Inoperative PAN – Sec 206AA of Income Tax Act – Big Relief for TDS deductors

Last Updated onApril 26, 2024 3:27 pm

For deductees with inoperative PAN , u/s 206AA of Income Tax Act , 1961, a higher rate of tax that was required to be deducted. CBDT has released a circular on 23rd April, 2024 for relief to the TDS deductors. This has come in light of the grievances faced by deductors/collectors who had received notices for short deduction of tax as per section 206AA of Income Tax Act for deductees who had inoperative PAN. Thus, to address this issue, there has been a partial modification in Circular 3 of 2023 dated 28.03.2023 issued by the CBDT earlier.

Relief from Sec 206AA of Income Tax Act, 1961 as per the latest circular

As per Circular No. 6/2024 issued by CBDT on 23^rd April, 2024, for transactions carried out up to 31st March 2024, and in cases where the PAN becomes operative (due to linkage with Aadhaar) on or before 31st May 2024, there shall be no liability on the deductor/collector to deduct/collect tax under section 206AA/206CC, as applicable. The deduction/collection mandated by other provisions of Chapter XVII-B or Chapter XVII-BB of the Act shall be applicable.

Section 206AA of Income Tax Act, 1961

As per Section 206AA of Income Tax Act, 1961, if a taxpayer fails to furnish their PAN to the person responsible for making the payment, TDS will be deducted at a higher rate. The higher TDS rates applicable in such cases are as follows:

• At the rates specified in the relevant provision of the Income Tax Act;
• At the prevailing rate;
• At a fixed rate of 20%.

This provision is applicable to both resident taxpayers and non-resident taxpayers.

What does inoperative PAN mean?

An inoperative PAN can arise due to non-linkage with Aadhaar i.e. a situation where a PAN (Permanent Account Number) issued by the Income Tax Department becomes invalid or unusable because it has not been linked with the Aadhaar number as mandated by the government. The Government of India has made it mandatory to link PAN with Aadhaar to curb tax evasion and streamline financial transactions.

Failure to link PAN with Aadhaar can result in the PAN becoming inoperative, which may lead to various inconveniences during financial transactions. Therefore, it is important for taxpayers to ensure that their PAN is linked with their Aadhaar to avoid any issues.

Circular 3 of 2023 dated 28.03.2023 for inoperative PAN

Circular No. 3 of 2023 dated 28.03.2023 issued by the Board explains the consequences of a PAN becoming inoperative as follows:

Following the notification substituting rule 114AAA of the Income-tax Rules, 1962, vide notification no. 15 of 2023 dated 28th March, 2023, it is clarified that a person who has failed to intimate the Aadhaar number in accordance with section 139AAA of the Income-tax Act, 1961, read with rule 114AAA shall face the following consequences as a result of his PAN becoming inoperative:

• Refund of any amount of tax or part thereof due under the provisions of the Act shall not be made to him,
• Interest shall not be payable to him on such refund for the period, beginning with the date specified under sub-rule (4) of rule 114AAA and ending with the date on which it becomes operative,
• Where tax is deductible under Chapter XVII-B in case of such person, such tax shall be deducted at a higher rate, in accordance with the provisions of section 206AA of Income Tax Act,
• Where tax is collectible at source under Chapter XVII-BB in case of such person, such tax shall be collected at a higher rate, in accordance with the provisions of section 206CC.

The specified consequences shall take effect from 1st July, 2023, and will continue until the inoperative PAN becomes operative again.

Issues faced by the Deductors u/s 206AA of Income Tax Act

CBDT had received numerous grievances from taxpayers who have been issued notices for default in ‘short-deduction/collection’ of TDS/TCS. These notices were issued because the deductees/collectees were found to have inoperative PAN. In such cases, as the deduction/collection was not made at a higher rate, demands were raised by the Department against the deductors/collectors during the processing of TDS/TCS statements under section 200A or under section 206CB of the Act.

To read about the latest changes in the E-invoice portal, check out the guide here.