INVESTOR EDUCATION SERIES
NON-SUBMISSION OF PAN AND THE ART OF TAX AVOIDANCE
Rama Krishna Vadlamudi March 14, 2010
"In this world, nothing is certain but death and taxes." Benjamin Franklin, more than 200 years ago
Steve Jobs, a great entrepreneur of Apple Inc “Tax is the price we pay for being innovative and successful.”
We are now in the month of March 2010 with the financial year coming to an end in the next two weeks.
Let us fast track and transport ourselves in to the middle of May, which is two months away from now. The following is an imaginary situation in a popular commercial bank located in India.
A senior citizen (for the sake of simplicity, let us name her Aruna) walks into a bank, with which she has been banking for over two decades. The ambience is good with nice interiors and air-conditioned banking halls. Aruna takes out her Savings Bank (SB) account passbook and hands over it to the clerk (Priya) at a desk.
Aruna: “Good Morning, madam, could you please update by passbook?”
Priya: “(promptly responding to the senior citizen) Good Morning, madam, I shall do it immediately.”
Aruna: “(upon seeing the entries in the passbook and being surprised by the lesser credit of quarterly interest on fixed deposits than that is being credited to her SB account regularly) I want to know why only Rs 12,000 was credited instead of Rs 15,000 every quarter.”
Priya: “(checks the computer records) Madam, the amount credited is correct as per the bank records.”
Aruna: “(raising her voice, she demands to know…) No, an amount of Rs 15,000 should’ve been credited. You can check previous quarters also, the same was being credited. Why not this quarter?”
Priya: “I’ve rechecked the records and Rs 12,000 is correct.” She informs.
Aruna: “There’s no change in the deposit amount in the last one year. Why is there difference in interest credit?”
Priya: “(she punches some keys on the keyboard and tried to find out the difference) Madam, an amount of Rs 3,000 was deducted towards tax deduction at source (TDS) from Rs 15,000. That’s why only Rs 12,000 was credited to your SB account.”
Aruna: “(surprised that TDS was affected on her interest, in a pitched voice) This isn’t correct. I’ve already submitted Form 15H for the current financial year. That is, 2010-11.”
Priya: “(punching some more keys, this time hardly, on the computer with a quizzical look on her face) I agree with you that you’ve submitted Form 15H, but an amount of Rs 3,000 is already deducted towards TDS as per the records.”
Aruna: “(incensed by the response) No, you should not have deducted TDS from my interest. Please reverse the TDS and get that Rs 3,000 re-credited back to my SB account.” She demands in a furious voice.
Priya: “(sensing some trouble from the valued customer, she offers Aruna a glass of orange juice and tries her best to console the customer) Madam, I don’t know why Rs 3,000 was deducted as TDS even though you’ve submitted the requisite form.”
Aruna: “(raising her voice further) This is wrong on your part to harass senior citizens in this way. I insist that you arrange for its reversal immediately.”
The clerk is completely taken aback by the annoyance of the senior citizen. Spooked by the fuming voice of the customer, she has pulled out an “ace” from her bag. After all, the clerk is a veteran and knows how to handle such tough customers. Closing her fist and raising her thumb and mincing no words, she waves her thumb three times and directs Aruna towards an officer (Samir) next to her.
Aruna raises from her seat and walks towards Samir.
Aruna: “(she informs the background of her grievance and tells Samir in a strident voice) How can TDS be deducted from my interest? Please arrange to re-credit the TDS wrongly deducted from interest.”
Samir: “Good Morning, madam, please take your chair. I’ll look into the issue and shall do whatever help you require.”
Aruna: “(cooled down a bit) That’s so nice of you!”
Samir browses some pages on his computer and checks the interest and TDS amount. He also checks the details concerning Form 15H. To his surprise, he finds an amount of Rs 3,000 is deducted from Rs 15,000 due to the customer. He does not know why TDS was deducted even though Form 15H was submitted by the customer. The bank is having core banking solutions (CBS), whereby all the branches are connected and routine and back office functions are done by the CBS team at the bank headquarters.
Excusing himself from the annoyed customer, Samir promptly contacts the Helpdesk team at the CBS headquarters and wants to know why TDS was deducted despite submission of Form 15H by the senior citizen. The person at the Helpdesk scratches her head and asks her seniors about the reason for the TDS deduction. Even the so-called seniors are clueless and they inform Samir that he needs to check with the software vendor. (Banks depend on big software companies for their banking software needs and CBS work is usually outsourced to these software guys.)
