident, these would consist of all amounts received that are taxable in India.
Submission of PAN
A recipient of taxable income should provide PAN to comply with TDS provisions under the Income Tax Act. When the recipient has furnished the PAN, payments made to him will be charged at the TDS rate specified under the various TDS provisions of the Income Tax Act. But when a recipient has not furnished PAN, the payer would deduct tax at the higher rates set in Section 206AA.
The recipient must provide the payer with his PAN, and both are obligated to indicate the same in all communication, bills, vouchers, and other documents.
What are the rates to be used?
In case a recipient fails to furnish PAN to the payer, he would bear a higher rate of TDS as mentioned below:
The rates as specified in the applicable provision of the Act;
The rate prescribed in the Finance Act (Finance Act 2019 for FY 2019-20) or you can say The rate or rates in force;
Rate of 20%
Applicability of Section 197 (Lower deduction of tax)
The recipient of taxable income can seek an application for lower deduction or nil deduction of tax (TDS) under Section 197.
In cases where the assessing officer has issued a certificate under Section 197, the payer shall deduct TDS at the rates mentioned therein. The certificate allotted remains active for a specified period. A section 206AA state that a certificate issued under section 197 is not valid unless the recipient provides their PAN when applying to the assessing officer.
Applicability in case of Form 15H and 15G
A recipient is also allowed to submit a declaration under Section 197A to the person making payment. This declaration under 197A includes information made under Form 15G and Form 15H for a nil deduction of tax. The statement under Form 15G can be submitted by a recipient who is less than 60 years of age, and Form 15H is to be made by a recipient who is 60 years and above.
As per Section 206AA, the declaration would be invalid if it does not contain the PAN of the person making the declaration. Therefore, if the recipient makes a declaration without their PAN, then TDS or tax is to be deducted at higher following rates:
The rate specified in the applicable provision of the Act OR;
The rate prescribed in the Finance Act OR;
At 20% rate.
Scope of Section 206AA of the Income Tax Act, 1961
Section 206AA is not applicable to the following payments made to non-residents:
In case payment of interest on long-term bonds to a non-resident is made under section 194LC or;
When The Finance Act 2016 eased the applicability of Section 206AA in case of payments made to a non-resident like interest, royalties, and fees for technical services, and charges on the transfer of any capital asset.
However, Section 206AA would not apply to such non-resident recipient if the following details and documents are provided to the payer;
Name, email ID, contact number;
Address in the country or specified territory outside India of which the deductee(receiver) is a resident;
Certificate of him being resident in any country or specified territory outside India from the government of that country or specified region if the law of that country or specified territory grants such certificate;
Tax Identification Number of the deductee (receiver) in the country or specified territory of his residence. If no such number is available, then a unique number held as is identity proof by the government of that country or specified territory he claims to be a resident.
Income Tax Act has introduced Section 206AA to bring the suggested changes. As per this section, any deductor making payment to a person on which TDS has to be deducted and who has not provided PAN is liable to a higher TDS rate.
Few safeguards are also discussed in the above article by which you can pay taxes at a standard or lower rate.
It is to remember that Section 206AA does not apply to the other part of prepaid taxes that is TCS. So any Tax collected for TCS provision does not make sense of higher rate determination for PAN deficiency.
CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system.
His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.
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