Section 397 Compliance and reporting.

Income-tax Act, 2025

At a Glance

Clause 397 of the Income Tax Bill, 2025 (Old Version) sets out compliance and reporting obligations for persons required to deduct tax at source (TDS) or collect tax at source (TCS). It prescribes TAN application and quoting requirements, PAN furnishing obligations by payees/payers, default higher rates on failure to furnish PAN, payment and statement-filing duties, correction statement provisions, and procedures for government offices and payments to non-residents. The provision primarily affects deductors/collectors, payees/collectees, banks and government pay-and-accounts officers. Effective date or enactment timing: Not stated in the document.

Background & Scope

Statutory hooks: Clause 397 is within the chapter dealing with Deduction and collection at source. It interacts with sections 392-395 and cross-refers to section 393 and section 200 of the Income-tax Act, 1961 (as cited in specific places). The clause regulates (i) TAN allotment and mandatory quoting, (ii) PAN furnishing by persons entitled to receive or paying amounts subject to TDS/TCS, (iii) prescribed consequences for non-furnishing of PAN (higher deduction/collection rates), (iv) obligations for payment to Central Government and statement submission, (v) correction statement mechanism, and (vi) special reporting for payments to non-residents and government offices. Definitions: The text does not explicitly define "tax deduction and collection account number," "Permanent Account Number," "prescribed authority," or the "Board" beyond usage; those terms are used in their ordinary or cross-referenced statutory sense (Not stated in the document: formal definitions within the clause).

Statutory Provision Mode

Text & Scope

Coverage: Clause 397 covers persons who deduct or collect tax, employers u/s 392, persons receiving or paying amounts on which tax is deductible/collectible, certain banking companies/co-operative societies/public companies (for interest payments), government offices that credit sums without production of challan, and payers of amounts to non-residents (not being companies). Key ingredients/elements include:

• TAN application requirement for deductors/collectors who do not already have TAN (sub-clause (1)(a)).
• Mandatory quoting of TAN in all challans, statements, certificates and prescribed documents (sub-clause (1)(b)).
• Specified exemptions from TAN application duty based on certain table entries (sub-clause (1)(c)).
• PAN furnishing requirement by payees/collectees/payers (sub-clause (2)(a)).
• Consequences for failure to furnish PAN - higher deduction/collection rates laid down (sub-clause (2)(b)).
• Exceptions for certain non-residents (sub-clauses (2)(c) and (2)(d)).
• Limits on rent deduction for last month where higher rates apply (sub-clause (2)(e)).
• Invalidity of declarations/applications where PAN is not furnished and consequences for deductor/collector behaviour (sub-clauses (2)(f)-(g)).
• Payment of deducted/collected tax to the credit of the Central Government within prescribed time; obligation to deliver prescribed statements after payment (sub-clauses (3)(a)-(b)).
• Specific reporting to buyer/licensor/lessee u/s 394(1) (sub-clause (3)(c)).
• Obligations to furnish information on payments to non-residents (sub-clause (3)(d)).
• Government office reporting where payments are credited without production of a challan (sub-clause (3)(e)).
• Correction statement mechanism and time limit for correction (sub-clause (3)(f)).
• Special statements for banking companies/co-operative societies/public companies for certain small interest payments and Board's power to require statements from other payers (sub-clause (3)(g)).
• Liability of collectors who fail to collect tax to nonetheless pay the tax to the Central Government (sub-clause (3)(h)).

Interpretation

Legislative intent as evidenced by the text: to centralise and standardise administrative compliance for TDS/TCS through mandatory identification (TAN/PAN), to incentivise furnishing of PAN by imposing higher withholding/collection rates for non-furnishing, to ensure timely deposit of collected/deducted taxes and reporting to tax authorities and payees, and to provide procedural avenues to correct reported information. The clause employs express cross-references to related sections and to "prescribed" forms, times and manners, indicating that detailed operational rules are intended to be set by subordinate legislation or administrative rules (Not stated in the document: the precise content of prescribed forms/procedures or the Board's specific rules).

Exceptions/Provisos

Carve-outs and conditions provided in the text include:

• Exemption from TAN application for certain persons identified by table references (sub-clause (1)(c)).
• Non-application of the higher deduction rate to certain non-residents for specified long-term bond interest and other prescribed payments (sub-clause (2)(c)).
• Non-application of higher collection rates where the non-resident lacks a permanent establishment in India (sub-clause (2)(d)).
• Limit on deduction in rent cases to the rent payable for the last month of the tax year or tenancy (sub-clause (2)(e)).
• Board's discretion to require statements from payers beyond the specified banking/co-operative/public companies (sub-clause (3)(g)(ii)).

Illustrations

• Example 1: A new contractor required to deduct tax who has not been allotted a TAN must apply to the Assessing Officer for TAN within the prescribed time; until that allotment the contractor is still bound by PAN furnishing and deduction rules. (Factual specifics such as timelines and prescribed forms: Not stated in the document.)
• Example 2: A payee who fails to furnish PAN will face deduction at the higher of the statutory rate, the rates in force, 5% in certain specified cases, or 20% in other cases; the deductor must apply the higher rate when the declaration is invalid. (Thresholds and exact table references determine whether 5% or 20% applies: Not stated in the document.)
• Example 3: A bank paying small amounts of interest below the section 393(1) threshold must deliver a prescribed statement to the tax authorities within the prescribed time; the bank may file a correction statement within six years (as per this Old Version text) from the end of the tax year. (The specified period and the term "less than" or numerical value of threshold: Not stated in the document beyond the quoted text.)