Unable to find answers for his doubt, Samir approaches the Branch Manager sitting in a corner away from the banking hall. Even the Branch Manager was not aware why TDS was deducted even though Form 15H is submitted.
One computer operator has been watching all the drama in the banking hall for a while. She approaches the Branch Manager and informs him that as per new Income Tax rules, if the depositor does not submit PAN (permanent account number) to the bank, an amount of 20 per cent or more will be deducted from the interest income of the depositor. The computer operator further informs that the new rules are effective from April 1, 2010. She shows them a circular that is pasted a few months back in the banking hall. The other staff members seemed to have forgotten about the introduction of the new rules. As the circular is in a small size (font size 10), nobody can read the notice which is put in the hall in a clutter of notices pasted on the wall at a height of 10 or 11 feet from the floor. (One needs a magnifying glass, rather binoculars, to read such notices!)
Then, Samir walks (dragging his feet and stooping his shoulders) towards Aruna sitting in a vexed position in the chair.
Samir: “Madam, I’m so sorry. The amount is deducted as you haven’t submitted PAN which is required as per the new Income Tax rules. Please submit the PAN immediately.”
Aruna: “(Her anger reached a pinnacle by this time and in a shrill voice) How can you deduct Rs 3,000 as TDS without informing me? Is it the way you treat or respect the senior citizens in your bank?”
Samir: “(exasperated by her demands) Madam, please see the notice board over there. We’ve put it a long time back.”
Aruna: “(the answer puts her off further) Do you know I depend only on my interest income for my monthly expenses. You know very well food items have gone up by more than 30 to 40 per cent recently. I don’t get any pension. How can I pay my medical and other bills if you deduct Rs 3,000? I don’t have any other source of income except this interest, you know.
“Who has given permission to you to deduct TDS? Have you informed me in advance about change of rules by the Government? As such, I demand that you should pay back the Rs 3,000; otherwise, I shall close my deposit accounts with your bank.”
She started recounting all her problems with the hapless officer.
Samir: “(he checks the computer records once again and finds that the TDS has already been remitted to the Income Tax Department a few weeks back) Madam, the amount is already credited to Government’s accounts and it cannot be paid back.”
The waiting of more than one hour and a half has completely drained her energy. Aruna starts to sob like a child and begins explaining why she requires all the money that is due to her. She creates a scene in the banking hall. Other customers too are a bit annoyed and the other staff are a bit embarrassed by this whole episode.
Watching this, the Branch Manager comes forward and takes stock of the situation. The Branch Manager immediately contacts the bank’s Zonal Office and explains the issue briefly to them. He takes their permission to reverse the Rs 3,000 to the re-credit of the senior citizen’s SB account even though TDS amount has been submitted to Government’s accounts.
He informs Samir accordingly and Samir recredits Rs 3,000 to the depositor’s account. Samir politely informs the lady that by the next quarter she has to submit her PAN compulsorily or else TDS will be deducted compulsorily. As a goodwill gesture, Branch Manager informs his driver to drop the customer off at her residence. After two hours of wrangling, she walks out of the banking hall with a strange and mixed feeling of happiness and irritation.
What are the chances of above scenario happening?
The above scenario is only an imaginary situation which is dramatized for impact purposes. What are the chances of its real happening? The author feels that it is MOST LIKELY to happen across banks and geographies after April 1, 2010 – especially, in the rural and semi-urban branches, where the awareness about tax matters among the public is the least. (Though, the author is not very sure of the bank deciding to re-credit the TDS that was already paid to the Government.)
Bank officials in these branches will have real tough time to convince the irate customers. There will be a lot of complaints to the Reserve Bank of India, the banking regulator; banking ombudsman; the Board of Banking Codes and Standards and other government bodies.
A consequential scenario that is likely to happen in the middle of next calendar quarter is recounted below:
Raising alarm over the ballooning number of complaints from the public, RBI issues directives to banks to start a campaign spreading awareness about the new Income Tax rules which make submission of PAN mandatory for not deducting tax at source at 20 per cent or more
Bowing to RBI’s pressure, banks start a campaign of awareness
The complaints and grumblings of senior citizens find their echo in Parliament, the biggest law-making body in the country
Some esteemed members of parliament (MPs) rush to the wells of Lok Sabha and Rajya Sabha and demand that the IT provision be rolled back
The Finance Minister responds to the MPs and promises that his government will look into the matter
Not satisfied with the FM’s response, the MPs start to tear off the copies of Finance Act 2009 and create pandemonium in both the houses
The pandemonium attracts the attention of both the vernacular press and the raucous English media
A few days later, the FM succumbs to the pressure from the media and the MPs and declares that, in the interest of vast majority of senior citizens and others, his ‘aam-admi’ government has decided to postpone the effective date for provision of PAN for the purpose of TDS to April 1, 2011 instead of the original date of April 1, 2010!
