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  7. Section 206AA: TDS on Payments Made to Non-Residents

Section 206AA: TDS on Payments Made to Non-Residents

Updated on: 04 Nov, 2024 01:11 PM

Section 206AA of the Income Tax Act regulates the TDS on payments made to non-residents. In the globalization era, Section 206AA is an important provision to regulate taxation in cross-border transactions.

This section mandates a higher rate of TDS when non-residents fail to furnish their Permanent Account Number (PAN) to the payer. This ensures effective tracking and taxation of international transactions, minimizing tax evasion.

Businesses and individuals involved in cross-border transactions must understand Section 206AA.

Contents

Updates

The 2023 Union Budget proposes a redefined "specified person" in the Income Tax Act. This amendment aims to relieve non-filers, including non-residents without a permanent establishment in India and individuals not required to submit income tax returns for the relevant assessment year. They will no longer face higher tax deductions at source under sections 206AB and 206CCA.

What is Section 206AA of the Income Tax Act?

If a person is due to receive income that requires tax to be deducted at source, they must provide their PAN to the deductor. Failure to provide PAN will result in tax being deducted at a higher rate as specified under Section 206AA.

Rate of TDS

Failure to provide the Permanent Account Number (PAN) to the payer results in the recipient incurring Tax Deducted at Source (TDS) at the higher of the following rates:

  • The rate specified in the relevant provision of the Income Tax Act.
  • The rate currently in force as prescribed in the Finance Act (specifically the Finance Act of 2019 for the financial year 2019-20).
  • A fixed rate of 20%.

Applicability in the case of reduced deduction under Section 197.

  • A recipient of payments subjected to Tax Deducted at Source (TDS) can apply for reduced or no TDS deduction under Section 197 of the Income Tax Act.
  • The Assessing Officer (AO) can issue a certificate for TDS deduction at specific rates for a predetermined period, but this certificate becomes invalid without the provided Permanent Account Number (PAN) or with an incorrectly entered PAN.
  • In such cases, where the PAN is missing or inaccurate, the benefits of a lower or zero deduction become void, and TDS rates are determined under Section 206AA.
  • Recipients can submit a declaration to their payer under Section 197A to opt for a zero-tax deduction. Form 15G is for individuals below the age of 60, while Form 15H is for individuals over the age of 60.
  • Failure to provide the PAN in these declarations results in the withholding of TDS at higher rates. This highlights the critical role of accurate PAN details and timely submission of declarations in securing the intended tax benefits.

Under the provisions of Section 206AA, any declaration made without the inclusion of the Permanent Account Number (PAN) of the declarant is considered invalid. In cases where a recipient submits a declaration without their PAN, the Tax Deducted at Source (TDS) or tax is to be deducted at higher rates, which are as follows:

  • The rate is determined by the relevant provision of the Act.
  • The rate or rates currently in force, as prescribed in the Finance Act.
  • The fixed rate of 20%.

Non-Applicability of Section 206AA

Cases that fall outside the purview of the provisions of Section 206AA encompass the following scenarios:

  • Similar consequences arise if the PAN of the payee is either invalid or not rightfully attributed to them, resulting in the application of tax deduction rates as stipulated by Section 206AA.
  • Notably, since June 1, 2016, non-residents and foreign corporations have been exempted from the ambit of Section 206AA of the Income Tax Act.
  • Interest payments on long-term bonds, governed by Section 194LC, also fall outside the scope of Section 206AA.
  • The Finance Act of 2016 brought about a relaxation in the regulations under Section 206AA for royalties, interest, capital transfers, and fees for technical services provided to non-residents.
  • Foreign corporations and non-resident individuals are granted an exemption from the PAN requirement under Rule 37BC if they disclose essential details such as their names, contact information, complete addresses, and tax identity numbers. This provision enables a streamlined process for non-residents to engage in financial transactions without the mandatory PAN obligation.

Payments exempted to Non-Resident Indians (NRIs) under Section 206AA of the Income Tax Act, 1961

Certain payments to Non-Resident Indians (NRIs) receive exemptions under Section 206AA, notably including:

  1. Payment of interest on long-term bonds in accordance with Section 194LC.
  2. Exemptions for payments such as interest, royalties, or fees for technical services.
  3. Exemptions for payments made for the transfer of capital assets.

Frequently Asked Questions

Q- Is 206AA applicable to non-residents?

Introduced in FY 2010-11, Section 206AA mandates that any taxpayer receiving taxable income must provide their PAN to the income payer. This requirement applies to both residents and non-residents.

Q- What is the difference between 206AA and 206AB?

Section 206AA applies when an individual fails to provide their PAN, while Section 206AB comes into effect when a person has not filed returns for the past two years.

Q- Can non-residents request an extension or exemption from the PAN requirement under certain circumstances specified in Section 206AA?

Non-residents may request an extension or exemption from the PAN requirement under certain circumstances specified in Section 206AA by following the prescribed guidelines and procedures outlined by the Income Tax Department, subject to the fulfillment of the specified conditions.

Q- How does Section 206AA impact foreign corporations engaging in business transactions with Indian entities?

Foreign corporations engaging in business transactions with Indian entities need to adhere to the requirements of Section 206AA, which mandates the furnishing of the PAN to ensure compliance with the TDS provisions.

Q- What is the procedure for applying for a lower TDS rate under Section 197 for non-residents affected by the provisions of Section 206AA?

Non-residents affected by the provisions of Section 206AA can apply for a lower TDS rate under Section 197 by submitting the necessary application and documents to the Assessing Officer, as per the prescribed procedures outlined in the Income Tax Act.

Q- Are there any specific forms or documents that non-residents need to submit to avail themselves of the provisions or exemptions under Section 206AA?

Non-residents may be required to submit specific forms or documents, such as Form 15G or Form 15H, depending on their age category, to avail themselves of the provisions or exemptions under Section 206AA.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.