Section 206AA – Issues and Implications
One of the important proposals which were introduced by the Finance (No.2) Act, 2009 is insertion of Sec 206AA in the Income Tax Act. The main objective of introduction of this section is to strengthen the PAN mechanism.
Till now, the onus of collecting PAN was with the deductor. Now, with the introduction of this section, the onus has been shifted to the deductee. Relevant extract from explanatory memorandum on section 206AA is reproduced below:
“In order to strengthen the PAN mechanism, it is proposed to make amendments in the Income Tax Act to provide that any person whose receipts are subject to deduction of tax at source i.e. the deductee, shall mandatorily furnish his PAN to the deductor failing which the deductor shall deduct tax at source at higher of the following rates ……….”
Key Provisions of Section 206AA
· Quoting of PAN is compulsory from 1 – April – 2010.
· Every person whose receipts are subject to TDS should furnish his PAN to the deductor.
· In case of such failure, the deductor has to deduct the tax at a rate higher of
a) The rate prescribed under the Act or
b) The rate in force (rates as mentioned in the Finance Act) or
c) The rate of 20%
· Certificate U/s 197 shall not be granted by the tax authorities unless the applicant quotes PAN in the application.
· These provisions will be applicable even if the deductee files declarations U/s 197A in Form 15G or Form 15H
· Quoting of PAN is compulsory in all the correspondence, bills and vouchers exchanged between deductor and the deductee.
The section starts with “Not withstanding anything contained in this Act” and hence this has an overriding effect on all the provisions of the Income Tax Act, 1961.
Since this section applies to any sum/amounts/income on which tax is deductible under Chapter XVII B, all the TDS provisions laid down in the chapter XVII – B are covered.
When this section gets attracted?
1. The deductee should be entitled to receive any sum/amount/income
2. Tax is deductible under the provisions of chapter XVII – B
3. The deductee should be liable to furnish PAN to the deductor responsible to deduct tax at source on such income
4. The deductee has failed to furnish PAN to the person responsible to deduct TDS
All the above provisions should be satisfied to trigger Sec 206 AA(1)
1. Applicability of these provisions in case of payment made to non-resident/foreign company
2. Applicability of this section in case of TDS U/s 192
3. Applicability of this section in case of payments (other than salaries) to residents when payment does not exceed the threshold limit specified in respective sections
4. Applicability of surcharge and education cess to the rate of 20% as specified U/s 266 AA.
5. When will the deductee be liable to furnish his/her PAN to the deductor?
Issue – 1
Applicability of Sec 206AA in case of payments made to non-resident/foreign companies:
Since section 206AA starts with non-obstinate clause which overrides any other provisions of the Act, and as such this section is applicable in case of non availability of PAN of non-resident/foreign companies. Hence, tax should be deducted at 20% rate.
Whether Sec 206AA overrides double taxation avoidance agreements?
As per section 90(2) of the Act, the taxpayer can opt for the provision of the relevant tax treaty over the provisions of the Act to the extent the same are more beneficial to that taxpayer. In this regard the relevant paragraphs of Circular 333 issued by Central Board of Direct Taxes (CBDT) on 2 April 1982 dealing with this issue can be discussed. The same reads as under;
“Where a double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective, of the provisions in the Income-tax Act. Where there is no specific provision in the agreement, it is the basic law, i.e., the Income-tax Act, that will govern the taxation of income”
Since Sec 206 AA precides over all other provisions of the Act, the same will also override the provisions of Sec 90(2).
In the absence of any specific provision in the tax treaty, the provision of Income Tax Act will prevail. Since the tax treaty does not have any similar provisions in the lines of Sec 206 AA, it appears that the provisions of Sec 206 AA will prevail over Sec 90(2). This implies that nonresident will not be able to avail treaty benefits in the absence of PAN.
Issue – 2
Applicability of this section in case of TDS U/s 192
· The provisions of this section are applicable in all cases whether estimated taxable survey income is less than the exemption limit or more than exemption limit.
· The Act nowhere mentions that Sec 192 is applicable only in case where the salary income is above exemption limit.
· For deducting TDS U/s 192, one has to keep in mind the provisions of Sec 192 and tax should be computed in accordance with the method specified in the TDS circular issued by CBDT.
