Recent Initiatives by Income Tax Department Regarding TDS Deducted on Inoperative PANs

Recently, the Income Tax Department (TRACES) has initiated the issuance of demand notices to deductors who have deducted Tax Deducted at Source (TDS) at the standard rates despite the deductee possessing an inoperative PAN. In such instances, as per Section 206AA of the Income Tax Act, the deductor is obligated to deduct TDS at a rate of 20%. This move underscores the department's commitment to ensuring compliance with tax regulations and the proper deduction of taxes in cases where PAN details are not valid or operational.

Unveiling the Income Tax Department's Recent Measures: A Comprehensive Look into TDS Deductions on Inoperative PANs

PAN-Aadhaar Linkage:?The linking of PAN and Aadhaar has a significant impact on taxation. This article aims to elucidate the implications of Tax Deducted at Source (TDS) rates for Specified Persons and individuals with an Inoperative PAN.?An Inoperative PAN refers to a PAN that is not linked to Aadhaar.

CBDT issued Circular No. 03 of 2023 dated 28.03.2023, notifying that from 1st of July, 2023, Tax is to be deducted at a higher rate in case of Inoperative PAN. As per the circular, for persons who failed to comply with the provision of section 139AA of the Income-tax Act, 1961 (‘the Act’) (Quoting of Aadhar Number), TDS has to be deducted as per provisions laid down in section 206AA (Requirement to furnish PAN) of the Act read with rule 114AAA of the Income Tax Rules, 1962 (Manner of making PAN inoperative). For a clear understanding, the provisions of these sections are discussed below.

Section 139AA?– As per section 139AA of the Act, every person who has been allotted PAN as of the 1st day of July 2017, and who is eligible to obtain an Aadhaar number has to link his PAN with Aadhaar.

Section 139AA, r.w Income Tax Rule 114AAA, specifies that failure to link the Aadhaar number by June 30, 2023, will render the PAN inoperative. CBDT circular 03/2023 requires the deduction of TDS at rates specified in 206AA.

However, it may be noted:?PAN can be made Operative again after linking PAN and Aadhaar along with paying the required fee which is currently Rs. 1000.

Section 206AA r.w.r 114AAA?– By referring to section 206AA, It appears that the Central Board of Direct Taxes (CBDT) aims to equate individuals with inoperative PANs to those who fail to furnish their PAN altogether. In accordance with provisions of section 206AA, in case of Inoperative PAN, tax is deductible under Chapter XVIIB at higher of the following rates-

-????????? at the rate specified in the relevant provision of this Act or

-????????? at the rate or rates in force; or

-????????? at the rate of twenty percent:

However, the higher rate at which tax is to be deducted u/s 194O and 194Q as per section 206AA of the Income Tax Act, 1961 is capped at 5%.

Significance of the above provisions for Tax Deductors:?The role of a tax deductor in verifying the operational status of every PAN is crucial. Hence, tax deductors must ensure the active status of the PANs they are dealing with.

Interest & Penalty: Furthermore, in cases where the deductor neglects to adhere to Section 206AA and deducts TDS at standard rates, it is imperative to include the interest on the short deduction (calculated at the rate of 1.5% for every month or part thereof) along with the deficient TDS amount. This measure is essential to avoid disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.

Reference to CBDT Circular 03 of 2023: https://incometaxindia.gov.in/communications/circular/circular-03-2023.pdf