JULY 31, 2009

By TIOL Edit Team

THE Finance Bill, 2009, which is all set to be enacted, is going to be remembered for a long time for the historic reform to make PAN-based transaction system mandatory. The ground reality is that our TDS system is going to be Unique Identification Number (UTN) based architecture for allowing tax credit to deductee. Since UTN is being seen as the panacea for all the ills of the present TDS system, the CBDT has further widened the coverage of PAN. In this Budget, even non-residents have not been spared from the need to quote PAN or penal rate of 20% TDS will be applicable in all such cases.

However, one interesting fall-out of all these changes is going to be a scenario of multiple PAN for non-residents. How? Let's look at the facts and then their implications. PAN has become a mandatory document even for non-residents. Such a change has been done in order to plug the loopholes in the TDS regime and help deductors claim their tax credit correctly. The intention is noble and fine. But the implementation of such an intention may create a funny situation for the Department unless a quick solution is worked out. Given the fact that the non-resident deductee may not be interested in getting PAN or getting TDS at a lower rate since his net receivables will be fixed in the contract itself. However the deductor, to avoid his extra burden on him to deduct tax at 20% and gross it up, will be interested in the non-resident getting a PAN. In the process, the deductors will try to act as agents of non-resident and will obtain PAN on behalf of non-resident ( with or without their consent ). In the process different deductors in India having transactions with a single non-resident assessee in the same year or in different years will obtain PAN in the name of each such deductor acting as agent of the very same non-resident. In short, the same non-resident will have multiple PAN obtained by different deductors who acted as their agents at different points of time. Whether this will defeat the very purpose of PAN which is going to be instrumental in the general of Unique Identification Number (UTN) in TDS Challans?

Let's now take a look at another unintended implication of this new TDS system. We all know that while negotiating foreign contracts with multinational giants, our Indian companies are at the receiving end and do not have much bargaining power. In most of such contracts, the negotiation will end up in fixing the net amount payable to the non-resident who in turn will tell the Indian company that Indian taxation on such transaction is the 'unwanted baby' of the Indian company ie. Payer. In the process, the Indian company will gross up tax liability in India and pay the negotiated amount to the non-resident. Thus if the liability to deduct tax at source gets increased on account of non-quoting of PAN, it will only increase the liability of the Indian company and will only affect their profits. This will not have any effect on the deductee ie. Non-resident.

Another weird implication of the mandatory PAN-quoting is going be the fact that foreign exchequers may suffer loss on account of excess revenue collected by India. For furnishing of PAN, if TDS is made at 20% on transactions with non-residents, such non-residents in their return will claim that such transactions have already suffered 20% tax in India. If the tax rate in their respective resident country is more than 20%, then the excess part alone will be taxed in such countries. Thus such countries will be suffering at the cost of Indian taxation.

True, treasuries in many countries may suffer but may not earn much sympathy from the Indian policy makers as their own treasury has fallen victim to their absent-mindedness or call it 'negligence'! Even if we cannot do much for overseas treasuries, we should do something for our own exchequer by amending the Sec 260A of the I-T Act. Let's wait and watch what solution the North Block honchos may work out to wriggle out of this sticky situation!

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