India Tax: Practical consequences of statutory crackdown on permanent account number requirement
The requirement under India's tax rules for residents and nonresidents to obtain a permanent account number (PAN - a unique tax identifier) is not new. PANs, by statute, must be included on income tax returns, in correspondence with the tax authorities and in various other documents for prescribed transactions entered into by taxpayers. The Finance (No. 2) Act, 2009, with effect from 1 April 2010, introduced a new section 206AA in the Income Tax Act, 1961 (ITA), providing that any person entitled to receive an amount on which tax is required to be deducted at source must furnish a PAN to the person responsible for withholding tax at source. Otherwise, the payer must withhold tax at the higher of the rate under Indian domestic law or an applicable tax treaty, or 20%.
While this provision applies to both residents and nonresidents, it has created confusion and apprehension among foreign companies and other nonresidents that are in receipt of sums from India and that have not yet obtained a PAN. Such confusion and apprehension may lead to nonresidents further delaying obtaining a PAN.
For example, one view being taken is that section 206AA applies only where tax is required to be withheld, i.e. only when the amount is taxable. This view, which appears to be correct under a plain reading of the law, relies on the following legislative language:
"206AA. (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"
Some nonresidents also are concerned that, having obtained a PAN to avoid the higher rate of withholding, they will then have to prepare and file a tax return in India and also be subject to the consequent tax assessments and other compliance requirements. This, however, was the case prior to the introduction of section 206AA; Indian tax rules already required a nonresident in receipt of income that is taxable in India to file a return with only a few exceptions (e.g. taxable interest and income received by sportsmen and sports associations on which tax is deductible and deducted at source).
Nonresidents trying to avoid obtaining a PAN for the above or other reasons should consider the following:
- Without a PAN, tax will be withheld at a higher rate;
- The underlying tax liability will remain at the applicable rates;
- The difference between the tax withheld at the higher rate and the tax payable at the applicable lower rate will result in a refund, which can be claimed only after filing a tax return;
- Filing of a tax return is not possible without a PAN; and
- Section 206AA specifically provides that the tax authorities will not entertain applications for a certificate for a reduced or zero rate of withholding under a tax treaty if the applicant does not include the PAN in the application. Moreover, nonresidents also risk complications in other jurisdictions; for example, a nonresident that suffers a higher withholding tax in India because it failed to furnish a PAN may not receive a credit for the higher withholding tax in its home country under the tax rules of that country. These consequences are in addition to the impact on cash flow for the recipient as a result of withholding occurring at higher rates.
The requirement to obtain and furnish a PAN applies even when the payer bears the financial cost of the withholding tax. Additionally, there may be consequences for an Indian entity making payments without withholding at the higher rates (despite not having the payee's PAN): a deduction claimed for the entire expense may be disallowed and/or interest and penalties may be imposed for under-withholding at source.
Because of the potential consequences to both the recipient and the payer, any entity with interests in India should obtain a PAN and, in the case of payments, furnish the PAN to the payer to avoid tax withholding at higher rates.