Introduction
When a person makes payment to another person (salaries, professional fees, payment for a contract, etc.), the payer must deduct tax at source or TDS. TDS is deducted at different rates depending on the nature of the payment. The receiver can claim a TDS deduction while calculating the income tax on his annual income. The receiver provides his Permanent Account Number (PAN) to the payer to ensure that TDS credit is available.
Many taxpayers do not have a PAN (e.g., non-residents or senior citizens having income below the taxable limit). Many others willingly do not procure the PAN to avoid tax liability. Such people take advantage of the tax arbitrage created by low TDS rates compared to the high actual tax rates. The income tax regulation introduced the provisions under sections 206AA and 206AB to plug this loophole. In simple terms, they allow the payer to deduct tax at a higher rate if the receiver does not furnish the PAN.
Section 206AA
Any payer making payment of any sum on which TDS must be deducted must obtain PAN from the receiver. If the receiver (resident or non-resident) does not provide the PAN, this section allows the payer to deduct TDS in the following ways:
- TDS rate applicable;
- The tax rate applicable to the receiver for the concerned year; or
- 20% (5% in certain cases).
However, the higher tax rates will not apply in the following circumstances:
- If the receiver:
- Furnishes a certificate for lower deduction of tax from the income tax authorities quoting the PAN;
- Furnishes Form 15G/15H quoting the PAN;
- If the receiver is a non-resident:
- Receiving interest on certain bonds.
- Receiving payments like dividends, interest, technical fees, royalty, and payments on the transfer of any capital asset only if it furnishes details like name, e-mail ID, contact number, address of the resident country, and tax residence certificate and the tax identification number issued by that country.
- If the non-resident is not required to obtain a PAN.
The receiver must furnish the correct PAN to the payer to ensure that TDS is not deducted at a higher rate.
Section 206AB
Any payer making payment of any sum on which TDS must be deducted to a ‘specified person’ must deduct TDS in the following ways:
- Twice the TDS rate applicable;
- Twice the tax rate applicable to the receiver for the concerned year; or
- 5%.
A specified person is a receiver (resident or non-resident) who has not:
- Furnished the return of income for the previous financial year, and the time limit for furnishing the return has expired; and
- The total TDS and tax collected at source (TCS) are Rs. 50,000 or more in the previous financial year.
The payer must obtain a declaration from the receiver that it is not a ‘specified person.’
The higher tax rates will not apply if the receiver is a non-resident who does not have a permanent establishment in India. Further, certain payments like salary, rent to the landlord, winnings from lotteries, games, horse races, etc., cash withdrawals, and consideration on the sale of immovable property will not be covered under this section.
We hope the above information will benefit you with your transactions under sections 206AA and 206AB. To make your life easier, you can opt to subscribe to the KDK Income Tax Software, one of the most used and preferred tools for income tax filing.
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