Clause 397 Compliance and reporting.

Income Tax Bill, 2025

Introduction

Clause 397(2) of the Income Tax Bill, 2025 introduces a comprehensive framework governing the furnishing of the Permanent Account Number (PAN) by recipients or payers in cases where tax is deductible or collectible at source. This provision, which is integral to the compliance and reporting regime under the new Bill, is the functional successor to Section 206AA of the Income Tax Act, 1961. The clause, in conjunction with the existing Section 206AA and Rule 37BC of the Income-tax Rules, 1962, demonstrates the legislative intent to tighten tax administration, ensure traceability, and curb tax evasion by enforcing robust identification requirements at the source of income. This commentary provides a detailed analysis of Clause 397(2), its objectives, core provisions, practical implications, and contrasts it with the established regime u/s 206AA and Rule 37BC. The analysis explores the evolution 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 reliefs to avoid undue hardship or double taxation.

This legislative intent is consistent with the policy considerations underlying Section 206AA and the subsequent relaxations provided u/r 37BC, which sought to address practical difficulties faced by non-residents.

Detailed Analysis of Clause 397(2) of the Income Tax Bill, 2025

Clause 397(2) is structured to address various scenarios involving the requirement to furnish PAN and the consequences of non-compliance. The key sub-clauses and their implications are analyzed below:

(a) Mandatory Furnishing of PAN

"Every person, entitled to receive any amount on which tax is deductible or, paying any amount on which tax is collectible, shall furnish his valid Permanent Account Number to the person responsible for deducting or collecting tax;"

This sub-clause imposes an unequivocal obligation on both deductees (recipients of income) and collectees (payers of amounts subject to TCS) to furnish their PAN to the deductor or collector. This is a significant compliance requirement, ensuring that every transaction under the TDS/TCS regime is mapped to a PAN.

(b) Consequences of Non-Furnishing of PAN

"In case of failure to comply with provisions of clause (a)- (i) tax be deducted at the higher of the following rates- (A) at the rate specified in the relevant provision of this Act; or (B) at the rate or rates in force; or (C) at the rate of 5% where tax is required to be deducted u/s 393(1) [Table: Sl. No. 8(ii) or 8(v)]; or 20% in any other case; (ii) tax shall be collected at the higher of the following rates, not exceeding 20%-- (A) at twice the rate specified in the relevant provision of this Act; or (B) at the rate of 5%;"

This clause lays down the punitive rates for failure to furnish PAN:

• For TDS: The higher of (a) the specified rate, (b) the rate in force, (c) 5% (for certain payments), or (d) 20% (in other cases).
• For TCS: The higher of (a) twice the specified rate or (b) 5%, but capped at 20%.

This structure mirrors and expands the deterrent mechanism found in Section 206AA, with specific lower rates for certain transactions, reflecting a nuanced approach.

(c) Exemptions for Non-Residents

"The provisions of clause (b)(i) shall not apply to a non-resident, not being a company or a foreign company in respect of- (i) payment of interest on long-term bonds as specified in section 393(2) (Table: Sl. 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 Declarations and Applications Without PAN

"If a person does not furnish his Permanent Account Number in- (i) any declaration u/s 393(6) or 394(2), then such declaration becomes invalid; (ii) any application made under provisions as per section 395(1) or (3), then no certificate under such provisions shall be granted;"

This ensures that all declarations for non-deduction or lower deduction, as well as applications for certificates, are valid only if accompanied by PAN.

(g) Consequence of Invalid Declarations

"If any declaration becomes invalid under clause (f)(i), then the deductor or collector shall deduct or collect tax as per the provisions of clause (b)(i) or (ii) as the case may be;"

This provides for automatic application of higher TDS/TCS rates upon invalidity of declaration due to non-furnishing of PAN.

(h) PAN Disclosure in Documentation

"The deductee or collectee shall furnish his Permanent Account Number to the deductor or collector, as the case may be, and the same shall be indicated in all bills, vouchers, correspondence and other documents which are sent to each other."

This ensures that all transactional documents between the parties carry the PAN, enhancing traceability.

Practical Implications

The implications of Clause 397(2) are multifold:

• For Deductees/Collectees: The obligation to furnish PAN is absolute. Failure results in higher TDS/TCS, causing cash flow issues and possible denial of credit for excess tax deducted/collected.
• For Deductors/Collectors: The duty to deduct/collect at higher rates in the absence of PAN is strict. Failure to comply may result in disallowance of expenses, interest, and penalties under other provisions.
• For Non-Residents: The carve-outs for certain non-residents (especially those without a PE in India or in specified cases) provide relief, reducing compliance burden and aligning with international tax norms.
• For Tax Administration: The provision enhances the ability to track high-value or cross-border transactions, but also imposes administrative burdens in processing declarations, certificates, and compliance checks.
• For Businesses: The requirement to collect and verify PAN for all transactions increases compliance costs and necessitates robust internal processes.