The Big Brother is watching you!
Now-a-days, we watch lot of advertisements in the media – both electronic and print – that Income Tax Department is tracking large financial transactions and exhorts us to pay our taxes diligently. So, nobody can escape the tax dragnet now. It is better to pay our taxes promptly rather than attract IT Department’s unnecessary and avoidable attention.
"The avoidance of taxes is the only pursuit that still carries any reward." JM KEYNES
What are the new rules of TDS?
The Existing rules applicable till March 31, 2010:
Tax deduction has to be made from interest (paid by banks, financial institutions, companies, NBFCs or post offices) under Sec. 194A of the Income Tax Act, when the payment exceeds Rs. 10,000 at the rate of 10 per cent of the actual interest paid for Resident Individuals. The fact that the recipient may be a senior citizen and/ or that his income is below taxable limit is not a matter of concern for the bank. It is obligatory on the part of the banks/FIs to implement the provisions of tax meticulously, otherwise they are likely to face penalty by the IT Department. Fixed deposits and recurring deposits with banks attract the provisions of TDS but not Savings Banks Accounts.
If a depositor’s income falls below the taxable limit, there is remedy for the reader under the law. All that he/she has to do is to file Form 15H, in duplicate with the bank, meant for senior citizens aged 65 years and above and Form 15G for others before interest becomes due. If it has been filed in time, tax would not be deducted by the banks for interest payment.
Most of the depositors are honest and usually pay their taxes meticulously. However, there are some who would keep deposits in different banks and avoid, rather evade, taxes by giving Form 15G or Form 15H as applicable by ensuring that the interest payable by a particular bank does not exceed Rs 10,000 in a financial year. In Form 15G/15G, the depositor gives a declaration to the effect that his/her annual income is below the taxable income during the financial year.
The amount Rs 10,000 is the limit beyond which banks are required to apply TDS on the entire amount of interest income paid/payable to the depositor in a financial year. Till now, some depositors have practised this art of avoiding taxes through claiming that their total income is not taxable and submitting Form 15G and Form 15H to banks and financial institutions where they keep their monies. This is no longer possible. To avoid loss of revenues from such tax evaders, the Government has decided to amend TDS rules with effect from April 1, 2010.
The revised rules applicable from April 1, 2010:
During the regular budget of 2009-10 presented by the Finance Minister in Parliament during July 2009, an amendment was made to Income Tax Act making it compulsory for bank depositors (or other fixed deposits kept with financial institutions or companies) to furnish PAN number to banks/FIs – otherwise, the banks/FIs will be obligated under law to deduct TDS on the entire interest amount paid/payable, irrespective of the fact that the annual interest is less than Rs 10,000 or more than Rs 10,000, at 20 per cent or higher. This new provision virtually makes the submission of Form 15G and Form 15H invalid.
The author had, today, checked the websites of several commercial banks to find whether they have started any information campaign to spread awareness about the new rules introduced by the Government in the month of July 2009, a good eight months have elapsed since then. Surprisingly and strangely, no bank has mentioned anything on their websites about the new Income Tax rule making it mandatory for depositors to furnish submission of PAN – otherwise they face the prospect of TDS being deducted from interest irrespective of the amount of interest that is being credited in a financial year. IT Department had issued some advertisements in the print media some three or four banks back. But, no media campaign is launched recently by them just before the date of applicability.
(The author’s experience with banks is not very palatable as far as provisions of TDS are concerned. Banks, usually, deduct TDS even though Form 15H/15G is submitted to them – because banks many a time fail to update their computer records promptly when a depositor submits the specified form. No information is provided to depositors when such TDS is deducted.)
To know new income tax slabs for 2010-11, JUST CLICK:
Retirement Plans for HIGHEST SAFETY, JUST CLICK:
Why is PAN is mandatory to quote wef 1.4.2010, JUST CLICK:
Abbreviations Used:
IT Act : Income Tax Act, 1961
NBFC : Non-Banking Financial Insitution
PAN : Permanent Account Number
RBI : Reserve Bank of India
SB : Savings Bank Account
TDS : Tax Deducted at Source
Disclaimer: The views of the author are personal and not necessarily those of the organization which he represents. Readers are advised to consult their certified tax consultants for correct interpretation of the provisions of income tax laws. This is being done for general information purposes only.
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