Whether PAN is mandatory for Non Resident Payment?

Background – Whether PAN is mandatory for Non Resident:

After Introduction of Section – 206AA in Income Tax Act which is imposing mandatory requirement to quote PAN by payee to payer. In absence of PAN, applicable TDS rate or 20% whichever higher is applicable. This may raise question whether there is any relaxation for this requirement. This post will provide details about Section-206AA regarding requirement to furnish  PAN and relaxation from deduction of tax at higher rate in absence of PAN.  This post will resolve query whether PAN is mandatory for Non Resident in case of foreign payment. 

Requirement to furnish PAN (Section 206AA):

As per Section 206AA of Income Tax, it is mandatory to quote PAN by Payee to Payer in case of transaction where TDS is applicable (Chapter XVIIB ). In case payee doesn’t provide PAN, following rate of TDS is applicable:

1. at the rate specified in the relevant provision of this Act;( i.e. TDS applicable as per relevant section of Income Tax. )or
2. at the rate or rates in force; (i.e. above mention (i) rates or rate notified as per Double Tax Avoidance Agreement, whichever is beneficial to assessee)  or
3. at the rate of twenty per cent

So it can be seen from above that in absence of PAN, 20 % TDS also applicable in case applicable rate is less than 20% .  

The provisions of this section shall not apply to a non-resident/foreign company  in respect of—

1. payment of interest on long-term bonds as referred to in section 194LC; and
2. any other payment subject to such conditions as may be prescribed.

Relaxation from deduction of tax at higher rate under section 206AA (Rule- 37BC):

Above discussed provision to quote PAN was creating lots of issue for foreign company who is not required to take PAN or file Income Tax Return in India. In order to provide Relaxation from deduction of tax at higher under section 206AA, Government had published Rule 37BC . This rule is prescribed as under:

(1) In the case of a non-resident/foreign company (deductee/payee) and not having permanent account number ,the provisions of section 206AA shall not apply in respect of payments in the nature of 

1. interest,
2. royalty,
3. fees for technical services and
4. payments on transfer of any capital asset,

if the deductee furnishes the details and the documents specified in to the deductor/payer as mentioned below:

Further Details prescribed above in Rule 37BC are required to furnish while filing TDS return by deductor/payer . You can refer below link related to notification 53/2016 Dated 24.06.2016 in this regard. 

https://www.incometaxindia.gov.in/communications/notification/notification532016.pdf

Conclusion – whether PAN is mandatory for Non Resident: 

So PAN requirement is relaxed only for above mentioned nature of payments. There is no requirement to furnish PAN by non resident not being a company or foreign company in case of above specified payment. This really provide lots of relaxation to business and truly help in ease of doing business . Hope this post will provide clarity whether PAN is mandatory for Non Resident .