Foreign companies to obtain PAN
What is the proposed amendment?
The Finance (No.2) Bill, 2009 proposes to insert section
206AA in the Income-tax Act, 1961. The proposed
section 206AA provides that every recipient is required
to furnish its Permanent Account Number [PAN] i.e. tax
registration number to the payer. If the payment attracts
withholding tax and PAN is not so furnished by the
recipient, tax is required to be withheld at the higher of
the following rates:
i) Rate specified in the relevant section1;
ii) Rates in force (rate specified in the Finance Act or
under the tax treaty);
iii) Rate of 20%.
In addition to the above, the income-tax authorities will
not entertain an application from the recipient for a
lower withholding tax rate. Moreover, the PAN is
required to be indicated in all correspondence, bills,
vouchers and other documents exchanged between the
recipient and payer.
When is it effective?
The amendment is proposed to apply to payments /
credits made on or after 1 April 2010.
What are the implications of the proposed
amendment for foreign companies?
The tax rate specified in the Finance Act for royalties
and fees for technical services is generally 10% (plus
applicable surcharge and education cess) of the gross
amount2. The tax treaties also typically provide for a tax
rate of 10% of the gross amount on royalties and fees
for technical services.
In many cases, foreign companies typically do not apply
for a PAN in India. In the absence of PAN,
notwithstanding the fact that a lower rate is provided
under the Finance Act or the tax treaty, on a literal
interpretation of the law, tax is required to be withheld
@ 20% or a higher rate3.
1
No specific rate is indicated in section 195 relating to payments to foreign companies
2
For agreements entered into on or after 1 June 2005, subject to satisfaction of prescribed conditions
3
The proposed provision has the effect of indirectly overriding the tax treaty, which is generally not in line with internationally accepted
principles
4
Foreign companies are required to inter alia file a return of income, undergo tax audit under section 44AB if turnover / gross receipts exceed
INR 4 million (business) / INR 1 million (profession) and comply with the transfer pricing provisions (including maintenance of documentation
and filing report in Form 3CEB)
If tax is withheld at a higher rate, what is the
option for foreign companies?
Foreign companies can file a return of income and claim
refund of the tax withheld in excess of the rate specified
in the Finance Act or the tax treaty. To file a return of
income, foreign companies will be required to obtain
PAN. Broadly speaking, the income-tax authorities have
time of two years from the end of the relevant financial
year (1 April to 31 March) to issue the refund.
How will the proposed amendment impact the
payer Indian companies?
In many contracts, an Indian company is required to
bear the foreign company’s income-tax liability in India.
Such a foreign company would typically be reluctant to
obtain a PAN and / or file an Indian income-tax return.
In this scenario, considering the provisions of the
proposed amendment and the grossing-up provisions,
the cost for the Indian companies would typically be
125% of the contracted amount.
What is the way forward?
! Initiate the process for obtaining PAN for foreign
group companies4.
! In contracts with unrelated foreign companies where
tax is to be borne by the company, the contracts
should stipulate that the foreign companies will
cooperate in obtaining PAN.
! In contracts with unrelated foreign companies where
tax is to be borne by them, the provisions of the
proposed section 206AA may be highlighted to ensure
that they are aware of the Indian tax requirements.
Are the provisions applicable to payments to
Indian entities as well?
Yes, the scope of the provisions of the proposed section
206AA covers payments to Indian residents as well.
Accordingly, the company may consider the following:
! Intimating the company’s PAN to all persons who
withhold tax from payments to the company.
! Obtaining PAN from all persons to whom payments
are made from which tax is required to be withheld.
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