TIBS Blog

The Income Tax Department, by introducing Section 206AA, has mandated that TDS deductors should deduct TDS at 20% or the actual TDS rate(s), whichever is higher, in the event of the assessee (deductee) not submitting a valid Permanent Account Number (PAN).

You can take a look at the text of Section 206AA by clicking here. This section is effective April 01, 2010.

The idea behind Section 206AA is to penalize assessees who do not have a valid PAN. Given that the 20% TDS rate could be higher than the TDS rate prescribed by law in many instances, assessees who do not have a valid PAN will be forced to get themselves a PAN in order to avoid the possibility of seeking refund.

The question for payroll managers is whether Section 206AA is applicable to TDS on salary payments.

We hear from some tax practitioners that the tax department intends to bring only non-salary payments under Section 206AA, and hence salary payments are excluded from this section.

While the text of Section 206AA does not make any explicit reference to TDS on salary, nowhere in the text it is mentioned that Section 206AA is not applicable to salary payments. In fact, the text states that all payments under Chapter XVII-B (Chapter 17B) are to be considered for the applicability of Section 206AA. Since chapter XVII-B includes payments under Section 192 (salary payments) of the Income Tax Act, payroll managers should assume that Section 206AA covers salary payments.

Things to do for the payroll manager with regard to conforming to Section 206AA

A payroll manager should deduct TDS on salary as per Section 206AA for employees:

• who have not submitted PAN
• who have submitted invalid PAN
• who have submitted PAN which is not theirs

Please collect PAN information from employees who are yet to submit the PAN information. With regard to employees who have provided the PAN information, please check the validity of PAN of both existing and new employees in your organization ahead of monthly payroll.

You could do an online check on the PAN of employees in your organization by using the NSDL site. For information in this regard, please take a look at the following link.

http://tin.nsdl.com/onlinepanintro.asp

In case any of your employees do not have PAN, please inform them you may deduct TDS at a higher rate in case they do not submit a valid PAN. Ideally, PAN should be included in the employee master data which is collected at the time of an employee joining your organization.

According to Section 206AA,

The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same in all the correspondence, bills, vouchers and other documents which are sent to each other.

Hence, in payslips and other documents pertaining to compensation, please state the employee PAN.

Please note that Section 206AA is applicable only if the deductee has an incidence of income tax. In case of salary payments, if an employee has a taxable income which is below the minimum taxable income i.e. less than Rs. 160,000 per annum for male and less than Rs. 190,000 for female employees, then Section 206AA will not be applicable even if the employee does not furnish PAN. Please take care to exclude such employees from the purview of Section 206AA.

We will discuss the methodology for deduction of higher TDS under Section 206AA in the next post.