Every person whose total income exceeds the maximum amount which is not chargeable to income tax is required to obtain a Permanent Account Number(PAN). Further, the central government may specify any class of person/s who are required to obtain the PAN, irrespective of their income / tax liability.

Mandatory to quote PAN

It is mandatory for a taxpayer to quote PAN in his/her tax return as well as other correspondence with the tax authorities, including tax payment challans. Further, PAN is also required to be mentioned in respect of specified transactions. These include sale and purchase of immovable property, bank deposits exceeding specified limits, buying mutual funds exceeding specified limits, etc.

Higher TDS w.e.f April 1, 2010

It is pertinent to note that w.e.f April 1, 2010, it has been specified that any person entitled to receive any sum or income or amount on which tax is deductible under the provisions of the Income-Tax Act, 1961, is required to furnish his PAN to the person responsible for deducting such tax.

If PAN is not furnished, then the deductor is under an obligation to withhold tax at the rates specified under the Act, rates in force or at the rate of 20%, whichever is higher. In other words, it effectively means that if the rate of tax deducted at source (TDS) on a particular transaction / payment is say 5% or 10%, however, if the recipient fails to provide his PAN to the deductor, then TDS on such payment would be withheld at a higher rate of 20%.

Quoting PAN must for all correspondence

It has also been specified that the deductee (recipient) shall furnish his PAN to the deductor and both shall indicate the same in all correspondence, bills, vouchers and other documents that are sent to each other.

No certificate for nil / lower TDS

It is important to note that there is a beneficial provision under the Act, wherein if the tax authorities are satisfied that the total income of the recipient justifies that TDS should be deducted at nil or lower rate in comparison with the TDS rates prescribed under the Act, then the tax authorities may issue a certificate specifying that the TDS should be deducted at such nil or lower rate. The tax authorities shall not grant such certificate for nil / lower withholding of tax unless the applicant furnishes his PAN, while applying for lower rate of TDS.

Exercise caution

In many cases wherein the payment is made to foreign parties, the provisions of the respective Double Taxation Avoidance Agreements (DTAA), if more beneficial in comparison with the Act, are applied to.

In the absence of the recipient furnishing the PAN, tax may now have to be deducted at the rate of 20%. This may cause hardship to the recipients based outside India, as they would now have to obtain PAN. Similarly, in domestic payments as well, the recipient should ensure that he has provided the PAN against the transactions where TDS is to be deducted like contractors, rent, professional payments, etc, to avoid hardship in the form of cash flow issues.

Therefore, caution needs to be exercised in this context and wherever the deductee does not have PAN, necessary steps should be taken to apply for the same, else TDS would be deducted at a higher rate.