Effective today, a higher withholding tax will be applicable on persons who have not obtained a permanent account number (PAN).
A tax identification number, the PAN is a unique 10-digit alphanumeric number issued by the revenue department in the form of a tamperproof card. PAN is a one-time compliance and it is required to be quoted on all tax returns and correspondence exchanged with the authorities.
The Income-Tax Act, 1961, requires every person who has to file tax returns, entering into specified financial transaction, or carrying on business or profession with gross receipts or turnover of more than Rs 5 lakh to obtain PAN (Section 139A). Non-residents have been exempt from this requirement.
Budget 2009 introduced a new provision (Section 206AA), effective April 1, 2010, which provides for deduction of tax at source at a higher rate where no PAN is provided to the payer. In such a scenario, taxes are required to be withheld at withholding tax rates provided under the Act; or rates provided under the tax treaty or schedules to tax laws; or 20%, whichever is higher.
The requirement of providing a PAN has been made applicable to payments to be made to all persons, i.e., residents as well as non-residents. The provision of PAN has also been made implicit where payments are allowed without tax withholding based on a self undertaking, and in cases where lower or nil tax withholding certificates are to be issued based on applications filed by receiver of income.
The move to impose penalty through higher withholding tax rate for not quoting PAN is aimed at strengthening the database of authorities, increasing tax compliance and better monitoring and tracking of taxpayers.
Going a step forward, to avoid disputes arising from failure to provide the PAN or due to inaccuracies in the number given, the new provisions necessarily requires quoting of PAN on all correspondence between payer and payee. Where no PAN is provided or PAN provided is invalid, does not exit or does not belong to the payee, the same shall be construed as a default, requiring withholding of taxes at the highest rate.
Interestingly, non-residents continue to figure in the list of persons who would be exempt from the provisions of Section 139A of the Act. As a result, it remains ambiguous whether non-resident payees are required to obtain a PAN. Also, there is a considerable debate whether beneficial tax rates, as provided under avoidance of double taxation conventions entered into by India, shall be over-ridden where the non-resident fails to provide a PAN.
While the higher withholding tax rate would severely impact cash flows of small-time entrepreneurs, investors and professionals, the same shall induce compliance with provisions relating to PAN.
For the payer, a default in deduction of appropriate taxes may result in denial of tax deduction in respect of payment(s) made, coupled with recovery of balance taxes, imposition of penalty and interest.
It may be worth noting that non-furnishing of PAN shall only impact the payees withholding tax incidence and not final India tax liability. Accordingly, the payee may claim a refund of excess taxes withheld under the annual tax return. Some of the far-reaching ramifications of the new provisions are:
Resident payees, whose total income does not exceed the minimum threshold limit prescribed for taxable income, shall be unnecessarily compelled to obtain a PAN. In a recent decision, the Chennai High Court stayed the requirement of quoting a PAN in case of a debenture-holder who was asked to provide PAN along with Form 15G to claim exemption from tax deduction at source. The court, while granting interim relief, held that this requirement is contrary to the provisions of tax laws. A clarification from the Central Board of Direct Taxes, the apex tax authority, on above lines shall avoid unwarranted hardship to small income group payees.
Non-resident payees with one-off transactions that are per se not taxable shall be required to obtain a PAN for filing an application seeking a Nil withholding tax rate.
In case of tax-protected contracts, the payer shall unnecessarily be burdened with higher taxes where the payee chooses not to obtain a PAN.
Unnecessary burden on government exchequer in the event excess taxes are later refunded along with interest.
Above provisions read with recent Karnataka High Courts decision in the case of Samsung, where it has been held that all payments to non-residents in the nature of income per se shall attract tax withholding or prior dispensation from tax authorities for Nil tax withholding, imply that all payments to non-residents, whether taxable or not and where no order has been sought from tax authorities, shall require a PAN.
Given that the provisions of the Income-Tax Act become effective on April 1, 2010, all deductors should promptly assess, monitor and review their withholding tax processes in the light of above provisions.