Importance of Obtaining a PAN in India by a Non-Resident

Why a non-resident in India should obtain a PAN number?

Importance of Obtaining a PAN in India by a Non-Resident
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If you are a NRI and think that it is not compulsory for you to obtain a PAN number in India, think again. If you generate income in any form in India, you are entitle to file income tax returns and hence required to apply for a PAN number. Let's look at an importance of PAN card for Non Resident Indians and obligations it comes with.

Importance of obtaining a PAN in India by a Non-resident

  • Section 195 of the Income Tax Act, 1961 (“Act”) imposes a statutory obligation on any person responsible for paying to a non-resident any interest or any other sum chargeable under the provisions of the Act, to deduct income tax at specified rates.
  • Further, a relief under double taxation avoidance agreement (“Tax Treaty”) entered into by India with the foreign country can be availed to deduct at a rate lower than the rate mentioned in the Act. Tax treaties are designed to provide relief in case an income suffers double taxation. However, to avail such relief, the non-resident shall obtain a ‘Tax Residency Certificate’ (“TRC”) from the country of which they are residents and provide the same to the deductor.
  • Section 206AA of the Income Tax Act entrusts obligation on the deductee to furnish PAN to the deductor. In the absence of PAN, the deductor is required to deduct tax at the highest of the following rates:
    • Rate specified in the Act, or
    • Rate as per the Treaty, or
    • 20 per cent
  • With the introduction of Section 206AA in the Act, the importance of obtaining PAN in India has become pivotal. If a non-resident fails to provide PAN to the deductor in India, the withholding of tax would happen at a higher rate as mentioned above. Hence, it is advisable for all non-resident recipients of income to obtain PAN in India.

Obligation to file tax returns in India by a Non-resident

  • Section 139(1) of the Act mandates every company to file its return of income for a financial year within the statutory time lines.

    Hence, a foreign company having a source of income in India is required to file its tax return in India.
  • Section 115A(5) of the Act provides that if a non-resident’s income from India consists of only dividend or interest income as mentioned in the Act, then such non-resident is exempt from filing of his tax returns in India.
  • Combined reading of both Section 139(1) and 115A would mean that a non-resident having any income, other than incomes of dividend, interest incomes, is required to file tax returns in India.
  • Further, it is to be noted that while obtaining of PAN is a pre-requisite for filing return of income in India, mere obtaining of PAN by itself does not mandate any non-resident to file return of income in India.

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