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

2. 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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3. 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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4. 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 /16/2016-TPL) dated June 24, 2016 to specify the conditions to avail the aforesaid relaxation.
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5. 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, 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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