Higher TDS rate if PAN not disclosed

Companies and individuals who do not reveal their Permanent Account Number (PAN) while receiving income from any source will be liable to pay tax deducted at source (TDS) at the maximum marginal rate of 30 per cent (plus surcharge and education cess).

Under the Income Tax Act, 1961, any income payable to the assessee is liable for TDS by the person or entity making the payment. TDS rate ranges from 1 per cent to 30 per cent depending on the nature of income.

The Central Board of Direct Taxes is considering changes to the Act to this effect.

For example, if a payment is made to a professional like an engineer or a doctor, TDS is deducted at a rate of 10 per cent. If the engineer or doctor fails to provide PAN number, tax will be deducted at the rate of 30 per cent. Similarly, if a contractor does not provide PAN, he will suffer a TDS at the higher rate of 30 per cent instead of 2 per cent now.

"In many situations, contractors or sub-contractors pay the normal TDS but still do not file return of income. By taxing at maximum marginal rate, they will be induced to disclose PAN and file tax return also," said Amitabh Singh, partner, Ernst & Young.

The move is being viewed as an effort by the government to expand the taxpayer base and ramp up revenue collections in view of the huge resource requirement to fund subsidies.

Many assessees do not reveal their PAN to evade taxes and get away with the normal TDS payment. Due to lack of PAN, taxes were often pocketed by deductors also. This creates difficulty in processing tax refunds as well.

PAN quoting has been made mandatory in the e-TDS returns being filed by firms and companies from last year. The tax deductors were facing some difficulty due to reluctant of assessees to prove PAN. The higher TDS rate will force the assessees to reveal the number. Near 100 per cent PAN quoting in TDS returns is important for moving towards dematerialisation of TDS certificates by 2010, the revised deadline set in Budget 2008.

The move is aimed at increasing the effectiveness of TDS provisions to expand the taxpayer base and improve collections. TDS collections constituted 34 per cent of the total Rs 3,14,000 crore direct tax collected in 2007-08.

TDS collections are expected to grow by 55 per cent to Rs 1,65,385 crore in 2008-09, or 45 per cent of the Budget estimate of Rs 3,65,000 crore for 2008-09.