Section 206AA - TDS at a higher rate (Applicability and Withdrawal)

Section 206AA - TDS at a higher rate (Applicability and Withdrawal)

This article will explain the grounds where TDS is deducted at a higher rate as per section 206AA and not at the rate as prescribed by Income Tax Act. However, there are few exceptions where withdrawal of this section applies. Let us study the same.

Section 206AA

Income Tax Act has introduced a New Section, Section 206AA to bring the notified changes. As per this new section, any Deductor making a TDS eligible payment to a party, who has not provided PAN, should make TDS at a higher rate.

For such case, the rate of TDS determine at higher of below conditions:

  • TDS rate prescribed in the Act
  • Rate of Tax in force
  • At 20%

The first condition states about the rate of tax prescribed through Section 193 to 196. The second condition states the rate of tax for Salaries (Section 192), where the tax should be calculated at Normal rates for Individuals. The third is a flat rate of 20%. The Deductor has to determine the tax amount for all the three conditions and apply the higher tax amount among the three.

The new section will be applicable only for the payments made on or after April 01, 2010. Till then, normal rates / prescribed rates would be applicable even in the case, PAN is not available / invalid.

PAN at the time of Payment

This criterion has to be checked “During the Payment” and not falling under future assurances, TDS has to be determined.

If an Employee / Party receive a payment that is eligible for TDS and assures Deductor of giving the PAN in short while, then such case has to be considered for higher rate determination.

The Maximum TDS rate (20%) is applicable in the following case:

  • if the pan is not provided by the deductee.[section 206AA(1)]
  • If pan provided by the deductee is invalid.[section 206AA(6) read with 206AA(1)]

As per the new provisions, certificate for deduction at lower rate or no deduction will be given by the Assessing Officer under section 197, or declaration by deductee under section 197A for non-deduction of TDS on payments (Form 15G/Form 15H) will not be valid, unless the application bears PAN of the applicant/deductee.

Providing False PAN

The new section states that the below cases has to be considered for the higher rate of TDS.

  • PAN not given by the Deductee.
  • PAN provided is structurally invalid.
  • Deductee has given a PAN, which is not in Department database.
  • Given PAN belong to some other assessee

PAN in all the correspondences

All deductors are liable to deduct tax at the higher rate in all transactions not having PAN of the deductees on or after 1st April 2010.

To meet with the compliance and to ease the Deductor in collecting PAN, section 206AA makes it compulsory to quote PAN on all correspondences between Deductor and Deductee.

Hence, PAN has to be mentioned in all bills, vouchers, salary slips, letters (other than statutory which does not come under Income Tax), etc. These documents are either given by the Deductee to the Deductor or vice versa.

It states that this condition applies only to the cases where Deductee’s (Party / Employee) payment in the financial year is exceeding or expected to exceed the threshold of TDS. This condition in the act is expected to help the Deductor in collecting the PAN easily.

Salaries applicability

Section 206AA states that TDS eligible payments covered under Chapter XVII-B need compulsory valid PAN. Failing to provide Valid PAN will attract TDS at the higher rate.

Chapter XVII – B (Chapter 17B) of Income Tax Act covers all payments including Salaries. This makes even Salaries payments include under Section 206AA

Non Resident Payments

Non-Resident payments also come under the purview of Section 206AA. In those cases, foreign residents should take an Indian PAN and provide it, before the payment.

Withdrawal of Section 206AA

TDS without PAN for NRI payment – at Normal Rate

The Central Board of Direct Taxes (CBDT) has notified that provisions of section 206AA will not apply for:

  • Interest Payment
  • Payments of royalty
  • fees for technical services
  • transfer of capital assets.

Section 206AA of the Income Tax Act requires a non-resident to furnish PAN to avail lower withholding rate. Furthermore, the lower withholding rate differs from country-to-country due to the treaty provisions.

As per the Income Tax Act, the lower withholding tax rate is 10.506% (inclusive of cess) and 20% in absence of PAN.

A non-resident, who do not have PAN, can now avail lower tax rates if he/she furnishes prescribed documents and details to the payer. Below documents can be submitted to avoid higher TDS deduction:

  1. Name, E-mail id, Contact number
  2. Address of NRI’s country of residence
  3. Tax Residency Certificate (TRC), if the law of country of residence provides for such certificate
  4. Tax Identification Number (TIN) in the country of residence. If TIN is not available, a unique identification number to be furnished that is identified in the country of residence.

This amendment is applicable form 1st June 2016.

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