Relaxation to non-residents from higher withholding tax rate in the absence of PAN – Much needed relief

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Customer Care No. 91-11-45562222
Relaxation to non-residents from higher
withholding tax rate in the absence of PAN Much
needed relief
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• The existing provisions of section 206AA of the
  Income Tax Act, 1961 ("the Act"), inter alia,
  provide that any person who is entitled to
  receive any amount on which withholding tax
  ("WHT") provisions apply shall furnish his
  Permanent Account Number ("PAN") to the deductor,
  failing which a higher WHT rate of 20 will be
  applicable.
• The above section was introduced by Finance
  (No.2) Act, 2009 to improve the compliance with
  the provisions of quoting PAN and with a view to
  trail the taxability of the payments in the hands
  of recipients. These provisions were made
  applicable not only for domestic recipients, but
  also for non-resident recipients, where the
  payments were subject to WHT provisions.
• In the context of non-resident recipients, it may
  be relevant to refer the provisions of section
  90(2) of the Act, which provides that where the
  Indian Government has entered into an agreement
  with the government of any other country outside
  India for granting relief from tax or preventing
  avoidance of tax, the provisions of the Act would
  apply to the extent they are more beneficial to
  the non-resident taxpayer. In other words, the
  provisions of the Tax Treaty would override the
  provisions of the Act if they are more beneficial
  to the non-resident taxpayer.

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• On the other hand, section 206AA of the Act also
  begins with a non-obstante clause that allows
  this section to override other provisions of the
  Act.
• Therefore, it has given rise to a dispute as to
  whether the provisions of section 206AA of the
  Act would also override the benefits (if any)
  available under the Tax Treaties in the absence
  of PAN. The revenue authorities were generally
  taking a position that the advantage of
  beneficial WHT rates as per Tax Treaties
  (wherever applicable) would not be available to
  the non-resident recipients, in case of
  non-furnishing of PAN, and the higher WHT rate of
  20 would apply.
• Accordingly, the above provisions were proving to
  be an impediment in terms of ease of doing
  business in India, as many non-residents
  preferred not to do business with Indian
  companies, if obtaining of PAN was insisted upon.
• Income-Tax Simplification Committee Report
• A committee under the chairmanship of Justice R.
  V. Easwar (Retd.) was constituted by the Indian
  Government in 2015 with the broad objective to
  study and identify the provisions of the Act that
  have given rise to litigation on account of
  interpretative differences and impacted the ease
  of doing business in India. The committee
  inter-alia provided its recommendations on the
  applicability of the provisions of section 206AA
  of the Act.

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• The committee in its report recommended that "it
  should suffice if the concerned non-resident
  furnished to the deductor, in lieu of such
  Permanent Account Number, his tax identification
  number in the country or the specified territory
  of residence and in case there is no such number,
  then, a unique number on the basis of which the
  person is identified by the Government of the
  country or the specified territory of which such
  person claims to be a resident."
• The committee observed that in view of the
  provisions under the respective tax treaties
  prescribing specific rates for WHT, there was no
  justification for providing WHT at a higher rate
  than as prescribed under the respective tax
  treaties. Accordingly, amending the provisions of
  section 206AA of the Act was recommended.
• Amendment made to section 206AA by Finance Act,
  2016 and recent prescribed rules
• In line with the recommendations proposed by the
  Committee, the provisions of the section 206AA of
  the Act were amended (w.e.f. June 1, 2016) to
  provide relaxation from higher WHT rate while
  making payment to non-resident recipients in the
  absence of PAN, subject to the fulfilment of the
  prescribed conditions.
• For this purpose, the Central Board of Direct
  Taxes ("CBDT") has recently notified a new Rule
  37BC under Income Tax Rules, 1962 ("the Rules")
  vide Notification No. 53 /2016 (F.No.370
  142/16/2016-TPL) dated June 24, 2016 to specify
  the conditions to avail the aforesaid relaxation.

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• In terms of Rule 37BC of the Rules, the following
  payments to non-resident recipients not having a
  PAN in India shall not attract higher WHT rate
  under section 206AA of the Act
• (1) Interest
• (2) Royalty
• (3) FTS and
• (4)Payments on transfer of any Capital Asset
• In order to avail the above relaxation, the
  non-resident recipients shall be required to
  furnish following details/documents
• (1)Name, e-mail id, contact number
• (2)Address in the home country
• (3)Certificate of being a resident in the home
  country, if the law of the country provides such
  a certificate and
• (4)Tax Identification Number (TIN) in the home
  country. Where TIN is not available, a unique
  identification number through which the deductee
  is identified in the home country.
• Further, to capture and report the details
  specified in the notification, the corresponding
  changes have also been made in quarterly WHT
  return (i.e. Form 27Q) applicable for reporting
  WHT on payments made to non-resident recipients.

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