Saturday, May 29, 2010
Law Street - Economic Times (May 2010) - PANs Prickly Pains
Sometimes laws can be shortsighted. Take the instance of everyone being required to have a PAN or else suffer a higher withholding, on payments due to them. This includes senior citizens, who perhaps are not tax payers, or even foreign entities doing a one off transaction with India. To hear Zenobia Aunty, rave and rant, click here. Else as always, if the link doesn't work, it is cut and pasted below.
Have a nice weekend.
PANs prickly pains
Sweeping all encompassing amendments cause problems
Exceptions must be carved out in tax laws
Practical regulations are required
These days, owing to the heat and humidity, Zenobia Aunty spends her evenings, sitting on the bench outside her colony, people watching and catching the breeze. In fact, she is soon joined by some friends, all of who sit quietly, at peace with each other and the world as they observe other people go about their tasks. I am sure one day; this group will surprise us with a book on human psychology or something equally profound.
Thus, this little group of senior citizens was taken aback, when Jingoo Uncle was spotting angrily waving his walking stick at all and sundry and muttering at random. He sure spoiled their peace and quiet.
However, one can empathize with Jingoo Uncle. The main reason for his anguish was that he had sold an antique table and tax had been withheld by the buyer at 20%, just because Jingoo Uncle, a retired person, did not have a PAN card.
Let us not even get into the argument of whether tax ought to have been withheld on such transaction or not. For now, let us solely concentrate on this new amendment, which came into effect from April 1, this year and requires tax to be withheld at 20% or the rate in force, whichever is higher, if PAN is not furnished by the payee (recipient of the income).
Perhaps the tax authorities can argue that Jingoo Uncle’s case is a rare exception. Jingoo Uncle retired at least two decades ago and is well looked after by his children. He is no longer a tax payer and does not have a PAN card, or rather does not remember whether he once had a PAN card and where it is. So couldn’t he be exempt from this new provision?
If you think the situation cannot get any more absurd, there is more to come. India is today a global player. Foreign entities carry out business with Indian parties even if they are not physically present in India. Let us take another illustration.
EasyDesign PLC has supplied an industrial design to another company in India. Such payment is in the nature of fees for technical services and under the relevant tax treaty, tax is to be withheld only at 10%.
EasyDesign PLC has never carried out any operations in India, this is its first transaction with an Indian buyer and everything seems to be smooth sailing, till such time that the Indian party insists on withholding tax at 20%.
An argument ensues. EasyDesign PLC is thunderstruck by the absurdity of Indian tax laws that require it to obtain a PAN to ensure that tax is withheld at the correct rate of 10 per cent and not 20 per cent. Moreso, if tax is incorrectly withheld in India, it would result in complexities in its assessments in its home country. The Indian buyer, on the other hand, wants to protect itself from any legal hassles.
Tax laws which are not practical have dented a good business relationship. Based on these designs, the Indian company would have been able to sell its final products to EasyDesign’s contacts overseas. It is true that withholding taxes ensure that the tax authorities get their share of the tax pie immediately and effortlessly. However, this rigid rule has complicated business matters.
Exceptions must be carved out to make laws practical. As regards obtaining a PAN number, certain categories must be exempt, such as senior citizens or foreign entities that do not have a fixed place of business in India. If there is a commercial branch in India, it is perfectly fine to expect the foreign entity to apply for and obtain a PAN and indeed to file its tax return and comply with other relevant tax obligations.
In the realm of withholding taxes, the larger issue still remains, of whether tax ought to be withheld at source in India irrespective of whether or not the payment made to the non resident is chargeable to tax in India.
It was the decision of the Karnataka High Court in the case of Samsung Electronics, which sparked off this debate. However, lately a decision by the Delhi High Court in the case of Van Oord ACZ, followed by that of the special bench of the Chennai Tribunal in the case of Prasad Productions have rightly concluded that an Indian payer need not withhold taxes on making payments if such payments are not liable to tax in the hands of the recipient. Yet, this has certainly dealt a blow to those in Karnataka and left others confused. Perhaps in the coming days, a decision by India’s apex court – The Supreme Court of India, will resolve this matter.
It is fair to expect any country to protect its share of the tax pie, however, as Zenobia Aunty always says: One must never miss the woods for the trees.
Posted by Lubna at 9:22 AM