Income Tax

Ease in Strictness of Section 206AA – Dealing with Previous Issues

Section 206AA was highly rigorous and confusing as it made mandatory to submit PAN number while submitting taxes. It created many controversies; especially in case of NRIs.

Background of Section 206AA

A new tax act under section 206AA was added in the Income Tax Act by the Income Tax Department. Under section 206AA, the act accomplishes to have a Permanent Account Number (PAN) by every individual. This PAN number would be useful for the citizens who were ready to receive a sum of amount or income, on which tax can be deductable.

If any of the individual failed to submit the PAN number, then they have to face certain rates like rate under TDS rate, rate under the act applied, and 20% rate. This rule is applied to both residents and non-residents citizens, who ever sum up with the amount, where TDS rate is applied.

By having PAN, any individual can save from extra tax deductions or any other penalties. Your bank accounts should have been linked up with this PAN card, where all your bank accounts and their balances can be known through this PAN number. It is advantageous to have a PAN card so that you can avoid high tax rates or penalties, when you receive higher amount.

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Controversies

The main confusion occurs for the Non-residents, on whether section 206AA act was considered for them or not. The rates under Double Taxation Avoidance Agreement would be applicable for Non-residents, as the rates under section 206AA would be holding higher tax rates.

The mandatory rule of having PAN card number for the non-residents to do business here, would result in negative response of not having any business deals in India, if the rule was insisted for Non- Residents. Hence, Income Tax Committee has decided to have the non-resident identification number, or unique number of his territory or any other identification of showing him as a resident of his own country.

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Recommendations

Controversies which were caused were studied further by the Income–tax Simplification Committee, Headed by Justice R.V.Easwar, and recommended with addition of new act under section 206AA as follows:

Committee then added the clause under section 206AA with the sub-section (7) as the rule of having PAN for non-residents shall not apply if, the non-resident is said to be deductor, or had tax identification number of his country, unique number which shows his nativity of claiming as resident of a particular place. If non-residents can provide relevant documents then the rules of section 206AA would not be applicable of paying higher taxes and there is no mandatory of having PAN card.

Considering the section 115A, higher rate tax should not be implied, and they should pay the specific rates under this section or followed by Double Tax Avoidance Agreements (DTAA). Hence, section 206AA with sub-section (7) was added to avoid the mandatory condition of having PAN card for non-residents.

Amendment of Section 206AA (7) by the Finance Act 2016

Sub-section (7) was effects from 01-06-2016, according to the finance Act 2016 as follows:

  1. If non-residents, pay interest on long-term based bonds, then it is referred as 194LC section, of not being a company or a foreign company, then sub-section (7) does not apply.
  2. Non-Residents without PAN are subjected to higher rate of TDS, and if proper alternative documents were submitted then higher rate tax will not be applicable.

New Rule 37BB

Central Board of Direct Taxes have mentioned about new rule 37BB in Income tax rules, to specify conditions as follows:

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Committee has added another clause under Section 206AA i.e., Rule 37BC, in which taxes were not applied on the transactions made for the Non-residents with certain conditions which are,

  1. On interests,
  2. Fees for technical services,
  3. Payments for transferring capital asset.

The conditions which are added help the non-residents in reducing additional tax rates and also Form 10F, would avail benefits for them and also they will show interest in transactions with India without getting effect by any extra charges or higher tax rates.

For applying this rule, Non-resident should submit their details like name, email, address, tax identification number (TIN), tax residency certificate (TRC) and contact number.

Conclusion

Income Tax Appellate Tribunal, had beneficiaries on amendments of Section 40 (a) (i) and Section 43B, which have past events effect.

Based on the recommendations suggested by the Committee head Justice R.V. Easwar, there were many cases who had provided the application based on the Section 206AA (7) and new rule 37BC, which are retrospective cases.  As of April 2010, many cases came to an end which is unwarranted issues on the basis of the new section 206AA and new rule 37BB.

Basically, all these section in Income Tax were added up for the public welfare. If anyone submits wrong PAN card number, then they should pay higher rate of tax or even can get punishment or penalty.

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