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Kripa, an overseas client, recently forwarded an email from her mutual fund registrar. It warned her to link her permanent account number (PAN) to her Aadhaar card by March 31, 2022, failing which there would be higher TDS (tax deduction at source), restrictions on further transactions, and a possible income-tax (I-T) penalty.
Kripa holds an Overseas Citizen of India (OCI) card. According to the Aadhaar Act, she is not entitled to apply for Aadhaar unless she spends 182 days in India. The notification (https://bit.ly/34xzJoh) that allowed non-resident Indians (NRIs, who are Indian citizens) to apply for Aadhaar on arrival in India doesn’t apply to OCIs. Kripa was worried as the MF registrar informed her it doesnt have any option to exempt NRIs’ PANs from linking with Aadhaar.
The I-T Act does not require NRIs or OCIs not eligible to apply for Aadhaar to link their PANs with Aadhaar. The tax department hasn’t made any provision for allowing those not eligible for Aadhaar to mark their PANs as such, so that their PANs can be kept active after March 31, 2022. There is a fear that the tax department will automatically mark such PANs as inactive.
NRI investors face several other travails. The adverse TDS provisions have given rise to many jugaad solutions. The most common example is in renting and sale of property by an NRI taxpayer. If the property owner is a resident, tax is deducted by the lessee once a year at 5 per cent if the rent exceeds ₹ 50,000 per month. This can be paid through a simple challan cum return. But if the owner is a non-resident, the lessee must apply and get a tax deduction account number (TAN), deduct tax at 30 per cent from each monthly rental, pay it every month, and file separate TDS returns with the TDS section.
In case of sale, if the seller is a resident, the buyer deducts tax at 1 per cent if the sale value exceeds ₹ 50 lakh and pays it through a simple challan cum return. But if the seller is an NRI, the buyer must deduct tax at 20 per cent on the entire sales consideration (not just capital gain) since the buyer can’t calculate the capital gain. Again, the buyer must register for TAN and file periodic TDS returns for a one-time purchase. While getting a certificate for tax deduction at a lower rate is possible, it takes time, effort and “money”. The hassles of getting a TAN number and filing periodic TDS returns remain.
The jugaad solution is for property owners to omit letting the lessees/buyers know they are NRIs. The lessees/buyers have no way of knowing this, especially if the owner has an Indian address. The buyer/lessee proceeds on the basis that the owner is aresident.
These onerous TDS provisions for NRIs were put in place in an era when it was assumed that if the lessee or buyer didn’t deduct maximum tax at source, it wouldn’t be possible for the department to recover the tax amount.
Meanwhile, NRIs can remit proceeds based on tax-payer self-certification backed by a chartered accountant’s certificate that is uploaded on the tax department’s website. It demonstrates trust in the taxpayer but through a verifiable process. One wonders why the same process can’t be followed for TDS.
The tax department should proactively provide a solution to NRIs’ impending problem of PANs being made inactive from April 1, 2022. It should also use the occasion to overhaul the complex TDS provisions relating to them.
The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor Twitter: @harshroongta
(A slightly different version of this column first appeared in the Business Standard on February 21, 2022.)