Comparative Analysis with Section 206AA and Rule 37BC

1. Section 206AA: Key Features and Comparison

Section 206AA, 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 for non-residents without PE in India under TCS, a feature not directly addressed in Section 206AA.
• The cap on TDS for rent payments is a new addition in Clause 397(2), providing specific relief not found in Section 206AA.

2. Rule 37BC: Relaxation for Non-Residents

Rule 37BC was introduced to mitigate the hardship faced by non-residents in obtaining PAN, particularly for payments such as interest, royalty, fees for technical services, dividend, and capital gains. The key features are:

• Section 206AA does not apply to non-residents (not being a company or a foreign company) for specified payments if they furnish prescribed details (name, contact, address, tax residency certificate, tax identification number, etc.).
• If provisions of Section 139A (requirement to obtain PAN) do not apply, Section 206AA is also inapplicable.

Comparison:

• Clause 397(2)(c) and (d) incorporate the spirit of Rule 37BC by exempting non-residents (not companies or foreign companies) from higher TDS/TCS rates for certain payments or where there is no PE in India.
• However, Clause 397(2) does not explicitly require the furnishing of alternate documents as in Rule 37BC, but presumably, such requirements may be prescribed in the rules under the new Act.
• The approach under the Bill is more streamlined, incorporating the relaxation directly into the statute rather than relying solely on delegated legislation (rules).

3. Key Differences and Developments

• Expansion to TCS: Clause 397(2) explicitly covers both TDS and TCS, whereas Section 206AA was initially focused on TDS.
• Relief for Non-Residents: The Bill directly incorporates exemptions for non-residents in the main provision, rather than relying on rules for relaxation. This provides greater certainty and clarity.
• Specific Caps and Rates: The new provision introduces caps (e.g., for rent) and differentiated rates for certain payments, reflecting a more calibrated approach.
• Procedural Clarity: Clause 397(2) is more detailed in specifying the consequences of invalid declarations and the requirement for PAN disclosure in documentation.

4. Comparative Table: Clause 397(2) vs. Section 206AA and Rule 37BC

Ambiguities and Potential Issues

While Clause 397(2) is comprehensive, certain ambiguities and practical issues may arise:

• Definition of "Permanent Account Number": The provision refers to a "valid" PAN, but does not elaborate on what constitutes validity (e.g., whether a PAN that is not linked to Aadhaar is valid).
• Scope of Exemptions for Non-Residents: The phrase "any other payment subject to such conditions, as prescribed" leaves room for further relaxation by way of rules, but may create uncertainty until rules are notified.
• Procedural Requirements: The provision anticipates that rules will prescribe the manner and form for compliance, but until these are notified, stakeholders may face uncertainty.
• Overlap with Other Provisions: The interaction with provisions for lower/nil deduction (e.g., Section 197 equivalent under the new Act) may require further clarification to avoid disputes.

Practical Implications for Stakeholders

• Businesses and Deductors: Need to update systems to ensure PAN is collected, verified, and recorded for all payees/collectees. Failure may result in higher TDS/TCS and potential disputes with deductees.
• Non-Residents: Should assess whether they fall within the exemptions and, if so, ensure that the prescribed details/documents are furnished to avoid higher TDS/TCS.
• Tax Authorities: Must update guidance, forms, and compliance procedures to reflect the new requirements and exemptions.
• Legal Advisors: Will need to interpret the new provisions and advise clients on compliance, particularly in cross-border transactions and cases involving complex payment structures.

Comparative Analysis with International Practice

The Indian approach to mandating PAN for TDS/TCS purposes is comparable to global trends where tax identification numbers (TIN) are used to track and verify taxable transactions. However, the Indian regime is notable for:

• Stringency: The punitive rates for non-furnishing of PAN/TIN are relatively high compared to many jurisdictions.
• Relief for Non-Residents: The carve-outs for non-residents, especially those without a PE, align with OECD principles to prevent excessive withholding in cross-border contexts.
• Documentation Requirements: The requirement for PAN in all documents and the invalidation of declarations/applications without PAN is stricter than in many countries, reflecting the Indian tax administration's emphasis on traceability.

Conclusion

Clause 397(2) of the Income Tax Bill, 2025 represents an evolution of the Indian tax compliance framework, building upon the foundation laid by under Section 206AA and the relaxations provided under rule 37BC. The provision maintains the core objective of ensuring robust identification of taxpayers and traceability of transactions, while introducing refinements to address practical difficulties, especially for non-residents. The explicit coverage of TCS, the nuanced approach to rates and caps, and the direct incorporation of exemptions reflect a maturing legislative approach. For taxpayers, the provision underscores the criticality of obtaining and furnishing PAN in all relevant transactions. For non-residents and cross-border transactions, the built-in exemptions and anticipated rules provide relief but also necessitate careful compliance with documentary requirements. The tax administration, in turn, is equipped with a more effective tool for enforcing compliance and combating evasion. As the new regime is implemented, further clarity through rules and administrative guidance will be essential to address residual ambiguities. Judicial interpretation may also play a role in resolving disputes, particularly in cases involving the interaction of these provisions with treaty obligations and international tax principles.

Full Text:

Clause 397 Compliance and reporting.