Higher TDS Rate applicable if the PAN is not linked with Aadhar at the time of payment or credit

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Higher TDS Rate applicable if the PAN is not linked with Aadhar at the time of payment or credit

 

Query]

My wife and I have jointly purchased a flat in Raipur for Rs. 1.45 Cr by availing the housing loan from SBI. The payment was done to the seller after doing TDS @1%. We have paid the amount of Rs. 1,43,55,000 to the seller and deposited Rs. 1,45,000/- as TDS in the Government treasury. Surprisingly, even though we have done & paid TDS fully @1%, we got the defaults notice from income tax department U/s 200A. We approached the tax counsel who downloaded the justification report from traces & informed us that the seller PAN was inoperative as PAN was not linked with Aadhar and so applicable TDS Rate was 20% and not 1%. To resolve the issue, we approached the seller & after serious efforts got his PAN linked with Aadhar. We have filed a Correction request in TRACES with her valid PAN. Now, we have again got a default statement u/s 154 with the same short deduction amount. I have following queries:

  1. How to rectify the demand as the seller is now having a valid PAN now?
  2. What is our fault? The demand is issued even if it was not our fault in linking in any way? How could we have come to know that the PAN is not linked with Aadhar?
  3. Why & how to pay the demand? We have fully paid the amount to the seller and Government. Nothing is payable by us to the seller and nothing can be recovered from the seller for paying it to the Government?

 

 Opinion:

Lot of taxpayers and businessmen may be facing similar issues or may come across similar situations in days to come. First of all, let us know about the recent changes/amendment in the TDS law, how it is impacting the taxpayers & precaution which every deductor must take to avoid the unwanted tax consequences.

  1. Tax Deduction at Source (TDS) is required to be done by the taxpayers at prescribed rate. Normally, the TDS rate is in the range of 0.10% to 10% depending upon the nature of payment, for example, interest payment attracts TDS @ 10%, commission @5%, Purchase of goods exceeding Rs. 50 Lakh @0.10% and TDS on purchase of property exceeding Rs. 50 Lakh attracts TDS @1%.
  2. The normal rate of TDS as discussed hereinabove is subject to a rider that the recipient has a valid PAN and the same is furnished to the payer.
  3. In case the recipient (i.e., deductee) doesn’t have a valid PAN or didn’t furnish it to the deductor then the TDS is applicable at a higher rate which is normally 20% (5% in case payment is covered by section 194-O/194-Q). Further, a person who doesn’t have a valid PAN cannot furnish declaration in Form 15G/15H.
  4. Income tax Act categorically provides that, if the PAN provided to the deductor is invalid or does not belong to the deductee then it shall be deemed that the deductee has not furnished his PAN & TDS shall be required to be done at a higher rate of 20% or 5%.
  5. Taxpayers may recall that the income tax law provided for compulsory linking of PAN with Aadhar and the last date for linking was 30th June 2023. Those PAN which has not been linked with Aadhar has now become inoperative.
  6. As a result of this, payment to all the persons whose PAN is not linked with Aadhar will attract TDS at a higher rate of 20% or 5% and not at a regular rate of TDS.
  7. Taxpayers may note that the liability to do TDS triggers in the hands of the deductor (a) at the time of payment or (b) at the time of credit to the account of the payee, whichever is earlier. If on the date of making the payment/credit, the PAN of the deductee is invalid then the TDS will be required to be done at a higher rate of 20% or 5%. In short, the deductor has to do TDS at the rate as applicable at the time of payment/credit. The change in the status of the PAN from invalid to valid at subsequent dates will not change the liability which has already triggered at the time of payment/credit only.
    For example, M/s. X Ltd has paid interest of Rs. 1 Lakh to Mr. A on 01.11.2023.  The PAN of Mr. A was invalid on 01.11.2023 as it was not linked with Aadhar. Subsequently, Mr. A linked the PAN with Aadhar on 02.11.2023. In this case, since the liability of M/s. X Ltd has arisen on 01.11.2023, TDS is applicable at a higher rate of 20%. Even though the status of the PAN has changed from invalid to valid on the very next day, the deductor is not allowed to proceed with TDS at a lower rate.

 

With the above background, let us come to the specific issues raised by you in the query.
a) The liability of TDS triggered in your case at the time of payment only. On this date, the PAN of the seller was invalid. As a result, the demand of an additional 19% is legally correct%.

  1. b) At present, there is no option at your end to nullify the demand except paying the same.
  2. c) Now, every deductor before doing TDS needs to check whether the PAN of the payee is valid or not? The status of every PAN can be verified from income tax portal incometax.gov.inat “verify your PAN” menu or at following link- https://eportal.incometax.gov.in/iec/foservices/#/pre-login/verifyYourPAN

 

Expectation from CBDT:

  1. TDS is already an unrewarding compliance burden on the deductor just to ensure that the Income tax department is able to track the taxability of income in the hands of the recipient.
  2. Present amendment is designed to ensure that every PAN gets linked with Aadhar. When the same is achieved then the correction statement should rectify the demand retrospectively. Asking the taxpayers to pay TDS at a higher rate despite the fact that TDS is done by the payer at a lower rate & income trail is already established is unnecessary complicating the issue.
  3. CBDT needs to distinguish the case of invalid PAN from No PAN cases.  In my view, CBDT should give blanket relief to the taxpayers in such cases. At least, some relaxation should be provided for FY 2023-24 as this is the first year wherein taxpayers may be realizing its impact.
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