Income Tax

Scope and Implications of Section 206AA of the Income Tax Act

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.

What is Section 206AA?

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.

Scope of Section 206AA of the Income Tax Act

It is worth mentioning here that Section 206AA will not apply to the below-mentioned payments made to the non-residents:

• In respect of interest payment on long-term bonds to a non-resident under section 194LC;
• Relaxation of the applicability of Section 206AA was made in the Finance Act 2016 in case of payments made to the non-resident by virtue of interest, royalties, technical services fees and payments on the transfer of any capital asset. This Section will not apply to such non-resident recipient in case where the details and documents specified below are furnished to the payer (Rule 37BC inserted vide Notification No. 53/2016):
  • The name, mail ID and contact number;
  • Address in country or specified territory outside of India of which deductee is a resident;
  • Certificate of being resident in any country or specified territory outside India from the government of such country or specified territory if that country’s law or specified territory provides for the issuance of the certificate;
  • Deductees’ Tax Identification Number in the country or specified territory of his residence. If the number is not available, then a unique number based on which the deductee is identified by the government of such country or specified territory of which he claims to be a resident.

Applicability of higher rates in case of lower deduction under Section 197

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^[1]. 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.

Conclusion

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