CBDT exempts higher withholding tax on dividend payment to Non-Resident due to non-availability of PAN

CBDT exempts higher withholding tax on dividend payment to Non-Resident due to non-availability of PAN

Summary

• • The Central Board of Direct Taxes (CBDT) vide notification exempts higher withholding tax on dividend payment to Non-Resident (NR) due to non-availability of Permanent Account Number (PAN) in addition to the prior exemption available to NR in case of interest, royalty, Fee for Technical Services and payment on transfer of any capital asset only.
  • Accordingly, in case a shareholder who is NR does not hold PAN but furnishes Tax Residency Certificate (TRC) and other specified information to the Company paying the dividend, withholding of tax can be done at a lower rate, if applicable, as per Double Tax Avoidance Agreement (DTAA) between India and country of resident of the NR shareholder.
  • Further, in case of withholding shall be done at 20% plus applicable surcharge and cess as per Section 115A of the Income Tax Act, 1961 (ITA) and there is no other income of the NR shareholder in India, income tax return shall not be required to be filed in India.
  • However, in case of withholding shall be done at a lower rate as per the DTAA, income tax return shall be required to be filed in India by the NR shareholder.

Detailed

• • As per Section 206AA of the ITA, any person entitled to receive any sum or income which is subject to withholding tax is required to furnish PAN to the payer, failing which withholding tax shall be done at higher of the following rates: a. Rate specified in the relevant provision of the Act; b. Rate or rates in force; c. Rate of 20%
  • As per the Rule 37BC of the Income Tax Rules, 1962 (ITR) prior to the amendment, higher withholding tax shall not apply to the NR due to non-availability of PAN in India subject to furnishing of TRC and other specified information to the payer for the following payments: a. Interest; b. Royalty; c. Fee for Technical Services; d. Payments on the transfer of any asset.
  • The Finance Act, 2020 shifted the taxation of dividends from Dividend Distribution Tax (DDT) by the Company paying dividend to taxation of dividend in the hands of the shareholder, resulting in withholding tax by the Company on payment of dividend to shareholders.
  • As per the Section 115A of the ITA, dividend income in the hands of the NR shareholders shall be taxable at the rate of 20% on a gross basis and in case there is no other income of the NR shareholder in India, income tax return shall not be required to be filed in India.
  • However, in case of withholding shall be done at a lower rate as per the DTAA, income tax return shall be required to be filed in India by the NR shareholder.
  • CBDT vide notification amended Rule 37BC of the ITR to exempt higher withholding tax on dividend payment to NR due to the non-availability of PAN in addition to the prior exemption available to NR in case of interest, royalty, Fee for Technical Services and payment on transfer of any capital asset only.
  • Accordingly, in case a shareholder who is NR does not hold PAN but furnishes TRC and other specified documents to the Company paying the dividend, withholding can be done at a lower rate, if applicable, as per DTAA between India and country of resident of the NR shareholder.

The notification has amended the Rule 37BC of the ITR to provide an exemption to the NR shareholders in absence of PAN from the higher withholding rate, however in case withholding of tax takes place at lower rate considering the beneficial provisions of the DTAA, NR shall be required to obtain PAN to furnish income tax return in India. Last Updated: 10th August 2020 This article is contributed by:  Janardan Singh COO, Direct Tax  

Tag: CBDT