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PAN made compulsory for TDS eligible payments

by Ashish Mohta

Just received an email from my Chartered Accountant regarding the new section which makes PAN compulsory now.Please read on.

Finance Act (2) of 2009 makes PAN compulsory in case of TDS eligible payments. Failing to that, Deductor has to make TDS at a higher rate!! This has been made by introducing a new section 206AA into the Income Tax Act w.e.f 01-04-2010.

Pan Card
Pan Card

New section 206AA provides:

  1. Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:—
    • at the rate specified in the relevant provision of this Act; or
    • at the rate or rates in force; or
    • at the rate of twenty per cent.
  1. No declaration under sub-section (1) or sub-section (1A) or sub-section (1C) of section 197A shall be valid unless the person furnishes his Permanent Account Number in such declaration.
  2. In case any declaration becomes invalid under sub-section (2), the deductor shall deduct the tax at source in accordance with the provisions of sub-section (1).
  3. No certificate under section 197 shall be granted unless the application made under that section contains the Permanent Account Number of the applicant.
  4. The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same in all the correspondence, bills, vouchers and other documents which are sent to each other.

Where the Permanent Account Number provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished his Permanent Account Number to the deductor and the provisions of sub-section (1) shall apply accordingly.

Thus 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 should be determined at higher of below mentioned conditions:

  1. TDS rate prescribed in the Act
  2. Rate of Tax in force
  3. At 20%

The first condition states about the rate of Tax prescribed through Section 193 to 196. The second condition deals with Salaries (Section 192), where the tax should be calculated at Normal rates for Individuals. The third is a flat rate of 20%. Deductor has to determine the Tax amount for all the 3 conditions and apply the higher tax amount among these 3.

PAN at the time of Payment

This criteria has to be checked “During the Payment”. 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.

PAN in all the correspondences

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. PAN has to be quoted in bills, vouchers, Salary Slips, Letters (other than statutory which does not come under Income Tax), etc which is either issued by Deductee to Deductor or vice versa. 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.

Providing a False PAN also covered

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

  1. PAN not given by the Deductee.
  2. Deductee has given a PAN, which is structurally invalid.
  3. Deductee has given a PAN, which is not in Department database.
  4. Deductee has given a PAN, which belong to some other assessee

However, department is yet to give the clear information on, how a Deductor can verify the PAN provided, before making the payment!!

Applicable to Salaries too

The new introduced section 206AA, clearly states, TDS eligible payments covered under Chapter XVII-B, needs compulsory Valid PAN, failing to which, TDS should be made at higher rate. Chapter XVII – B (Chapter 17B) of Income Tax Act covers all Payments including Salaries. So, Salaries are not excluded by Section 206AA.

Also for Non Resident Payments

Section 206AA applies for the payments being made to Non Residents. In those cases, foreign residents should take an Indian PAN and provide it, before the payment is being made by the Party.

Form 15H and Form 15G

In case of certain payments (Eg: Interest), where party was allowed to declare on Form 15G / 15H for non-deduction of tax, earlier many were not used to provide PAN. But, newly introduced section, makes such payments, if eligible for TDS, to compulsory quote the PAN. This means in such case where PAN is not-available/invalid, TDS has to be charged at higher rate, not ZERO irrespective of Form 15G / 15H.

Assessing Officer Certificate u/s 197

If a Deductee proves under certain circumstances and Assessing officer is satisfied by the justification, assessing officer can issue a certificate u/s 197 for a TDS at lower rate or at ZERO rate. The Section 206AA, makes it compulsory to assessing officer for collecting valid PAN, before issuing such certificates. That means, Assessing officer will not provide 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 is not applicable for 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 makes sense of higher rate determination for PAN deficiency.

Effective from April 2010

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 case, PAN is not available / invalid.

Following are the new threshold limits for deduction of tax at source with effect from 1-7-2010

Section

Particulars

Existing

limit

New

Limit effective from 01-07-2010

194B

Winning from lottery or crossword puzzle

5,000/-

10,000/-

194BB

Winnings from horse race

2,500/-

5,000/-

194C

Payments to contractors

20,000/50,000

30,000/75,000

194D

Insurance commission

5,000/-

20,000/-

194H

Commission or Brokerage

2,500/-

5,000/-

194I

Rent

1,20,000/-

1,80,000/-

194J

Fees for professional or technical services

20,000/-

30,000/-

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