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Every payment covered under the TDS provisions should be made after a deduction of tax. Every payer is bound by the provisions of TDS to deduct taxes at the specified rates under the relevant sections of Income Tax Act. In all cases, the recipient should furnish their PAN to the person making the payment. However, there are circumstances where the recipient may not be having a PAN. In such situations, the payer should adhere to the provisions of Section 206AA and deduct tax at a higher rate for the recipient.
This Section was introduced in Financial Year 2010-11. It requires every taxpayer who receives taxable income to produce their PAN to the payer of such income. This applies to both the resident and non-resident recipients. In case of residents, the payments will include salary, rent, professional receipts, contractual receipts etc. In case of non–resident, these would consist of all receipts that are taxable in India.
A recipient of the taxable income should furnish PAN to comply with the TDS provisions under the Income Tax Act. When the PAN is furnished, payments made to the recipient will be taxed at the rate of TDS mentioned under the different TDS provisions of the Income Tax Act.
In case a recipient does not furnish PAN, would suffer TDS at the higher rates as mentioned in Section 206AA of the Income Tax Act. The recipient should also furnish his PAN to the payer, and both recipient and the payer should indicate the same in all correspondence, bills, vouchers and other documents which are sent to each other.
It is worth mentioning here that Section 206AA will not apply to the below-mentioned payments made to the non-residents:
The recipient of taxable payment can seek an application for lower deduction or nil deduction of tax as per Section 197 of the Income Tax Act. In cases where the assessing officer has issued a certificate under Section 197, TDS shall be deducted at the rates mentioned therein.
The certificate under Section 197 is generally issued for a specified period. It may be noted that as per 206AA section, a certificate under section 197 shall not be valid unless the recipient furnishes their PAN to the assessing officer at the time of making an application.
Section 206AA of the Income Tax Act is inserted to provide that any person whose receipts is subject to deduction of tax at source (TDS), i.e. the deductee, will have to mandatorily furnish his PAN to the deductor. Failure to furnish the PAN will cause the deductor to deduct tax at source at higher of the following rates – applicable rate of TDS or at the rate of 20%. It may be noted that the tax should be deducted at the rates (as provided under this section) also if the deductee files a declaration in Form 15G or 15H (under section 197A) but fails to provide his PAN.
Read our article:Understanding Section 206AB of Income Tax Act 1961