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Section 206AA: Understanding the Impact of Non-Availability of PAN on TDS

As per the Income Tax Act of 1961, many payments or transactions between two taxpayers involve the deduction of Tax Deducted at Source (TDS) at the appropriate rate. The Act specifies that the payer must provide their Permanent Account Number (PAN) to avoid higher tax rates. However, if the recipient fails to provide their PAN, it creates complications for all parties involved, including the payer, payee, and the Income Tax Department. To address this issue, Section 206AA of the Income Tax Act of 1961 has stringent provisions requiring the payee to cite their PAN when receiving TDS-eligible amounts.

What is Section 206AA of the Income Tax Act?

Section 206AA mandates that any taxpayer entitled to receive a TDS-eligible amount must provide their PAN to the taxpayer responsible for making the payment. Failure to quote the PAN will result in a higher percentage of TDS deduction. It is important to note that Section 206AA applies to both resident and non-resident taxpayers.

Exception under Section 206AA

Certain provisions in Section 206AA may result in different TDS deduction rates. For example, sections 194O and 194Q cover payments where TDS rates may vary. Section 194O involves TDS deductions from E-commerce participant payments, and Section 194Q covers tax deductions at source for goods acquisition payments. In these instances, the higher rate between 5% or the rate indicated in the relevant section will be used.

TDS Rate under Section 206AA

When the payee fails to provide their PAN to the payer, the payer is required to deduct TDS at higher rates. The TDS rates under Section 206AA are as follows:

  • 20% annual rate
  • The rate prescribed in the applicable section of the Income Tax Act

If Mrs. Neha owes Mrs. Priya ₹1,00,000, but Mrs. Priya doesn't provide her PAN, Section 206AA applies. Instead of the 10% TDS under Section 194J, a 20% rate applies. So, Mrs. Neha deducts ₹20,000 as TDS.

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Applicability of Lower Tax Deduction under Section 206AA

Taxpayers have the provision to apply for a lesser or zero TDS deduction under Section 197. This section allows taxpayers to approach the Assessing Officer (AO) and obtain a certificate authorizing a reduced TDS deduction for a specified period. However, it is important to note that the certificate issued under Section 197 becomes void if the taxpayer fails to provide their PAN while applying. In such cases, Section 206AA and standard TDS rates will apply, rendering the reduced or zero TDS deduction ineffective.

Non-Applicability of Section 206AA

Section 206AA of the Income Tax Act of 1961 excludes two types of transactions. One is interest income on long-term bonds paid to a non-resident taxpayer under section 194LC. The other is payments made to a non-corporate non-resident or foreign business without a PAN for royalties, interest, technical service fees, or capital asset transfers. However, the payee must provide certain info to the payer as per Rule 37BC from Notification No. 53/2016. This info includes the payee's full address, name, contact info, email, and tax identification number from their home country or territory. If a tax id is not available, the payee should provide the identification used for tax purposes in their home country. If needed, the payee must also present a residential certificate.

Important Considerations

It is crucial for taxpayers to provide accurate PAN information to avoid any complications regarding TDS deductions. If a taxpayer submits an inaccurate PAN, it will be assumed that they have failed to provide their PAN, and the provisions of Section 206AA will apply. Furthermore, Forms 15G and 15H will be considered invalid if the taxpayer does not provide their PAN. In such cases, Section 206AA will be applicable. Both the payer and the payee are required to provide their PAN and include it in all bills, vouchers, and other documentation that establish their work relationship.

Wrapping Up

To conclude, Section 206AA of the Income Tax Act mandates that taxpayers provide their PAN when receiving TDS-eligible amounts to avoid higher TDS rates. This provision applies to both resident and non-resident taxpayers. However, there are exceptions and provisions for lower TDS deduction rates under certain circumstances. Taxpayers must ensure the accuracy and availability of their PAN to avoid complications and potential higher TDS deductions. By adhering to the provisions of Section 206AA, taxpayers can navigate the TDS process more effectively.

 

author

The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

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