Interplay

The clause explicitly cross-references sections 392-395 and section 393 (and table entries within section 393(1)), as well as section 200 of the Income-tax Act, 1961. It also contemplates "prescribed" forms, times and manners and invokes the "Board" to require additional statements. The clause therefore sits within a framework of subordinate rules and prior tax law provisions; specific interactions (e.g., conflict resolution, precedence) are not elaborated in the clause itself (Not stated in the document: detailed interplay mechanics with notifications, rules, or guidelines).

Differences between Document 1 (Section 397 of Income-tax Act, 2025) and Document 2 (Clause 397 of the Income Tax Bill, 2025 (Old Version))

• Table references in exemptions (sub-clause (1)(c)(i)): Document 1 references Table: Sl. No. 2(i), 3(i) and 6(ii); Document 2 references Table: Sl. No. 2(i), 3(i) and 5(ii).
  • Practical impact: a change in the table entry number alters which categories of payers are exempted from the application requirement for a tax deduction and collection account number (TAN). This may expand or narrow the exemption pool depending on the substantive content of the referenced table entries (Not stated in the document).
• Use of the term "valid" in relation to PAN (sub-clause (2)(a) and (2)(f)): Document 1 requires furnishing of a "valid Permanent Account Number"; Document 2 uses "Permanent Account Number" without expressly qualifying it as "valid."
  • Practical impact: adding "valid" in Document 1 imposes an express quality requirement, potentially allowing rejecting PANs that are invalid/defunct; Document 2 lacks that express quality threshold (interpretive effect only; enforcement practice Not stated in the document).
• Time limit for filing correction statements (sub-clause (3)(f)): Document 1 permits delivery of a correction statement "within two years from the end of the tax year in which such statement is required to be delivered under the said clauses or section 200 of the Income-tax Act, 1961"; Document 2 allows correction statements "within of six years from the end of the tax year" (the text in Document 2 contains a drafting error "within of six years").
  • Practical impact: changing the available correction window from six years (Document 2) to two years (Document 1) is a substantial procedural tightening - materially reduces time available to rectify reporting errors. The drafting error in Document 2 also creates uncertainty as to the exact limitation (clarification required, Not stated in the document).
• Threshold phrasing for interest statements (sub-clause (3)(g)(i)): Document 1 refers to "not exceeding the threshold limit mentioned in section 393(1) [Table: Sl. No. 5(ii) and (iii)]"; Document 2 uses "less than the amount mentioned in section 393(1) [Table: Sl. No. 5(ii) and (iii)]."
  • Practical impact: the difference between "not exceeding" and "less than" may affect inclusivity of boundary amounts (i.e., whether the exact threshold value is included). The practical effect depends on the numerical threshold (Not stated in the document).
• Minor drafting/terminology variations: Several small textual differences (e.g., "apply for allotment... to the Assessing Officer" vs "apply to the Assessing Officer for allotment..."; "amount collected" vs "sum collected") appear.
  • Practical impact: largely stylistic, unlikely to alter substantive meaning; however, drafting precision may affect interpretation in marginal cases (Not stated in the document).
• Reference to section 200 of the Income-tax Act, 1961: Document 1 expressly links the correction period to statements required u/s 200 of the 1961 Act; Document 2 does not.
  • Practical impact: Document 1 provides explicit cross-reference to prior law, indicating intended interplay; Document 2 lacks that linkage which may create ambiguity about the applicable correction window for statements made u/s 200 (Not stated in the document).

Practical Implications

• Compliance and risk areas: Deductors/collectors must ensure timely TAN application, mandatory TAN quoting, PAN collection and verification, correct application of higher rates where PAN is not furnished, timely deposit of deducted/collected sums, and accurate statement filing. Failure to collect tax does not absolve the collector from liability to pay the tax (sub-clause (3)(h)).
• Record-keeping/evidence: The text implies the need to retain records of PAN/PAN declarations, TAN allotment communications, challans evidencing payment to Central Government, statements filed and any correction statements. Specific retention periods and formats are left to prescription (Not stated in the document).

Key Takeaways

• Clause 397 mandates TAN allotment and quoting obligations for deductors/collectors and imposes PAN furnishing duties on payees/payers.
• Non-furnishing of PAN triggers withholding/collection at higher specified rates (including a 20% backstop), with specific exceptions for some non-residents and certain interest payments.
• Deductors/collectors must deposit tax to the Central Government within prescribed times and file prescribed statements; government offices have parallel reporting duties when challans are not produced.
• A correction statement procedure exists, with a time limit (Old Version text specifies six years, though the clause contains a drafting anomaly in wording).
• Banks and similar institutions have special reporting duties for small interest payments; the Board may extend reporting requirements to other payers.
• Collectors who fail to collect tax remain liable to pay the tax to the Central Government.
• Many operational details (forms, timelines, verification methods) are left to be prescribed; those prescriptions will materially affect compliance practice (Not stated in the document: the content of those prescriptions).

Full Text:

Section 397 Compliance and reporting.