Section 206AA of ITA, 1961 : Section 206Aa: Requirement To Furnish Permanent Account Number

Explanation using Example

Imagine John, a freelance graphic designer, provides services to a marketing firm and issues an invoice for his work. According to Indian tax laws, the marketing firm is supposed to deduct tax at source (TDS) before making payment to John.

Under Section 206AA of the Income-tax Act, 1961, John is required to furnish his Permanent Account Number (PAN) to the marketing firm. If John fails to provide his PAN, the marketing firm must deduct TDS at the higher of the following rates:

• The rate specified in the relevant provision of the Act,
• The rates in force, or
• A flat rate of 20%.

Since the standard TDS rate for professional services might be lower, say 10%, not providing a PAN means John could have a higher tax deducted from his payment (20%).

If John later provides a valid PAN, future invoices can be processed with the correct TDS rate. However, for the invoice already paid, the higher deduction stands unless John takes steps to rectify this with the tax authorities.