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What is Income Tax Clearance Certificate?

There are a few transactions where obtaining an Income-Tax Clearance Certificate is currently required under the Income-Tax Act.

Earlier, many transactions required obtaining an Income-Tax Clearance Certificate. For instance, while filing a tender for government works, registration of immovable properties, renewal of import/export licenses, renewal of post licenses, and renewal of shipping licenses. With liberalization, all these have been dispensed with. Now, taxpayers are only required to quote their Permanent Account Number (PAN) in their tender or other relevant documents.

There are a very few transactions, however, where obtaining an Income-Tax Clearance Certificate (or similar certificate) is currently required under the Income-Tax Act, 1961.

Here they go:

Certificate under Section 281 of the Act

“The Income-Tax Act provides that if any person transfers or alienates any property while any proceedings under the Income-Tax Act is pending, such transfer/alienation is void as against demand from income-tax unless (a) the transaction is for adequate consideration and without notice of pending proceedings/demand; or (b) with previous approval of the tax officer,” says Ashok Shah, Partner, N.A Shah Associates LLP.

In a large property transaction or sale of business, it is an usual practice of the purchaser to insist on the seller for obtaining such a certificate, as the purchaser does not want to get involved in the controversy with the tax department later on.

Certificate under Section 195/197 of the Act

  • The Income-Tax Act provides that any person who is making any payment/crediting any amount to the non-resident, then he is required to withhold tax, if such amount is liable to tax in India in the hands of such a recipient.
  • “If a person makes remittance without deduction of tax at source and later on the tax department holds that such payment was liable to tax in India, remitter is made liable for such tax,” says Shah.
  • Hence, if the remitter wants certainty, he can approach the tax officer for the issue of certificate and remit the amount in accordance with such a certificate.
  • Similarly, the recipient can also approach the IT Department for grant of a certificate for receipt of money without deduction of tax at source.

Certificate under Section 230 of the Act for persons not domiciled in India, leaving India

If a person who is not domiciled in India, comes to India for the purpose of business, profession or employment and who derives any income in India is required to obtain a tax clearance certificate before leaving the country.

This certificate is needed to ensure that such a person, before leaving the country, has duly paid all the taxes on the income earned in India by means of business or employment.

It is, however, imperative to note that “any person who is not domiciled in India but visits India as a foreign tourist or for any other purpose not connected with business, profession or employment does not need to obtain a tax clearance certificate from tax authorities,” informs Shah.

Any assistance or guidance needed in relation to Income Tax E-filing or any other matters, please reach out to us at contact@msassociates.pro.