Editor

Re: Make Section 206AA inapplicable to Non Residents

After 8 years of inaction/ drift, a number of mega scams and countless reported incidents of corruption at high echelons of Indian polity, the Government has now woken up and has initiated steps to stimulate economic growth, encourage FDI and remove misapprehensions from minds of foreign investors caused by the policy paralysis and various retrospective amendments by the Finance Act, 2012.

At the ground level, one provision which greatly inconveniences and irks Non-Residents is Section 206AA inserted with effect from 01-04-2010, requiring every person to obtain and furnish his PAN Number to the payers or otherwise, be ready to suffer TDS @ 20% irrespective of the actual rate of TDS applicable to the transaction either under the Tax Treaty or under various provisions of Incometax Act applicable to Non Residents. One fails to understand the rationale of making this provision applicable to Non-Residents.

 The Non-Residents, particularly those who do not have frequent transactions with India, are very hesitant to obtain PAN. Further, the procedure for obtaining PAN is very cumbersome and time consuming. In most transactions, the Non-Resident wants payment net of tax and, therefore, the burden of paying the tax @ 20% falls on the Indian Resident and it works out to 25% due to the application of Grossing up provision u/s 195A.

The Government has all the Information online about the Non-Resident payees, as the payer has to upload full details about all remittances in Form 15CA before making any remittance overseas. If the resident payer makes any mistake in deducting TDS from any remittance to a Non-Resident, the payment is liable to be disallowed u/s 40(a)(i) besides other consequences by way of recovery of tax short deducted, interest and penalty.

How many advanced countries have such harsh provisions? The FM should consider consequences for Indian MNCs and others, if India’s trading partners were to introduce provisions similar to Section 206AA in their Tax Laws.

If the Finance Minister really wants to create a business / investor / tax payer friendly environment in India, he should make Section 206AA inapplicable to Non-Residents. Such an action would remove a massive irritant and also reduce the cost of doing business with Non Residents.

Yours sincerely,

Tarun Singhal.