Obtaining PAN by Non-Residents in India – Objective and Implications

Every non-resident entering into transactions with Indian payers is now familiar with the requirement of obtaining a Permanent Account Number (or PAN) in India to avoid higher withholding of tax at source. While the tax authorities have initiated this move to build up a database and strong information network, non-residents are finding it tricky to deal with such a requirement. There is fear that this move will enable the tax authorities to track every transaction, enforce statutory compliance and which eventually would entail a detailed verification of such non-resident by the authorities. Those planning a structured entry into India by avoiding a Permanent Establishment (PE) at the initial stages are more concerned.

This article aims to address various issues emerging out of the PAN requirement. It provides a pragmatic view on the legislature’s basic intent to introduce such a requirement, statutory need for PAN enrollment, implications and suggested course of action.

Let’s first take a step back and understand what the law has to say on PAN requirement. India Fiscal Budget 2009 made it mandatory for payers to obtain a PAN from payees effective April 1, 2010, failing which, the transaction suffers a minimum withholding of 20 percent. The intent, as indicated above, was just to strengthen internal databases. This issue of higher tax withholding is particularly important for non-residents since in most cases their income is taxable at 10 percent, which in absence of a PAN, suffers a 20 percent withholding. In other words, the recipient of income must flash a PAN in all the cases to avoid higher tax withholding, even when India has agreed to charge a lower rate (generally 10 percent) through the relevant tax treaty.

Click on the Download link below to access complete article.

Download Pdf