Clause 397 Compliance and reporting.

Income Tax Bill, 2025

Introduction

Clause 397(2) of the Income Tax Bill, 2025 and Section 206CC of the Income Tax Act, 1961 represent pivotal statutory provisions within the Indian tax framework, specifically addressing the compliance and reporting requirements concerning the Permanent Account Number (PAN) in the context of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS). These provisions are designed to ensure robust tax compliance, improve traceability of transactions, and curb tax evasion by mandating the furnishing of PAN by deductees and collectees, and prescribing higher rates of TDS/TCS in the event of non-compliance.

This commentary provides a detailed and comparative analysis of Clause 397(2) and Section 206CC, examining their objectives, key provisions, practical implications, and the legal and policy rationale underlying their enactment. The analysis further explores the similarities, differences, and potential issues that may arise under the new legislative regime proposed in the Income Tax Bill, 2025.

Objective and Purpose

The primary legislative intent behind both Clause 397(2) and Section 206CC is to enforce the quoting and furnishing of PAN in all transactions where tax is required to be deducted or collected at source. The rationale is twofold: first, to enhance the transparency and auditability of financial transactions, and second, to ensure that the tax authorities are able to link TDS/TCS credits with the correct taxpayer, thereby facilitating accurate tax assessments and reducing the scope for tax evasion.

Historically, the absence or incorrect quoting of PAN has led to significant challenges for the tax administration, including difficulties in tracking TDS/TCS credits, mismatches in tax returns, and the proliferation of unaccounted income. The policy response has been to introduce stringent measures, including higher rates of TDS/TCS for non-furnishing of PAN, to incentivize compliance.

Section 206CC, introduced by the Finance Act, 2017, was a direct response to these challenges, focusing specifically on TCS transactions. Clause 397(2) of the Income Tax Bill, 2025 builds upon and seeks to consolidate these compliance requirements, extending them to both TDS and TCS, with certain modifications and clarifications.

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

1. Scope and Applicability

Clause 397(2) is broadly applicable to all persons entitled to receive any amount on which tax is deductible (deductees) or paying any amount on which tax is collectible (collectees). It imposes a mandatory obligation on such persons to furnish their valid PAN to the person responsible for deducting or collecting tax. The provision is overriding in nature, operating "irrespective of anything contained in any other provision of this Act."

2. Consequences of Non-Furnishing of PAN

Sub-clause (b) of Clause 397(2) prescribes stringent consequences for failure to furnish PAN:

• For TDS: Tax shall be deducted at the higher of the following rates:
  • At the rate specified in the relevant provision of the Act;
  • At the rate or rates in force;
  • 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
  • At the rate of 20% in any other case.
• For TCS: Tax shall be collected at the higher of:
  • Twice the rate specified in the relevant provision of the Act; or
  • At the rate of 5%.

  However, the rate of TCS under this provision shall not exceed 20%.

3. Exemptions and Carve-outs

Certain exemptions are carved out for non-residents:

• TDS Exemption: The higher TDS rate for non-furnishing of PAN does not apply to non-residents (other than companies or foreign companies) in respect of:
  • Payment of interest on long-term bonds as specified in section 393(2) (Table: Sl. No. 2, 3, and 4); and
  • Any other payment subject to prescribed conditions.
• TCS Exemption: The higher TCS rate does not apply to non-residents who do not have a permanent establishment in India (including a fixed place of business).

4. Special Provision for Rent

For rent payments specified in section 393(1) [Table: Sl. No. 2(i)], if tax is required to be deducted at higher rates due to non-furnishing of PAN, the deduction shall not exceed the rent payable for the last month of the tax year or the last month of tenancy, whichever is applicable. This provision prevents the tax deduction from exceeding the total liability of the deductee.

5. Impact on Declarations and Applications

Clause 397(2)(f) provides that:

• If PAN is not furnished in any declaration u/s 393(6) or 394(2), the declaration becomes invalid.
• If PAN is not furnished in any application u/s 395(1) or (3), no certificate shall be granted under those provisions.

If a declaration becomes invalid, the deductor or collector must deduct or collect tax at the higher rates prescribed.

6. Obligation to Quote PAN in Documentation

Deductees and collectees must furnish their PAN to the deductor or collector, and both parties must indicate the PAN in all bills, vouchers, correspondence, and other documents exchanged.

7. Key Differences and Additional Features

While Clause 397(2) consolidates and expands upon the existing requirements u/s 206CC, it also introduces certain new features:

• It covers both TDS and TCS, whereas Section 206CC is limited to TCS.
• It provides for a specific cap on TDS in the context of rent payments.
• It introduces a mechanism for invalidation of declarations and denial of certificates for non-furnishing of PAN.
• It prescribes a more detailed regime for documentation and reporting.

