SKP Tax Alert
Volume 9 Issue 9 |
Rules for non-applicability of section 206AA notified

Section 206AA of the Income Tax Act (the Act) provides for tax deduction at source at the higher of the following rates, if the recipient of the income has not furnished their Permanent Account Number (PAN).
•             At the rate specified in the relevant provision of this Act
•             At the rate or rates in force
•             At the rate of 20%

 
This provision was also applicable to non-residents with the exception of payment of interest on long-term bonds as referred to in section 194LC of the Act. This forced foreign companies and non-residents to obtain a PAN to avoid higher withholding of tax. To reduce the compliance burden of foreign companies and non-residents, the Finance Act, 2016 has relaxed the condition of obtaining a PAN by such foreign companies and non-residents, subject to certain conditions which were to be prescribed later on.
 
The Indian government has now prescribed these conditions by introducing Rule 37BC in the Income Tax Rules vide notification no. 53/2016.
 
As per the said Rule, the provisions of a higher withholding tax of 20%, as specified above, would not apply to a foreign company or non-resident with respect to payments of interest, royalty, fees for technical services and payments on the transfer of any capital asset, even if they have not obtained a PAN. This is subject to the recipient foreign companies or non-residents furnishing the following details:
  • name, email id, contact number;
  • address in the country or specified territory outside India of the home country of the non-resident;
  • a certificate of residence in any country or specified territory outside India from the government of that country or specified territory if the law of that country or specified territory provides for the issuance of such certificate i.e. Tax Residency Certificate (TRC); and
  • Tax Identification Number (TIN) of the non-resident in the country or specified territory of his residence and, in case no such number is available, a unique number on the basis of which the non-resident is identified by the government of that country or specified territory of which he claims to be a resident.
Furthermore, these details are required to be reported to the Indian tax authorities by the Indian party by way of including it in the withholding tax returns and stating ‘PAN not available’.
SKP's comments
The introduction of these rules is a welcome move and will reduce the compliance burden to a large extent for non-residents and foreign companies having transactions with India. However, it is pertinent to note that the said relaxation is only for payments made in the form of interest, royalty, fees for technical services and transfer of capital asset. In the case of any other payments which might be taxable (such as salary payments, other income or chances of non-resident forming a permanent establishment in India with respect to installation, EPC or any such huge contracts or in the form of being agents), the requirement of obtaining PAN still exists.
 
It is pertinent to note that the said amendment and new rules only provide relaxation from the non-applicability of a higher rate of withholding tax without obtaining PAN. However, that does not exonerate a foreign company from its obligation of filing tax returns. As per the provisions of section 139(1) of the Act, all companies, including foreign companies, are liable to file tax returns in India if they have earned income from India and is chargeable to tax in India. For filing these tax returns, a PAN would have to obtained.
 
Even practically, the reporting requirement entails providing information such as name, address, contact number, email id, etc. by non-residents and foreign companies. It is possible that non-filing of tax returns by such foreign company or non-resident may invite some notices/scrutiny by the Indian tax authorities at the email id/address given by such non-residents/foreign companies. Given this possibility, it may be advisable to obtain a PAN and file tax returns in India with respect to income chargeable to tax in India.
SKP
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