Income Tax--Current Issues

Practice Update

V.K. Subramani

TAX CONSEQUENCE OF NOT HAVING PAN OR BEING NON-FILER OF ITR

The provisions of Income Tax Act, 1961 are gaining more teeth in the recent times by casting onerous burden on the taxpayers. It is seeking the taxpayers to meticulously comply with the provisions leaving the tax administration to see only the exceptions /omissions for initiating action. Now, taxpayers are to act like extended arm of the tax administration by rigid TDS/TCS provisions. Section 206AA casts responsibility on the payee to furnish his PAN to the payer when tax is deductible at source under Chapter XVIIB. Failure to furnish PAN mandates the payer to deduct TDS at a higher rate specified in section 206AA(1).

Clause (iii) to section 206AA(1) stands modified with reduced TDS rate @5% (instead of 20%) in respect of payments covered by section 194Q (payment in respect of purchase of goods) and section 194-O (payment by e-commerce operator to e-commerce participant). Lower deduction certificate under section 197 and declaration under section 197A are not valid without PAN of the payee.

As regards non-residents and foreign companies, this provision will not apply with regard to (i) interest on long-term bonds covered by section 194LC; and (ii) any other payment which may be prescribed with conditions. One can expect some notification with regard to (ii) above, where there is no DTAA with the country where the non-resident resides (or where the foreign company is located) or where the withholding rates in DTAA are not beneficial to them (of course, this could be a rare occurrence).

Non-filing of ITR is yet another occasion where the higher TDS rate would apply w.e.f. 1st July, 2021. This would apply for all payments liable for TDS except those covered by sections 192, 192A, 194B, 194BB, 194LBC or 194N. Provisions of section 206AB will apply to non-residents also if they have PE in India.

The payee if had not filed ITRs for preceding 2 assessment years relevant to 2 previous years immediately prior to the previous year in which the tax is required to be deducted, for which the time for filing ITR under section 139(1) has expired and the aggregate of TDS/TCS of the payee is Rs. 50,000 or more (for each of those earlier years), the higher rate of TDS contained in section 206AB would apply.

Example: A Co. Ltd. deducted out of contract payments Rs. 2 lakhs to Mr. X (resident) in August, 2021. At the time of TDS, the deductor has to see whether ITRs for previous years 2018-19 and 2019-20 have been filed. If the facts relate to February, 2022 then previous years 2019-20 and 2020-21 have to be considered.

Where both sections 206AA and 206AB are applicable, the TDS shall be at the higher of the two rates prescribed therein.