Practical Implications

1. For Businesses and Collectors/Deductors

Both provisions place a significant compliance burden on businesses and other entities responsible for deducting or collecting tax. They must ensure:

• PAN is obtained and verified for every deductee/collectee.
• Higher rates of TDS/TCS are applied in cases of non-furnishing or invalid PAN.
• Proper documentation and reporting to tax authorities, including quoting PAN in all relevant documents.
• Systems are in place to handle declarations and applications, ensuring PAN is furnished, failing which declarations are invalidated or certificates denied.

2. For Individuals and Non-Residents

Individuals who fail to furnish PAN face the prospect of higher TDS/TCS, which can significantly impact their cash flows and result in loss of credit for taxes paid. Non-residents, in specific circumstances, are exempted, but must ensure they meet the conditions for such exemption.

3. For Tax Administration

These provisions enhance the ability of the tax administration to track transactions, match TDS/TCS credits, and identify cases of non-compliance. The invalidation of declarations and denial of certificates for non-furnishing of PAN strengthens the enforcement mechanism.

Comparative Analysis Section 206CC of the Income-tax Act, 1961

1. Scope and Coverage

• Section 206CC: Applies only to TCS transactions (i.e., tax collectible at source).
• Clause 397(2): Applies to both TDS (tax deductible at source) and TCS, thereby broadening the compliance net.

2. Rate Structure

• TCS: Both provisions require tax to be collected at the higher of twice the specified rate or 5%, subject to a maximum of 20%.
• TDS: Clause 397(2) introduces a nuanced rate structure for TDS:
  • At the rate specified in the Act;
  • At the rate or rates in force;
  • At 5% (for certain payments u/s 393(1));
  • At 20% in other cases.
  This is a significant departure from Section 206CC, which does not address TDS.

3. Exemptions for Non-Residents

• Section 206CC: Exempts non-residents without a permanent establishment in India.
• Clause 397(2): Provides a more detailed exemption regime, distinguishing between TDS and TCS, and specifying additional cases (e.g., interest on long-term bonds).

4. Treatment of Declarations and Applications

• Both provisions invalidate declarations or deny certificates if PAN is not furnished, but Clause 397(2) explicitly references more types of declarations/applications and provides a direct linkage to higher TDS/TCS in such cases.

5. Documentation and Reporting

• Both require PAN to be quoted in all relevant documents, but Clause 397(2) is more explicit and comprehensive in its coverage, reflecting a more modernized approach to compliance and reporting.

6. Special Provisions

• Clause 397(2) introduces a special cap on TDS on rent, which is not present in Section 206CC.
• Clause 397(2) also addresses the scenario where declarations become invalid and mandates the deductor/collector to deduct/collect tax at higher rates, a feature only implied in Section 206CC.

7. Treatment of Invalid PAN

• Section 206CC specifically deems invalid or incorrect PAN as equivalent to non-furnishing; Clause 397(2) does not explicitly mention this, but such treatment may be implied or addressed in rules.

8. Legislative Evolution and Modernization

• Clause 397(2) reflects an attempt to modernize and harmonize the compliance regime for both TDS and TCS, consolidating multiple provisions and clarifying ambiguities present in the legacy framework.

9. Comparative Table

Potential Issues and Ambiguities

• Interpretational Challenges: The detailed rate structure and multiple carve-outs in Clause 397(2) may give rise to interpretational issues, particularly regarding the applicability of exemptions and the calculation of higher rates.
• Overlap and Transition: The transition from Section 206CC to Clause 397(2) (if the Bill is enacted) may create overlaps or confusion regarding ongoing transactions and compliance obligations.
• Administrative Burden: The increased documentation and reporting requirements may impose additional administrative burdens on businesses, especially SMEs and entities dealing with a large number of transactions.
• Non-Resident Compliance: The practical application of exemptions for non-residents, especially in cross-border transactions, may require further clarification and robust documentation to prevent misuse or litigation.

Conclusion

Clause 397(2) of the Income Tax Bill, 2025 represents a significant evolution of the statutory framework governing compliance and reporting for TDS and TCS in India. By consolidating and expanding the existing requirements under section 206CC, the new provision seeks to create a more comprehensive, transparent, and enforceable regime. The imposition of higher rates for non-furnishing of PAN serves as a strong deterrent against non-compliance, while the detailed exemptions and clarifications reflect a nuanced approach to balancing compliance with practical realities, especially in the context of non-resident transactions.

While the new regime promises greater effectiveness in tax administration, it also brings with it increased compliance obligations and potential interpretational challenges for taxpayers and businesses. The success of Clause 397(2) will depend on clear administrative guidance, robust technological infrastructure, and ongoing stakeholder engagement to ensure smooth implementation and minimal disruption to legitimate business transactions.

Full Text:

Clause 397 Compliance and reporting.