TaxTMI 
TaxTMI 
Reforming PAN Compliance : Clause 397(2) of the Income Tax Bill, 2025 vs. Section 206AA of the Income Tax Act, 1961
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....on of the law, highlights the changes, and discusses the implications for residents, non-residents, deductors, and collectees. Objective and Purpose The primary objective behind Clause 397(2) is to ensure that every person who receives or pays any sum subject to tax deduction or collection at source (TDS/TCS) is properly identified through a valid PAN. This mechanism is critical to the Indian tax administration for the following reasons: * Traceability of Transactions: Mandating PAN ensures that all high-value or potentially taxable transactions are linked to a unique identifier, facilitating audit trails and reducing the scope for tax evasion. * Compliance Monitoring: The provision enables the tax authorities to monitor compliance with TDS/TCS provisions more effectively, as all related documentation must bear the PAN. * Deterrence: The imposition of higher tax deduction or collection rates in the absence of PAN serves as a deterrent against non-compliance and incentivizes taxpayers to obtain and furnish PAN. * International Transactions: With increasing cross-border flows, the provision also caters to non-residents, balancing the need for identification with practical r....
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....No. 2, 3 and 4); and (ii) any other payment subject to such conditions, as prescribed;" This sub-clause carves out exceptions for non-residents (other than companies and foreign companies), aligning with international tax practices and addressing practical difficulties faced by non-residents in obtaining PAN. (d) Exemption for Non-Residents Without Permanent Establishment "The provisions of clause (b)(ii) shall not apply to a non-resident who does not have permanent establishment in India..." This further relaxes the TCS regime for non-residents not having a permanent establishment (PE) in India, ensuring that only those with a significant presence are subject to the punitive TCS rates for non-furnishing of PAN. (e) Cap on TDS for Rent Payments "In respect of rent specified in section 393(1) [Table: Sl. No. 2(i)], if the tax is required to be deducted as per clause (b)(i), then such deduction shall not exceed the amount of rent payable for the last month of the tax year or the last month of the tenancy, as the case may be;" This provision caps the maximum TDS in rent cases, preventing excessive deduction that could otherwise arise due to high punitive rates. (f) Validity of....
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.... introduced in 2009, was a pioneering provision mandating PAN for all persons entitled to receive income subject to TDS. The salient features are: * Mandates PAN for all deductees; failure attracts TDS at the higher of (i) specified rate, (ii) rate in force, or (iii) 20% (with certain exceptions at 5%). * Declarations for non-deduction or lower deduction (u/s 197A) are invalid without PAN. * No certificate for lower/nil deduction (u/s 197) is granted without PAN. * Both deductor and deductee must indicate PAN in all documents. * Exemptions for non-residents (not companies or foreign companies) in respect of interest on long-term bonds and other prescribed payments. Comparison: * Clause 397(2) closely tracks Section 206AA, but with refinements. The punitive TDS rate is set at 20% (or 5% for certain payments), similar to Section 206AA. However, for TCS, Clause 397(2) prescribes a higher of twice the specified rate or 5%, capped at 20%, whereas Section 206AA is silent on TCS, as TCS was not originally covered. * Both provisions invalidate declarations/applications without PAN and require PAN disclosure in documentation. * Clause 397(2) provides more explicit relief fo....
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....ectees TDS only; applies to deductees Relaxation for non-resident deductees for specified payments Obligation Furnish valid PAN for TDS/TCS transactions Furnish PAN for TDS transactions Furnish specified details (if no PAN) for relief from higher TDS Consequence of Default TDS: Higher of specified rate, rate in force, 5% (for certain payments), 20% (others); TCS: Higher of twice specified rate or 5%, max 20% Higher of specified rate, rate in force, 20% (5% for 194-O/194Q) If details furnished, higher TDS does not apply Non-resident Exemption TDS: Exemption for interest on specified bonds and other prescribed payments; TCS: Exemption if no permanent establishment in India Exemption for interest on long-term bonds (194LC) and other prescribed payments Relaxation for interest, royalty, FTS, dividend, capital asset transfer payments if details are furnished Impact on Declarations/Certificates Declarations/applications invalid without PAN; no certificate granted Declarations invalid without PAN; no certificate granted Not directly addressed Documentation PAN to be quoted in all bills, vouchers, correspondence, and documents PAN to be quoted ....