Firstly, this provision does not apply only to resident
payees, but also to non-residents and foreign companies which may not have a
presence in India. There are many foreign companies who are paid royalty or fees
for technical services by Indian companies, foreign companies otherwise not
having anything else to do with India. Even in such cases, the tax laws seem to
require such foreign companies to obtain a PAN, or else suffer a higher rate of
TDS. On a practical level, most foreign companies not having a presence in India
are reluctant to obtain a PAN in India, for fear of having to file tax returns
in India, or having further obligations on account of obtaining PAN, etc. Even
if they are willing to obtain a PAN, the procedural requirement of getting their
documents certified by the Indian consulate or embassy in their home country,
acts as a definite dampener and obstacle to their applying for a PAN.
Further, in many cases, the burden of the additional tax
would not fall upon the foreign companies but on the Indian payer companies,
since the foreign companies insist upon receiving their payments tax-free. One
understands that the purpose of ensuring that every payee has a PAN is to
facilitate tax credit under the electronic mode in the Tax Information Network.
In cases where the tax is borne by the Indian payee, is this purpose really
served or does it just add to the cost of the Indian companies?
So far as resident payees are concerned, the income tax
department seems to believe that everybody should have a PAN. In a way, the tax
department is seeking to counter its inefficiency in finding tax evaders through
this measure. Today, PAN is already rquired for most transactions, such as
opening of a bank account, opening of a demat account, subscription to mutual
funds above a limit, share applications above a limit, etc. However, there are
often cases where a person does not have a PAN, and he can give a declaration
instead. It is therefore possible that certain recipients may still not have a
PAN. In such cases, having a higher rate of TDS seems to be justified, to ensure
that such recipients of income are part of the tax net, and if they choose to
remain outside the tax net, they are penalised for it.
The problem however is in cases where the PAN is misstated,
and therefore appears to be of another person or to be invalid. Wherever human
efforts are involved, there are bound to be mistakes. Further, we have to accept
that a large part of our population is not yet fully literate or conversant with
English, and therefore unable to correctly provide the PAN. The presumption of
the tax authorities seems to be that every recipient of income is well trained,
knowledgeable and efficient. While this may be true in a large part for larger
businessmen in bigger cities, the same does not hold good for all depositors or
small businessmen in smaller towns or villages. Common errors can and should be
expected.
In such cases, the payee may be disproportionately penalised
for common clerical errors. While a taxpayer having taxable income can adjust
such excess deduction against his normal tax liability,
persons with income below the taxable limit may have to wait for their refunds,
and lose out in the process. The provision could therefore have the negative
effect of driving certain transactions into the black economy, to avoid these
problems.
The requirement of stating the PAN on all correspondence
between the payee and the payer also seems to be an overdose. Would it mean that
all businesses or depositors should now put their PAN on their letterheads?
Also, while the burden on the taxpayers and public is being
increased, the tax department has to realise that it does have a corresponding
obligation to improve the quality of its services. The process of giving tax
credit has to be improved and made error free, so that no person is deprived of
the legitimate tax payments made on his behalf. TDS payments lying in suspense
in the Tax Information Network have to be sorted out by follow up with the tax
deductor, and proper credit has to be given to the correct deductee. The process
of refunds has to be improved, and speeded up.
It may also be advisable for the tax department to restrict
the applicability of this provision only to resident payees, given the
underlying intention behind the provision. The documentation procedures for
obtaining PAN by foreign companies should also be simplified, so that obtaining
PAN is not regarded as a nuisance. A proper online facility needs to be provided
to all tax deductions free of charge to verify the correctness of the PAN. It is
only then that the provisions would work without causing undue hardship to many.
