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TDS Amendments and its Impact

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Some says TDS is a simple, logical and interesting area. On the other hand most of the people are of the opinion that it is Vast, difficult and complicated. For fun professionals says TDS is a TEDIOUS topic (Both TDS and tedious have same pronunciation).

However the taste of a delicious dish (TDS) can be enjoyed only by care full cooking (understanding) and adding spices and dry fruits (updating the amendments and case laws)

As per the recent amendments W.e.f 01/04/2010, on non-submission of PAN, Tax is to be deducted @ higher of prescribed rate or 20%.

ü  The Finance (No.2) Bill, 2009 had introduced a new section 206AA in the Income-tax Act, 1961 (ITA), which provides that every recipient of income is required to furnish its Permanent Account Number (PAN) i.e. tax registration number to the payer.

ü  From the new financial year, Assessees will have to pay a higher income tax at source if they do not have a Permanent Account Number (PAN). Tax at higher of the prescribed rate or 20 percent will be deducted on all transactions liable to tax deduction at source (TDS), if the person liable to the tax does not possess a PAN.

ü  All those liable to pay the tax, including non-residents, need to obtain a PAN by March 31, 2010. This number has to be communicated to those liable to deduct tax before the tax is actually deducted on transactions after that date.

ü  As such, all financial transactions without PAN will attract tax from April 1, 2010. The Income Tax Department has already made it mandatory for employers to quote PAN of their employees and parties from whom tax is deducted while filing TDS returns.

ü  According to the new provisions, declaration by a taxpayer under Section 197A for non-deduction of TDS on payments will not be valid if it is given without quoting PAN. The certificate for deduction at a lower rate or no deduction will not be given by the assessing officer under Section 197 in the absence of PAN.

ü  Henceforth any person eligible for deduction fails to do so, he will have to pay 20 percent TDS instead of two percent on rental payments for plant and machinery and 10 percent on land and building.

ü  To avoid disputes regarding quoting, no quoting of PAN or accuracy, all eligible for the deduction and those liable to deduct will be required to quote PAN in all correspondence, bills, vouchers and other documents sent to each other.

 

Implications for foreign companies / non-residents:

The current tax rate under the domestic tax laws for royalties and fees for technical services generally is 10% (plus applicable surcharge and education cess) of the gross amount. The tax treaties also generally provide for a tax rate of 10% / 15% of the gross amount. Even in case of interest, many Indian tax treaties provide for a lower withholding tax rate of 10% / 15%. In several cases, foreign companies do not apply for a PAN in India since they earn only such passive income or they do not have business operations /Permanent Establishment in India.

Now, with the above amendment, in the absence of PAN, notwithstanding the fact that a lower rate is provided under the ITA or the tax treaty, tax is required to be withheld @ 20% in India.

The above provision seems to have the effect of Indian laws having an extra territorial jurisdiction whereby the foreign companies and non residents are obligated to comply with the laws of India. Questions are being raised regarding the validity of these provisions since the provision requires compliance in India overriding even the provisions of tax treaties and ignoring practical difficulties faced by foreign companies in respect of tax registration and compliance.

In practice, it is quite unlikely, that Indian companies would consider these arguments while withholding taxes given the punitive consequences for withholding lower taxes in India.

Credit for such excess tax withheld may not be available to the foreign company in its home country since the taxes are not withheld as per treaty provisions, Thus if foreign company does not have PAN at the time of receipt of the income, it would later have to apply for PAN and file return of income in India to claim refund of such excess tax.

In any case, irrespective of whether a refund is due or not, technically, the Indian law requires all the foreign companies to file return of income, in case of income being earned from India – even if the applicable taxes have been paid in India. Till date, most foreign companies are practically not complying with the said provision and even the tax authorities do not have any mechanism to monitor the same. However, with the introduction of the above provision, the tax authorities can easily scrutinize the compliances by foreign companies in India based on the PAN allotted to foreign companies. Filing of return of income in India would be accompanied by host of other compliances.

Foreign companies are required to inter alia undergo tax audit under section 44AB if turnover / gross receipts exceed INR 4 million (business) / INR 1 million (profession) and comply with the transfer pricing provisions (including maintenance of documentation and filing report from Chartered Accountant in Form 3CEB).

 

It is mandatory to quote PAN on return of income, all correspondence with any income tax authority and challans for any payments due to Income Tax Department. It is also compulsory to quote PAN in all documents pertaining to economic or financial transactions notified from time-to time by the Central Board of Direct Taxes.

 

The effort is also seen as a step by the government to increase revenue collections. The 20 percent rate on TDS will be a deterrent and compel many to obtain and furnish PAN. Otherwise, it will directly impact their cash flows in terms of higher tax payout at source.

The move of imposing penalty for not quoting PAN is aimed at strengthening the database of the revenue department and increasing tax compliance.

 




Category Income Tax
Other Articles by -
Manikanta Raju CA,CWA,(CS) 

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