Section 206AA is a section included in the Income Tax Act 1961 that deals with the responsibility of the payee to furnish their PAN card to the payer of income that is liable for Tax Deducted at Source (TDS). TDS is one of the most common taxes in India, and a payment made to a resident or non-resident must be subject to TDS.
The Indian government requires the payer to deduct the TDS amount from the payment made to residents and non-residents and deposit it within a specific time frame. However, previously, without the PAN of the payee, the TDS deduction process created inconvenience for the Indian government, especially in the case of non-residents. Hence, the Indian government introduced section 206AA in the Income Tax Act to ensure that the payees provide their PAN cards to the payers for effective TDS compliance.
If you are a payer or a payee, sending or receiving money from a resident or a non-resident Indian, it is important to comply with the provisions of section 206AA. This article will help you understand everything about section 206AA of the Income Tax Act and how you can better comply with TDS laws in India.
What is section 206AA of the Income Tax Act?
Section 206AA of the Income Tax Act mandates taxpayers to provide their PANs to a resident or non-resident who has paid a certain amount and is liable for a TDS deduction. The Indian government introduced section 206AA in the Income Tax Act in FY 2010-11 and made it applicable to both residents and non-residents to furnish their PAN cards to the payer for effective TDS deduction and compliance. Under section 206AA, if a taxpayer fails to provide the PAN to the payer responsible for deducting and depositing the TDS from the amount, the TDS is liable to be deducted at a higher rate.
Also read: What are Short Term Capital Gains Tax
Rate of TDS
As per the provisions of section 206AA of the Income Tax Act, TDS deduction is applicable at a higher rate if a taxpayer (resident or non-resident) fails to provide PAN to the payer liable to deduct and deposit the TDS from the amount before sending. In such a case, the higher rate is the highest of the following:
- The rate specified in the relevant provision of the Act.
- The rate or rates in force, which are the rates prescribed in the Finance Act.
- A rate of 20% (5% in case sections 194-O and 194Q are applicable).
Scope of section 206AA
Section 206AA of the Income Tax Act applies to all payments subject to Tax Deducted at Source (TDS), where the recipient needs to provide their PAN to the deductor. This includes payments like salaries, interest, professional fees, commissions, and rent. The section ensures that tax is deducted at a higher rate in the absence of PAN, promoting better tax compliance and reporting. It also applies to non-residents, requiring them to furnish PAN or face higher TDS rates. As long as taxpayers furnish their PAN to the payer at the time of payment and TDS deduction, the provisions of section 206AA do not apply, and higher TDS deduction at a higher rate is not applicable.
Also read: What is Long Term Capital Gain Tax
Why was Section 206AA implemented?
Section 206AA was introduced to enhance tax compliance, particularly for non-residents receiving payments from Indian entities. It requires a higher rate of TDS if a Permanent Account Number (PAN) is not provided. This regulation ensures taxes are collected at the source, discourages non-disclosure of PANs, and facilitates better tracking of cross-border transactions.
TDS rates with Form 15H and 15G
According to section 197A of the Income Tax Act 1961, the payee is also required to submit a declaration under Forms 15H and 15G for nil TDS deduction for nil or lower TDS deduction to the payer. Form 15H applies to individuals under the age of 60, while Form 15G applies to individuals above the age of 60. However, if you do not furnish your PAN card, the declaration will be deemed invalid, and higher TDS rates will be applied at the following rates:
- The rate specified in the relevant provision of the Act.
- The rate or rates in force which are the rates prescribed in the Finance Act.
- A rate of 20%.
Also read: What is Hindu Undivided Family
How does Section 206AA affect non-residents?
Non-residents must provide a PAN to avoid higher TDS rates on payments from Indian sources.
- Non-residents receiving payments from Indian entities are required to provide their Permanent Account Number (PAN).
- If a PAN is not furnished, the payer must deduct Tax Deducted at Source (TDS) at a higher rate.
- The applicable TDS rate is typically 20% or the rate specified under the relevant Double Taxation Avoidance Agreement (DTAA), whichever is higher.
- This rule applies to various types of payments, including:
- Interest
- Royalties
- Fees for technical services
- Other taxable amounts.
Applicability and non-applicability of section 206AA
Here is a detailed table with the applicability and non-applicability of section 206AA of the Income Tax Act:
| Applicability of section 206AA | Non-applicability of section 206AA |
| If section 206AA applies, the payee receiving a payment that is subject to TDS can submit an application for nil or smaller TDS deduction u/s 197 of the Income Tax Act. In some cases, the Assessing Officer may issue a certificate for the person submitting the application for TDS deduction at the designated TDS rates for the relevant and predetermined period. | The same results arise if the PAN of the payee is not rightfully attributed to them or is invalid. In such a case, a higher TDS deduction rate is applicable as per section 206AA. |
| However, it is mandatory that such certificates have the applicant's PAN and the correct PAN details at the time of application. If not, the application will be deemed invalid, and a higher TDS under section 206AA will be applied. | Since June 1, 2016, the Indian government has exempted foreign corporations and non-residents from the provisions of section 206AA of the Income Tax Act. Furthermore, u/s 194LC, the section doesn’t apply to interest payments on long-term bonds. |
| If you want to request the payer for a zero TDS deduction, you can submit a declaration under Form 15G (under the age of 60) and Form 15H (above the age of 60) u/s 197A. However, to avoid a TDS deduction at a higher rate, it is mandatory to attach your PAN to the declaration submitted through both Forms. | After the Finance Act 2016, the regulations under section 206AA for interest, royalties, fees for technical services provided to non-residents, and capital transfers were loosened. Furthermore, under Rule 37BC, foreign corporations and non-residents are not required to furnish their PAN cards if they disclose information such as their names, complete addresses, tax identity numbers, contact details, etc. |
Also read: Difference Between Income Tax Act and Direct Tax Code
Exemption under Section 206AA
Here are the exemptions under section 206AA of the Income Tax Act:
- If a taxpayer has paid interest on long-term bonds u/s 194LC to a non-resident.
