Section 206AA – TDS on Payments Made to Non-Residents and Residents Not Having a PAN

Every payment which is covered under the provisions of tax deduction at source is required to be made after a deduction of tax. Every payer is bound by the TDS provisions to deduct taxes at the rates specified in the relevant sections of the Income Tax Act.

In all situations, the recipient is required to furnish their PAN to the person making the payment. However, there are certain circumstances where the recipient would not have PAN. In such circumstances, the payer is required to adopt the provisions of Section 206AA and deduct tax at a higher rate for the recipient. We discuss the scope and implications of Section 206AA below.

Scope of Section 206AA

Section 206AA was introduced from FY 2010-11. Section 206AA requires every taxpayer who receives taxable income to furnish their PAN to the payer of such income. This applies to both the resident as well as non-resident recipients. The payments in case of residents would include salary, rent, professional receipts, contractual receipts and so on. In the case of non-resident, these would include all receipts that are taxable in India.

Submission of PAN

A recipient of taxable income should furnish PAN to comply with the provisions of TDS under the Income Tax Act. Upon furnishing of the PAN, payments made to the recipient would be taxed at the rate of TDS specified under the various TDS provisions of the Income Tax Act. A recipient who does not furnish PAN would suffer TDS at the higher rates specified in Section 206AA. The recipient is also required to furnish his PAN to the payer and both of them are required to indicate the same in all correspondence, bills, vouchers and other documents which are sent to each other.

Rate of TDS

A recipient who fails to furnish PAN to the person making a payment would suffer TDS at the higher of the rates mentioned below:

• At the rate specified in the relevant provision of the Act;
• At the rate or rates in force, i.e., the rate prescribed in the Finance Act;
• At the rate of 20% (5%, in case tax is required to be deducted at source u/s 194-O and 194Q)

Applicability in case of lower deduction under Section 197

A recipient of taxable payment can seek an application for lower deduction or nil deduction of tax (TDS) under Section 197. In such cases, where the assessing officer has issued a certificate under Section 197, TDS shall be done at the rates mentioned therein. The certificate is generally issued for a specified period. Section 206AA states that a certificate under section 197 is not valid unless the recipient furnishes their PAN at the time of making an application to the assessing officer.

Applicability in case of Form 15H and 15G

A recipient is also entitled to submit a declaration under Section 197A to the person making payment. Declaration under 197A includes declaration made under Form 15G and Form 15H for a nil deduction of tax. Declaration under Form 15G can be submitted by a recipient who is less than 60 years of age. Declaration under Form 15H can be submitted by a recipient who is 60 years and above.

As per Section 206AA, the declaration would not be valid if it does not contain PAN of the person making the declaration. If the recipient makes a declaration without their PAN, then TDS or tax is to be deducted at higher following rates:

• At the rate specified in the relevant provision of the Act.
• At the rate or rates in force, i.e., the rate prescribed in the Finance Act.
• At the rate of 20%.

Exemption under Section 206AA

Section 206AA would not apply to the below payments made to non-residents:

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