· Normally the CBDT issues circular every year with guidance on the manner in which TDS should be calculated and deducted from income U/s 192. [The recent circular being circular no 1 of 2010].
· As per the circular, the responsible person responsible for paying any income chargeable under the head salaries shall deduct income tax on estimated income of the assessee under the head “salaries”.
· The circular specifies that no tax is required to be deducted at source in any case unless the estimated salary income including the value of perquisites for the FY exceeds Rs. 160,000 or Rs. 190,000 or Rs. 240,000 (or the applicable limit for the financial years as as may be notified by the Department) as the case may be depending upon the age and gender of the employees.
· It is not clear that the Board will issue similar instruction in the forthcoming TDS circulars after insertion of Sec 206AA.
· If similar instructions are issued in the next TDS circular for the FY 2010-11, then no tax will be deducted U/s 192 if salary income is below exemption limit.
· In the absence of such instructions, tax will be deductible @ 20% if employee whose income is below exemption limit does not disclose PAN.
Issue – 3
Applicability of this section in case of payments (other than salaries) to residents when payment does not exceed the threshold limit specified in respective sections
· In case of payments or credits of payments which are covered by Sec 193 – Sec 194 LA the threshold limit as notified under the respective sections should be taken into consideration.
· The sections mentions clearly that no tax is required to be deducted where the amount or income or as the case may be the aggregate amounts of such income are paid or likely to be paid during the financial year by the aforesaid person to the account of the payee does not exceed the threshold limit mentioned in the respective sections.
· Thus when tax is not required to be deducted under these sections, Sec 206 AA cannot be activated even if the recipient does not furnish his PAN.
Issue – 4
Applicability of surcharge and education cess to the rate of 20% as specified U/s 206 AA.
Surcharge is applicable when recipient is a foreign company and the payment or credit subject to TDS is more than Rs. 1 crore. This is imposed by sub-sections (5)/(6) of section 2 of the Finance Act, 2010 read with Part II of the first schedule to the Finance Act.
Subsection (5) of Section 2: In cases in which tax has to be deducted under sections 193, 194, 194A, 194B, 194BB, 194D and 195 of the Income-tax Act, at the rates in force, the deductions shall be made at the rates specified in Part II of the First Schedule and shall be increased by a surcharge calculated in cases wherever prescribed, in the manner provided therein.
Subsection (5) of Section 2: In cases in which tax has to be deducted under sections 194C, 194E, 194EE, 194F, 194G, 194H, 194-I, 194J, 194LA, 196B, 196C and 196D of the Income-tax Act, the deductions shall be made at the rates specified in those sections and shall be increased by a surcharge in the case of every company, other than a domestic company, calculated at the rate of two and one-half per cent of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees.”
There is no reference of section 206AA in the two sub-sections of section 2 of the Finance Act, 2010. Likewise, a reference of section 206AA is missing in the First Schedule to the Finance Act.
Education cess is imposed by sub-sections (11) and (12) of section 2 of the Finance Act, 2010. Even in these sub-sections, one fails to find out a reference of section 206AA. Consequently, the rate of 20 per cent under section 206AA cannot be increased by surcharge and education cess.
Issue - 5
When will the deductee (resident) be liable to furnish his/her PAN to the deductor?
Sec 206 AA of the act will be triggered when tax is deductible under the provisions of chapter XVII-B of the Act. The deductor is not required to furnish his PAN unless he is entitled to some income/sum/amount on which tax is deductible as per the provisions of Income tax act.
However in case of the persons who does not have PAN but are entitled to any income/sum/amount on which tax is deductible under the Act during the period under consideration, the said persons are advised to apply for PAN and then furnish the same with the deductor.
The section uses the word “Failing which”. Failing to do anything pre supposes that there exists an action which should be fulfilled and if not fulfilled, then that becomes a failure. If we analyze these words from the deductee point of view, we arrive at the below conclusion:
· The deductee is entitled to any income/sum/amount
· Tax is deductible as per provisions contained in Chapter XVII B on the income/sum/amount.
· The deductee as PAN
· Deductee has not furnished PAN with the deductor.
If the deductee is entitled to any income/sum/amount but tax is not deductible under provisions of chapter XVII B (the reason being there is no specific provision for tax deduction in chapter XVII B or the income/sum/amount so entitled is within the threshold limit specified under the respective sections), then he is not liable to furnish PAN.