- The Finance Act 2016 has provided relaxation in case of the applicability of section 206AA if payments are made to non-residents in the nature of interest, royalties, fees for technical services provided to non-residents, and capital transfers.
- Section 206AA provisions are exempted for non-resident payees, and they do not have to furnish their PAN card to the payer if they provide the following documents and details under Rule 37BC inserted vide Notification No. 53/2016):
- Name, contact number, email ID.
- Complete address in the resident country or specified territory outside India of which the payee is a resident.
- A certificate of the non-resident being a non-resident and residing in any other country or specified territory outside India which is issued by the government of that country or specified territory. Applicable only if that country’s or specified territory’s law allows the issuance of such a certificate.
- Tax Identification Number of the non-resident in the country or specified territory of residence. In case the government of a resident country or specified territory doesn’t assign such a number, then any number issued by the government on whose basis the non-resident is identified in the resident country or specified territory.
Section 206AA for NRIs
The following payments are not eligible under the provisions of section 206AA if made by non-residents:
- On paying royalties, fees for technical services provided to non-residents, capital transfers, and interest for long-term bonds u/s 194LC. This is when the non-resident Indian provides the following information to the Income Tax Department:
- Name, email ID, and contact information.
- Complete address in the country of residence or specified territory outside India.
- Tax Identification number or any other relevant identification number issued by the government of a resident country or specified territory outside India.
Also read: What is direct tax code
What are the implications of non-compliance with Section 206AA?
Non-compliance with Section 206AA can have far-reaching consequences for both the payer and the non-resident recipient. These implications include:
- Higher TDS rates: If a non-resident fails to provide a Permanent Account Number (PAN), the payer must deduct Tax Deducted at Source (TDS) at a higher rate, typically 20% or the rate defined in the applicable Double Taxation Avoidance Agreement (DTAA), whichever is greater. This increases the non-resident’s tax burden, reducing the net payment received.
- Penalties and interest: Payers who fail to deduct TDS at the mandated higher rate may face penalties and interest charges on the unpaid tax amount. The Income Tax Department may impose interest from the due date of deduction until the date the tax is actually paid. This can lead to significant financial strain if not resolved promptly.
- Disallowance of expenses: According to Section 40(a)(i) of the Income Tax Act, if tax deductible on an expense is not deducted or paid, that expense cannot be claimed as a deduction when calculating the payer's taxable income. This increases the payer’s taxable income and results in a higher tax liability.
- Heightened tax scrutiny: Non-compliance with Section 206AA may attract additional attention from tax authorities, leading to audits, inquiries, and investigations. This can disrupt business operations and cause reputational harm.
- Legal consequences: Persistent non-compliance or deliberate tax evasion can result in legal actions, including fines and other penalties as outlined in the Income Tax Act. In extreme cases, prosecution may follow, leading to severe legal and financial repercussions.
- Challenges in international transactions: For businesses frequently transacting with non-residents, non-compliance can complicate cross-border dealings. Excessive withholding taxes may lead to disputes with foreign partners or clients, potentially straining business relationships and impacting future collaborations.
Are there any exemptions or special cases under Section 206AA?
While Section 206AA sets strict rules for tax compliance, there are certain exemptions and special cases where higher TDS rates may not apply. Non-residents can avoid the elevated TDS rates for specific types of income, such as interest on long-term infrastructure bonds covered under Section 194LC, royalties, fees for technical services, and capital gains.
To avail of these exemptions, non-residents must provide alternative documentation, including their Tax Identification Number (TIN) and any other relevant details as required. These provisions help reduce the tax burden in qualifying cases and facilitate smoother transactions. However, it is important to note that these exemptions do not apply if the non-resident has a permanent establishment in India.
Also read: What is an inheritance tax
Section 206AA vs Section 206AB
The following table outlines the key differences between Section 206AA and Section 206AB:
Aspect |
Section 206AA |
Section 206AB |
Scope |
Applicable when the deductee fails to provide their PAN, provides an invalid PAN, or submits a PAN that does not belong to them. |
Applicable when the deductee has not filed their income tax return for the previous financial year and the total TDS or TCS during that year exceeds Rs.50,000. |
Higher rate |
The higher of:
|
The higher of:
|
Conclusion
Section 206AA of the Income Tax Act mandates that taxpayers receiving payments that are liable for TDS deduction must furnish their PAN cards to the payer. If they fail to do so, a higher TDS rate is applicable, and the payer is liable to deduct and deposit the higher TDS amount with the government. However, there are certain exemptions, mainly for non-residents, allowing them to not furnish their PAN cards if they provide certain documents or information to the Income Tax Department. Where you are a resident or a non-resident receiving or making a payment that is liable for TDS deduction, it is important to adhere to the provisions of section 206AA.
