Section 206AA was inserted in the I-T. Act, 1961 (Act) by the Finance (No.2) Act, 2009 from April 1, 2010. It provides that any person, whose receipts are subject to tax deduction at source (TDS) shall mandatorily furnish his Permanent Account Number (PAN) to the tax deductor or failing which the deductor shall deduct tax at source at higher of the following rates namely – the rate prescribed in the Act; the rate in force i.e. rate mentioned in the Annual Finance Act; or at the rate of 20 per cent.

The objects of Section 206AA show that it has been introduced to ‘improve compliance'. The section also applies to credits or payments to non-residents. Quoting of PAN has become obligatory also in cases of persons, who file declarations in forms 15G or 15H and apply for certificates u/s 197 of the Act. One of the reasons for introducing this provision is the ease in getting PAN. According to the Circular, the average time for allotment of PAN has come down to 10 calendar days. HHowever, the problem of getting PAN is fraught with difficulties in the case of non-residents.

TDS provisions for NRIs

Section 195 governs deduction of tax in cases of non-residents. Further, Chapter-IX (Sections 90, 90A and 91) relating to Double Taxation Avoidance Agreements (DTAA) also deals with this subject. Many DTAAs have been entered into by the Central Govt. with various countries, which have been notified from time to time before the enactment of Section 206AA. The settled rule regarding DTAAs is that treaty provisions, which are more favourable to taxpayers, prevail over the domestic tax law. This has been accepted by the CBDT in its Circular No.333 (F.No.506/4/81-FFD) dated April 2,1981, which has not been superseded. The issue, needing clarification, is whether S.206AA will prevail over DTAAs, negotiated before April 1,.2010? In other words, whether the government can make a change in DTAAs position unilaterally, affecting the existing position?

As far as application of Sec. 206AA , it is posing problems for both the deductors and the deductees. Sec.139 of the Act provides that every person, covered by the section, shall apply for the allotment of PAN in accordance with the prescribed procedure in Form No.49-A. A non-resident is to visit India as a consultant for 3 months. He imposes the condition that he will come only if the entire payment for the services to be rendered is made to him in advance in his country. Obviously, quoting of PAN in such a situation will not be possible. Hence, in terms of Sec.206AA from the advance payment, tax will have to be deducted at 20 per cent, though, otherwise, he may not be liable to tax in India.

The problem can also arise when a resident Indian outsources some of his work to a non-resident, who does not visit India, but does the work from his country. In such cases too, quoting of PAN is not possible. Hence, TDS will be at 20 per cent because of non-availability of PAN.

Requirement of quoting PAN in view of Sec.206AA is likely to impact flow of foreign exchange to India. CBDT needs to consider changes to overcome such situations and resolve the problems. The solution could be to exempt non-residents from the operation of Sec. 206AA. Payments to them can continue to be governed by Sec.195.

In the alternative, non-residents can be specifically exempted from application of Sections 139A or 206AA. It may be mentioned in this regard that by proviso to Sec.139A(5A), certain categories of non-residents were exempted from getting PAN in the situations mentioned.

Till a satisfactory solution to the problem is worked out, the operation of Sec. 206AA, as far as non-residents are concerned, can be stopped by a Circular u/s 119 of the Act.

(The author is a former chairman of CBDT.)

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