TDS without PAN - higher deduction @ 20%

Hello and welcome. In this post, we will be discussing about TDS without PAN. Here, we have discussed in detail about TDS at the rate of 20% if PAN is not provided.

Let us begin.

Provision relating to TDS [No PAN – TDS at higher rate]

Finance Act (2) of 2009 makes PAN compulsory in case of TDS eligible payments. Failing that, the deductor will be paying TDS at a higher rate.

The government of India issued a notification dated January 20, 2010, relating to tax deduction at source (TDS) under Income Tax Act 1961. This was applicable with effect from 1st April 2010.

As per the notification, all transactions liable for TDS will have tax deduction at a higher percent of 20% if the Permanent Account Number (PAN) of the payees is not available.

The law also applies to all non-residents in respect of payments/remittances liable to TDS.

Section 206AA

Income Tax Act has introduced a New Section, Section 206AA to bring the notified changes. As per this new section, any Deductor making a TDS eligible payment to a party, who has not provided PAN, should make TDS at a higher rate.

For such case, the rate of TDS determine at higher of below conditions:

  • TDS rate prescribed in the Act
  • Rate of Tax in force
  • At 20%

The first condition states about the rate of tax prescribed through Section 193 to 196. The second condition states the rate of tax for Salaries (Section 192), where the tax should be calculated at Normal rates for Individuals. The third is a flat rate of 20%. The Deductor has to determine the tax amount for all the three conditions and apply the higher tax amount among the three.

The new section will be applicable only for the payments made on or after April 01, 2010. Till then, normal rates / prescribed rates would be applicable even in the case, PAN is not available / invalid.

PAN at the time of Payment

This criterion has to be checked “During the Payment” and not falling under future assurances, TDS has to be determined.

If an Employee / Party receive a payment that is eligible for TDS and assures Deductor of giving the PAN in short while, then such case has to be considered for higher rate determination.

The Maximum TDS rate (20%) is applicable in the following case:

  • if the pan is not provided by the deductee.[section 206AA(1)]
  • If pan provided by the deductee is invalid.[section 206AA(6) read with 206AA(1)]

As per the new provisions, certificate for deduction at lower rate or no deduction will be given by the Assessing Officer under section 197, or declaration by deductee under section 197A for non-deduction of TDS on payments (Form 15G/Form 15H) will not be valid, unless the application bears PAN of the applicant/deductee.

Providing False PAN

The new section states that the below cases has to be considered for the higher rate of TDS.

  • PAN not given by the Deductee.
  • PAN provided is structurally invalid.
  • Deductee has given a PAN, which is not in Department database.
  • Given PAN belong to some other assessee

PAN in all the correspondences

All deductors are liable to deduct tax at the higher rate in all transactions not having PAN of the deductees on or after 1st April 2010.

To meet with the compliance and to ease the Deductor in collecting PAN, section 206AA makes it compulsory to quote PAN on all correspondences between Deductor and Deductee.

Hence, PAN has to be mentioned in all bills, vouchers, salary slips, letters (other than statutory which does not come under Income Tax), etc. These documents are either given by the Deductee to the Deductor or vice versa.

It states that this condition applies only to the cases where Deductee’s (Party / Employee) payment in the financial year is exceeding or expected to exceed the threshold of TDS. This condition in the act is expected to help the Deductor in collecting the PAN easily.

Salaries applicability

Section 206AA states that TDS eligible payments covered under Chapter XVII-B need compulsory valid PAN. Failing to provide Valid PAN will attract TDS at the higher rate.

Chapter XVII – B (Chapter 17B) of Income Tax Act covers all payments including Salaries. This makes even Salaries payments include under Section 206AA

Non Resident Payments

Non-Resident payments also come under the purview of Section 206AA. In those cases, foreign residents should take an Indian PAN and provide it, before the payment.

Form 15H and Form 15G

In case of certain payments (Eg. Interest), Deductee was permitted to declare on Form 15G / 15H for non-deduction of tax. In these cases, many were not providing PAN during declaration.

But, the newly introduced section makes such payments, if eligible for TDS, to compulsory quote the PAN. In case PAN is not-available/invalid, TDS should charge at the higher rate and not ZERO rates, irrespective of Form 15G / 15H.

Assessing Officer Certificate u/s 197

Deductee can apply for certificate u/s 197 for TDS at Lower or Zero rate with proper justification. If the justification is convincing for the Assessing Officer then the relevant certificate will be issued.

The Section 206AA makes it compulsory to assessing officer for collecting valid PAN, before issuing such certificates. That means, Assessing officer will not provide the certificate for lower/ non-deduction u/s 197 if applicant Deductee fails to provide his/her valid PAN.

Not Applicable for TCS

New section 206AA does not apply to the other part of prepaid taxes, TCS. This section covers only the payments under Chapter 17B of Income Tax Act. TCS falls under Chapter 17BB. So any Tax collected through TCS provision does not make sense of higher rate determination for PAN deficiency.

How can deductor check correctness of the PAN?

The procedure for obtaining PAN is simple, inexpensive and quick. Form 49A is the form to apply for new PAN at National Securities Depository Ltd. (NSDL) or Unit Trust of India Investor Services Ltd. (UTIISL) or their intermediaries. Non-residents can apply through the local embassy/consulate of India.

When a person provides PAN to the deductor then it is deductor responsibility to verify the correctness of PAN of the deductee. In case, PAN provided is correct then deduct tax as per normal rate provided in income tax act. Otherwise, deduct tax @ 20 % or the rate provided whichever is higher. If deductor fails to deduct and deposit tax at the proper rate then he has to face the penalty for late deposit of TDS as well as disallowance u/s 40a(ia). Both these penalties are very stringent.

Few thing which may be helpful for Deductor to ensure correctness of PAN are:

  • Deductor should do is that demand photocopies of the pan card from regular service providers, agents etc
  • If photocopies has not been provided by the deductee and only PAN is provided then verify by login into TRACES account 

TDS without PAN for NRI payment – at Normal Rate

The Central Board of Direct Taxes (CBDT) has notified that provisions of section 206AA will not apply for:

  • Interest Payment
  • Payments of royalty
  • fees for technical services
  • transfer of capital assets.

Section 206AA of the Income Tax Act requires a non-resident to furnish PAN to avail lower withholding rate. Furthermore, the lower withholding rate differs from country-to-country due to the treaty provisions.

As per the Income Tax Act, the lower withholding tax rate is 10.506% (inclusive of cess) and 20% in absence of PAN.

A non-resident, who do not have PAN, can now avail lower tax rates if he/she furnishes prescribed documents and details to the payer. Below documents can be submitted to avoid higher TDS deduction:

  1. Name, E-mail id, Contact number
  2. Address of NRI’s country of residence
  3. Tax Residency Certificate (TRC), if the law of country of residence provides for such certificate
  4. Tax Identification Number (TIN) in the country of residence. If TIN is not available, a unique identification number to be furnished that is identified in the country of residence.

This amendment is applicable form 1st June 2016.

That’s it for the post on TDS @ 20% if PAN is not provided. If you have any questions or doubts kindly drop them in the comment section below.

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