PAN must be quoted in all transactions between two entities that involve a tax deduction at source, failing which the tax deducting entity will impose a 20 per cent levy.

The new rule will take effect from the next fiscal, the Central Board of Direct Taxes said in a notification.

PAN (permanent account number) is an identification number issued to all entities with taxable income.

Transaction is a legal document between two parties such as a rent deed or a gift deed; transaction is not salary. Tax consultants said in most cases the 20 per cent levy was higher than the existing TDS (tax deducted at source) rate. Entities are individuals as well as firms.

The deductee (person from whom income tax is deducted) shall mandatorily furnish his PAN to the deductor, failing which the deductor shall deduct tax at source at higher rates, said the Finance Bill for 2009-10.

The new rule applies to non-residents as well in respect of payments and remittances that are liable to TDS.

Besides, there were no grounds of dispute between entities vis--vis quoting and non-quoting of PAN or its accuracy. The law requires all deductees and deductors to quote PAN in all correspondences, bills, vouchers and other documents sent to each other, the CBDT said in a statement.

According to the new provisions, a certificate for deduction at a lower rate or no deduction shall not be given by the assessing officer, if there is no PAN. Besides, declaration by deductee for non-deduction of TDS on payments shall not be valid.

All deductors are advised to intimate their deductees to obtain and furnish their PAN to avoid TDS at a higher rate, the statement said.

The CBDT has advised entities as well as non-residents engaging in taxable transactions to get PAN by March 31 and communicate the information to the deductors.

TDS rates vary depending on the transactions but are lower than 20 per cent. The latest notification is aimed at encouraging better compliance with TDS norms.

Faced with a huge budget deficit, the government is pulling out all the stops to increase revenue collections.