Section 206AA of Income Tax Act
Section 206AA of Income Tax Act
Section 206AA of the Income Tax Act has been a recent inclusion in the tax laws. According to this, when a resident is making a payment to another resident or NRI, the payee must provide their Permanent Account Number (PAN).
Failing to comply with this rule leads to a 20% tax deduction or the applicable tax rate as per section 206AA - whichever is more. Let’s understand Section 206AA of the Income Tax Act in better detail.
What is Section 206 of the Income Tax Act?
When a taxpayer is due to receive any amount that is subject to TDS, they will need to share their PAN with the payer. This is because, without a PAN card, TDS deduction is at a much higher rate. This rule for without PAN TDS rate applies to both Indian citizens and non-resident Indian (NRI) taxpayers.
Applicable Tax Rate as per Section 206AA
Individuals who fail to produce PAN for the person who makes the payment will have to suffer from additional ‘without PAN TDS rate.’ Here is how without a PAN card TDS deduction works:
At rates that are mentioned in the relevant provision of the act
Current force rates (prescribed in the Finance Act)
At 20% rate (or 5% if it is TDS u/s 194O and 194Q).
206AA TDS Clauses
A declaration under sub-section (1), (1A), or (1C) of section 197A will not be accepted without a PAN.
In the case of an invalid declaration under sub-section (2), the TDS is as per sub-section (1).
TDS without PAN will receive no certificate under section 197.
In every correspondence and document, the deductee and deductor will have to mention the same PAN.
If the PAN of the deductor is invalid, it is assumed that the PAN is not provided and the provisions under sub-section (1) are applied.
Section 206AA of the Income Tax Act overrides others and has compulsory compliance. The resident and the non-resident payee are affected if the concerned individual fails to provide their PAN.
Section 206 of the Income Tax Act – Effect on the Resident Payee
In most cases, the recipient or the non-resident supplier cannot recover such a high amount in the form of withholding tax and so, will add it to the cost of supplies for the resident Indian. This subsequently causes discouragement to set up a business in India.
If the resident’s income from sources such as rent, salary, or professional fees is below the limit outlined u/s 192 to 194LA of the ITA, then section 206AA of the Income Tax Act may not apply to them.
However, no definitive confirmation exists about whether this exemption applies to Chapter XVII B of the IT Act. Unclear TDS provisions have frequently led to confusion among businessmen and the corporate sector, who have learned to cope with this ambiguity over time.
Section 206 of the Income Tax Act – Effect on the Non-Resident Payee
When Indian nationals make payments to non-residents who are in business together, confusion often arises owing to unclear tax rules.
This is particularly true when non-residents insist that Indian residents pay the taxes. If it is challenging to procure the PAN, then Indian residents deduct higher taxes that on occasion, even exceed the profit from transactions.
Section 90(2) of the ITA states that if the act offers more advantages than the treaty, it prevails. In this scenario, however, section 206AA would supersede Section 90(2) of the ITA.
Section 206AA TDS Exemptions
Section 206AA of the ITA does not apply to payments made to non-residents in specific scenarios such as:
Interest on long-term bonds u/s 194LC
Payments made to non-residents for interest, royalties, fees for technical services, and capital asset transfers, according to the Finance Act of 2016. To receive an exemption from Sec 206AA, non-residents will have to give details and documents to the payer, including:
Contact information such as name, email address, phone number, etc.
Address of the deductee’s (NRI) country or specific territory.
Certificate of residency from the government of the deductee’s (NRI) country or territory if available.
Tax Identification Number (TIN) or a unique government-issued identifier in case of unavailability of the former.
Conclusion
Section 206 of the Income Tax Act is concerned with the TDS and its subsequent obligation to deposit the deducted tax amount with the government. It details the applicability of the TDS, including salaries, interest, dividends and rent for residents and for NRIs it be all receipts taxable in India.
It also specifies the deduction rates and procedures for filing returns and issuing certificates to deductees.
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Disclaimer / TnC
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To whom is Section 206AA applicable?
To whom is Section 206AA applicable?
Section 206AA applies to both taxpayers - residents and non-residents who are eligible for TDS deductions but fail to furnish their PAN details.
How to comply with Section 206AA?
To comply with Section 206AA, taxpayers should promptly submit their PAN details to the payer to avoid higher TDS deductions. Non-residents may also provide alternative documentation as per notified rules.
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