Electronic Filing of Form 10F – Does this mean a foreign company is mandated to obtain PAN?
Globalization has catalyzed business growth, rendering Indian companies to avail various services from vendors outside India and incur expenses like Royalties, Fees for Technical Services (FTS), interest, etc. However, while making payments to these vendors outside India, it is critical to examine the Withholding Tax (TDS) implications on the same. Typically, the scope of taxability of income, as well as the applicable rate of tax is defined under the Income Tax Act,1961 (the Act) and also under the Double Tax Avoidance Agreement (DTAA) that India has signed with that country. The taxpayer has a right to avail the beneficial provisions between the DTAA and the Act.
In order to claim the benefit of DTAA under Section 90 of the Act, there is an obligation to furnish Tax Residency Certificate (TRC), which must contain certain specified information such as mentioned below:
- Name of the assessee
- Status (individual/company/ firm etc.
- Nationality (in case of individuals)
- Country or specified territory of incorporation or registration (in case of others)
- Tax Identification Number (TIN)
- Residential Status
- Period for which applicable
- Address of the assessee.
However, in cases where the TRC does not contain all the specified information, the Indian Government had prescribed Form 10F to be furnished under the Income-tax Rules. As a result, the foreign companies whose TRC did not contain the specified information were required to furnish a self-certified document in Form 10F.
At the outset, it is pertinent to note that the TRC of very few countries, like Bangladesh, Egypt, Kenya, Mauritius, Nepal, the Netherlands, Sri Lanka, etc., contains all the requisite information. Accordingly, foreign companies from most of the other countries were mandated to furnish Form 10F to claim the benefit of DTAA.
However, we have often observed that the TRC format of each country undergoes a change periodically. Furthermore, separate states of a country may issue a TRC in a different format. Hence out of caution, TRC should be checked basis the above criteria on a case-to-case basis before determining whether 10F is not required.
Until now, the foreign vendors used to provide to the Indian deductors their TRCs obtained from the Revenue authorities of their home country along with No PE and Beneficial Ownership declarations and physical Form 10F in order to avail beneficial tax rate, if any, under the tax treaties. This Form 10F furnished by these foreign vendors was manually filled and executed as prescribed under Rule 21AB of the Income-tax Rules.
However, on 16 July 2022, the Central Board of Direct Taxes (CBDT) of India issued a circular1 wherein it prescribed the filing of certain forms/statements electronically through the income-tax portal. While the list contains quite a few forms, one form that could impact the companies' day-to-day operations is Form 10F. Accordingly, in light of the aforementioned notification, foreign entities are now required to furnish Form 10F electronically by logging on to the income-tax portal.
Some immediate issues which could crop up from foreign remittance perspective are provided in the table below:
| Sr. No. | Particulars | Challenges and possible resolutions |
|---|---|---|
| 1. | Foreign entities having a valid PAN or not having PAN but taxes deducted under relevant tax treaties | In the case of these entities, one will have to ensure that all the relevant information required under Rule 21AB is provided in the TRC issued by their government. In case TRC does not contain the relevant information, these entities will be required to furnish Form 10F electronically and thus shall be required to obtain PAN, if not available and create their income-tax logins on the portal. While this may not be a challenge for the entities already having a PAN and complying with the tax filings in India, it would create issues for those foreign entities who have not obtained PAN in India. |
| 2. | Cases where Foreign Entities are not required to obtain PAN | This shall pose a challenge for taxpayers, as in certain cases, a non-resident payee
is not required to obtain PAN under the Act. Section 206AA of the Act, which
prescribes a higher rate of tax for taxpayers who do not have PAN, provides an
exception to a non-resident, not being a company, or to a foreign company, from
obtaining PAN in the following situations:
|
| 3. | Validity of Manual Form 10F received before 16 July 2022 | The Indian government needs to address the ambiguity of whether the Form 10F received on or before 16 July 2022 shall be considered valid for granting the benefits for FY 2022-23. If the same is invalid, it would require updating the same electronically. |
| 4. | Online submission of TRC along with electronic Form 10F | It is imperative to note that foreign entities are mandatorily required to upload a copy of the TRC while furnishing Form 10F electronically. However, if TRC would not be available at the time of earning the income but only later in the tax year, covering the period when the non-resident earns the income, the tax treaty benefit may be denied. |
| 5. | Validity of Manual Form 10F from 16 July 2022 to 12 August 2022 | Form 10F has to be furnished electronically w.e.f. 16 July 2022, i.e., AY 2023-24 (FY 2022-23) and onwards. However, initially, the Income Tax portal had a number of glitches and only allowed filing such forms for AY 2022-23 (FY 2021-22). The dropdown was made available for AY 2023-24 (FY 2022-23) only from 12 August 2022, which has caused inconvenience to many taxpayers. Clarity needs to be provided on the acceptability of the manually signed Form 10F during such period (i.e., 16 July 2022 till 12 August 2022). |
| 6. | Requirement to obtain Digital Signature Certificate (DSC) | Typically, Income Tax Rules specifying the procedure for electronic furnishing of the forms state that the forms shall be signed either through a DSC or through the EVC method prescribed. Therefore, if such payee is a person other than an individual, the partner or director or authorized signatory of such payee, who may also be a non-resident having no income from India, would also be mandated to obtain a DSC in India. |
The above issues may result in practical challenges for the non-resident payees as well as resident payers, and the Chartered Accountants certifying the Form 15CB, who are required to ensure all relevant documents are furnished by the payee while complying with the TDS provisions under Section 195 of the Act.
Practically, we have observed that non-residents availing of tax treaty benefits fail to furnish a return of income in India. The recent prescription for electronic verification of Form 10F might be an attempt by the Indian Government to plug this get-out. Furthermore, it is imperative to note that as of now, the Act does not specifically provide for any consequences for non-furnishing of electronically filed Form 10F nor any consequences on the deductor.
However, non-Furnishing Form 10F electronically may result in denying beneficial tax treaty provisions by the Indian Tax Authorities. Thus, failure to furnish the form may create issues in claiming the tax treaty benefits for the non-resident and also may have tax and penal consequences on the Indian resident remitter/deductor for shortfall/ nil deduction of tax.
1. Notification No. 03/2022 dated 16 July 2022