The long-pending demand to exempt non-resident Indians from furnishing Permanent Account Number (PAN) in India to avail lower withholding tax on payments has finally been met by the government.
The Central Board of Direct Taxes (CBDT) has notified the rules providing that provisions of section 206AA should not apply for payments of interest, royalty, fees for technical services and transfer of capital assets.
Section 206AA of the Income Tax Act requires a non-resident to furnish PAN to avail lower withholding rate. However, the lower withholding rate may differ from country-to-country based on the treaty provisions. However, as per the Income Tax Act the (lower withholding tax) rate is 10.506% (inclusive of cess). In absence of a PAN, tax was withheld at the rate of 20%.
Now a non-resident can avail lower tax rates if he/she furnishes prescribed documents and details to payer. The details to be submitted include email ID, contact number, address of resident country and Tax Identification Number of the deductee in the country or specified territory of his residence.
Tax experts and business communities have always maintained that requirement of PAN for non-resident was unfair as it did not consider the treaty benefit.
According to Jiger Saiya, partner-direct tax, BDO India, with the relaxation in the rule, the undue hardship or practical difficulties faced by non-residents such as obtaining PAN for one-off transaction with Indian party to avoid higher withholding will be reduced to a great extent. "This would bring relief to Indian payers who were required to remit payments net of tax and thus bear a burden on account of grossing up at a higher rate," he says.
Earlier in absence of PAN, no TDS certificates could be generated and thus apart from suffering a higher withholding, the non-residents would also face difficulty in claiming tax credit in their country of residence.
"The rules notified were much awaited and would help closure of transactions which were held up because of lack of clarity on the documents required to avoid 20 per cent non-creditable withholding tax," says Amit Maheshwari, managing partner, Ashok Maheshwary & Associates.
It is to be reminded that the RV Easwar Committee on simplification of tax law had made a recommendation to relax this particular provision of the Income Tax Act.
In its recommendation, the committee had said that "this provision (deduction at higher rate in absence of PAN) has proved to be an impediment in terms of ease of business, as many non-residents prefer not to do business with Indian residents, if obtaining of PAN is insisted from them."
The committee had recommended that it should suffice if a non-resident furnishes to the deductor his tax identification number (instead of PAN) in the country of his residence.