Amendments for ease of PAN requirement while transacting with IFSC Banking Units

Background

The Central Board of Direct Tax (CBDT) vide its Notification No. 53/2022, dated 10 May 2022, amended Rule 114 of the Income-tax Rules, 1962 (IT Rules) and inserted new Rule 114BA and Rule 114BB for the purpose of notifying transactions for which it will be mandatorily required to quote Permanent Account Number (PAN) as per the provisions of section 139A(1)(vii) and section 139(6A) of the Income-tax Act, 1961 (IT Act).

Rule 114BA of IT Rules specifies the list of transactions, for the purposes of section 139A(1)(vii) of IT Act, when entered into by any person who has not been allotted PAN, shall within such time, as may be prescribed, apply to the Tax Officer for the allotment of a PAN.

This Rule is applicable for the following transactions:

1. Cash deposits/withdrawals aggregating to INR 2mn or more in a Financial Year (FY), in one or more accounts of a person with a banking company or a cooperative bank to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act) or a Post Office; and
2. Opening of a current account or cash credit account by a person with a banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act) or a Post Office.

Rule 114BB of IT Rules mandates that every person shall, at the time of entering into a specified transaction for the purpose of section 139A(6A) of the IT Act, quote its PAN or Aadhaar number, as the case may be, in documents pertaining to such transaction, and every specified person for the purpose of clause (ab) of Explanation to section 139A of the IT Act, who receives such document, shall ensure that the said number has been duly quoted and authenticated.

On a related note, CBDT vide its recent Notification¹, amended PAN related Rules for foreign companies & Non- Residents (NRs) transacting with International Financial Service Centre (IFSC) Banking Units. We at BDO in India, have analysed and summarised the said notification and provided our comments on its impact hereunder:

Amendment in Rule 114B of IT Rules

Rule 114B of the IT Rules mandates the specified transactions in relation to which PAN is to be quoted in all documents for the purpose of section 139A(5)(c) of the IT Act. Every person specified under this Rule shall quote his PAN in all documents pertaining to the transactions specified under the rule.

The second proviso of the aforesaid Rule states the requirement to declare particulars of transactions entered by any person not having a PAN in Form 60. This requirement has now been restricted to any person 'not being a company or a firm'.

Further, a new proviso has been inserted wherein a foreign company not having PAN and no income chargeable to tax in India, would be required to make a declaration in Form 60 when it enters into any specified transaction with an IFSC banking unit.

Amendment in Rule 114BA of IT Rules

Through the said Amendment in Rule 114BA of IT Rules, specific exclusion on the application for allotment of PAN has been made for an NR (not being a company) or a foreign company making a deposit or withdrawal of an amount other than by way of cash or opening a current account not being a cash credit account, if:

1. The transaction is entered into with an IFSC banking unit; and
2. Such NR (not being a company) or the foreign company does not have any income chargeable to tax in India.

Amendment in Rule 114BB of IT Rules

CBDT vide Amendment in Rule 114BB of IT Rules, has specifically excluded an NR (not being a company) or a foreign company making a deposit or withdrawal of an amount other than by way of cash aggregating INR 2mn or more in an FY or opening a current account not being cash credit account, if:

1. The transaction is entered into with an IFSC banking unit, and
2. Such NR (not being a company) or the foreign company does not have any income chargeable to tax in India.

BDO in India Comments

• The proposed amendment vide the said Notification simplifies the requirement of PAN for foreign companies & NRs transacting with IFSC Banking Units wherein such foreign companies neither have PAN nor have any income chargeable to tax, whenever they enter into a transaction with an IFSC banking unit. On the other hand, CBDT has also granted relief to certain taxpayers for complying with the requirements of the application of PAN.
  This amendment is aimed at boosting the liability and deposits segment and the retail business segment of banks in IFSC. Summarily, it will benefit overseas firms willing to set up treasury management operations, global institutional investors as well as NR who want to set up investment funds and other financial structures at GIFT IFSC.
   
• Additionally, CBDT vide its Notification No. 42/2021 dated 4 May 2021, amended Rule 114AAB of IT Rules and exempted the requirement of obtaining PAN subject to the following conditions:
  •  Eligible Foreign Investors (EFIs) who do not earn any income in India, other than the income from the transfer of a capital asset referred to in Section 47(viiab) of the IT Act;
  • EFI furnishes the specified details and documents to the stockbroker through which the transaction is made.

This amendment provided an exemption to NR investors/unit holders earning income from investment in Alternative Investment Funds (AIFs) set up in IFSC, from the requirement of obtaining PAN under section 139A of the IT Act, subject to satisfaction of certain conditions.