Permanent Account Number (PAN) is an India tax identification number. Over the years, revenue authorities have been using PAN to track high value transactions, curb tax evasion, and there by increase the tax base. In line with this objective section 206AA of the Income-tax Act, 1961 (Act) was introduced in Finance Act, 2009 with effect from 1 April 2010, which provides that if PAN is not furnished by the payee, the withholding tax would be applicable at the rate specified in the relevant provision of the Act or rate in force or 20%, whichever is higher.
India has tax treaties with various countries which provides for reduced rate of withholding tax for various sources of income like interest, royalties, fees for technical services.
With the introduction of section 206AA, a non-resident payee not having a PAN was caught in the rigour of these provisions and the reduced tax treaty rate got increased to 20% under section 206AA.
This was so because section 206AA starts with a non-obstante clause viz. "notwithstanding anything contained in any other provisions of this Act,..". Considering the wordings of section 206AA of the Act there was a view that it may override the beneficial provisions of the tax treaty.
Concerns were raised whether the provisions of section 206AA overrides the treaty provisions, and whether the non-resident payee will not be eligible to avail benefit of lower rate prescribed under the tax treaty if PAN is not furnished.
The Pune Income-tax Appellate Tribunal (ITAT) in the case of Serum Institute of India Limited, the Bangalore ITAT in the cases of Infosys BPO Ltd. and Wipro Ltd. have held that withholding rate of 20% should not be applicable where the rate prescribed under tax treaties is lower since section 206AA of the Act is not the charging section and cannot override treaty provisions.
The requirement to obtain a PAN increased compliance burden on non-resident tax payers, especially for those who entered into one-time transaction with an Indian resident.
It seems that with a view to align the provisions with the judicial decisions and rate of withholding tax of 10% under section 115A of the Act, the Finance Act, 2016 inserted section 206AA(7) of the Act to provide that higher rate of withholding shall not be applicable to payment made to non-resident tax payers subject to such conditions as may be prescribed.
The Central Board of Direct Taxes has now by notification dated 24 June 2016,inserted Rule 37BC to the Income-tax Rules, 1962. Rule37BC prescribes details and documents which the deductee (non-resident taxpayer) is required to furnish to the deductor (Indian resident). The Rule states that in the absence of PAN, Section 206AA of the Act shall not apply in respect of payments in the nature of interest, royalty, fees for technical services and payments on transfer of any capital asset, if the deductee furnishes details and documents prescribed therein.
The prescribed details and documents are as follows:
1. name, e-mail id, contact number;
2. address in the country or specified territory outside India of which the deductee (i.e. non-resident) is a resident;
3. A certificate of his being resident 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 issuance of such certificate;
4. Tax Identification Number of the deductee in the country or specified territory of his residence and in case no such number is available, then a unique number on the basis of which the deductee is identified by the Government of that country or the specified territory of which he claims to be a resident.
Rule 37BC provides for non-applicability of section 206AA of the Act in respect of payments in the nature of interest, royalty, fees for technical services and payments on transfer of any capital asset. Rule 37BC thus covers major payments which have a beneficial rate to the non-resident taxpayer under the tax treaty and the rate of withholding tax under section 115A of the Act.
The higher withholding tax rate of 20% will not be applicable in case the above documents are made available at the time of tax deduction by the non-resident payee. This will reduce the compliance burden of a non-resident payee.
Also, certainty is provided to the non-resident taxpayer on availability of beneficial rate in the tax treaty up on furnishing details and documents prescribed.
This is a welcome step by the Government in line with its objectives of making India a tax friendly jurisdiction and providing ease of doing business in India for non-residents.