E-Filing Of Form 10f – A Unnecessary Compliance Burden?

Section 90(4) and 90(5) of Income-tax Act, 1961 (ITA) prescribes the documents to be maintained by non-residents to avail the benefits of Double Taxation Avoidance Agreements (Tax Treaties) that India has entered with various countries. Section 90(4) of the ITA provides that a non-resident person needs to obtain a Tax Residency Certificate (TRC) from the tax authorities of the Country in which such person resides.

This Budget laid down the 7 priorities i.e., “Saptarishi” which are:

Apart from the TRC, section 90(5) read with Rule 21AB(1) of the Income-tax Rule, 1962, the non-resident needs to provide the following information in Form 10F which is signed by the Director/Partner/Self of the non-resident person:

Status (individual, company, firm etc.) of the assessee;
Nationality (in case of an individual) or country or specified territory of incorporation or
registration (in case of others);
Assessee’s tax identification number in the country or specified territory of residence and in case there is no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory of which the assesse claims to be a resident;
Period for which the residential status, as mentioned in the certificate referred to in subsection (4) of section 90 or sub-section (4) of section 90A, is applicable; and
Address of the assessee in the country or specified territory outside India, during the period
for which the certificate, as mentioned in (iv) above, is applicable.

Recently, the Central Board of Direct Taxes (“CBDT”) issued a Notification no.3/2022 dated 16 July 2022 wherein they have made it mandatory for all the persons to electronically file Form 10F through the e-filing portal of the person. However, in December 2022, the CBDT issued another Notification dated 12 December 2022 wherein the CBDT has relaxed this requirement of electronic filing of Form 10F for non-residents not having a PAN in India. This relaxation is provided only up to 31 March 2023.

Let’s throw some light on how these notifications issued by the CBDT will have an impact on the non-residents and the tax department:

Impact on Non-Residents: -

The non-residents having PAN in India, but no taxable income in India do not file the return of income in India. In such cases, it becomes difficult for the non-residents to register themselves on the income-tax portal, obtain a DSC and file the From 10F electronically.
b. The non-residents would require to appoint a professional in India to manage this compliance for them.
Obtaining a DSC in India only for the purpose of filing Form 10F may pose a threat of misuse of the same. Further, they would require the relevant software for using the DSC themselves in the foreign country. To avoid such hassles, the non-residents may consider to issue of Letter of Authority (“LOA”) to a professional in India to use his DSC for uploading the Form 10F electronically in terms of the provisions of Section 140 of the ITA read with Rule 131 of the Income-tax Rules, 1962.

For non-residents not having a PAN in India, would be required to obtain one in India post 31 March 2023 and repeat the entire procedure mentioned above.
To sum up, the non-residents would be required to go through an additional tax compliance burden even for a small payment to be received from India. This might impact the foreign imports in India especially import of services where the remitter is required to obtain Form 15CA/15CB and provide to the banks.

Impact on Income Tax Department: -

This move will ensure that the benefits of Tax Treaties cannot be availed without a Valid TRC and Form 10F.
The Tax department would be able to track all the payments to non-residents through their PAN number (after 31 March 2023).
In case the non-residents do not file return of income in India with respect to the taxable income earned from India, the Tax department may send notices to such non-residents and compel them to file return of income in India.
This move will increase transparency with respect to the payments to non-residents.

Expectations from Union Budget 2023-2024: -

As per the provisions of the Income tax Act, 1961, to claim the benefit of double taxation avoidance agreement (DTAA), a non-resident is required to obtain certificate of residence from home country along with furnishing of Form10F, as applicable.
Recently, the Central Board of Direct Taxes (CBDT) has issued a notification stating that Form10F is to be filed electronically. This poses a practical difficulty for the non-residents, requiring them to necessarily obtain a permanent account number (PAN) for the e-filing portal, even in cases where they are not required to file income tax return in India.
To resolve this issue, the earlier system of furnishing manual Form10F could be restored for non-residents who are not required to obtain PAN in India. Alternatively, a non-PAN based login facility can be enabled over the portal for them.

Conclusion

The non-residents will be required to add one more compliance to be carried out in India i.e. obtaining PAN if not obtained already and filing Form 10F electronically on their e-filing portal.
The non-residents would require assistance from professionals in India to comply with the above requirements.
The mischief of not obtaining valid TRC and Form 10F before making payments to non-residents will stop.
The tax department would be able to tap the transactions with non-residents and track their compliances in India.