The share of tax revenues as a proportion of a country’s gross domestic product (GDP), commonly known as the ‘tax to GDP ratio’, reflects the rate at which taxes fuel a nation’s economy.

India’s tax to GDP ratio has seen an improvement in the past few years with the ratio standing at 10.9% for the fiscal year ending 31 March 2019. As against this, the average tax to GDP ratio for Organisation for Economic Co-operation and Development (OECD) countries is around 35% and the ratio is between 10% to 25% for countries in the Asia-Pacific region.

Evidently, one of the stated objectives of the government’s tax policy has been to widen the tax base for both direct and indirect taxes which would lead to an increase in tax collections and an improvement in the tax to GDP ratio.

Successive governments have taken various policy initiatives over the years towards achieving this objective, including steps to increase the taxpayer base.

One of the important steps in this direction was amending the tax laws to make it mandatory to quote the permanent account number (PAN) in a range of economic activities/ transactions which would help the government identify high-value transactions, investments in shares, immovable property, cash spends above specified limits, etc.

PAN is a 10-digit alphanumeric number issued by the government’s income tax department, which is used as the central identification of a taxpayer in India.

The Income-tax Act, 1961 (Act) lays down the framework for allotment and usage of PAN which, inter alia, includes the list of persons who are required to apply for PAN, quoting of PAN in all income-tax and tax withholding returns, correspondence with any income-tax authorities, specifying transactions where PAN is required to be quoted, etc.

PAN also facilitates easy retrieval of information related to investments made by persons, banking transactions and other business activities of taxpayers collected by the government through various sources.

In 2017, the government amended the tax laws to provide that every person who is eligible to obtain an Aadhaar number shall link his/her PAN to his Aadhaar number. Aadhaar is a 12-digit unique identity number issued by the Unique Identification Authority of India (UIDAI), after verifying the demographic and biometric information of the individual.

Individuals who are residents of India are eligible to apply for and obtain Aadhaar number. A ‘resident’ for this purpose is any individual who has been living in India for at least 182 days, in the year immediately preceding the date of application for enrolment. The government also issued a notification in May 2017 exempting the following categories of individuals from obtaining Aadhaar, provided they do not already hold Aadhaar or have not enrolled for the same:

(i) Residents of states of Assam, Meghalaya and Jammu and Kashmir;

(ii) individuals qualifying as non-resident (NR) under the Act;

(iii) Individuals whose age is 80 years or more at any time during the tax year; and

(iv) Individuals who are not citizens of India.

The key objective behind linking Aadhaar and PAN was the elimination of duplicate PANs. Instances of duplicate/multiple PANs obtained by some individual taxpayers under different names or variation in names had come to the attention of tax authorities. By linking Aadhaar, based on its unique bio-metric identifying mechanism, the problem of duplicate PANs could be dealt with in a more systematic and fool-proof manner.

Impact of Aadhaar-PAN linking

Finance Act 2017 introduced provisions in income tax laws, which sought to link Aadhaar number with PAN and provided that:

* Every person who was eligible to obtain Aadhaar number was, with effect from 1 July 2017, required to quote the same in the PAN application form and in the income-tax return (IT return) form. Individuals who do not have an Aadhaar number were permitted to quote the enrolment ID of the Aadhaar application form in the PAN application/ IT return.

* Every person who held a PAN as on 1 July 2017 and who was eligible to obtain Aadhaar number was required to intimate the Aadhaar number to the tax authorities within the date to be specified by the government.

The Central Board of Direct Taxes (CBDT), which is the apex tax administrative body, had initially notified 31 March 2019 as the specified date by when Aadhaar number was required to be intimated to tax authorities. To facilitate taxpayers who may not have received Aadhaar number or may not have been able to link the two numbers, this deadline has now been extended to 31 December 2019.

Aadhaar-PAN interchangeability introduced by Finance (No. 2) Act, 2019

Taking the Aadhaar-PAN linking a step further, the government in July 2019 announced its intention to make Aadhaar and PAN interchangeable. This would enable individuals who do not have a PAN to quote their Aadhaar number in I-T returns or in any other document where PAN is required to be quoted.

Towards this objective, the following amendments were introduced in the tax laws:

* Every individual who is required to quote his PAN for any purpose under the Act and who does not have a PAN, may quote his Aadhaar number in lieu of PAN. Such individual shall be subsequently allotted a PAN based on the Aadhaar number

* In case of an individual who has a valid PAN and who has intimated his Aadhaar number to the tax authorities, he may quote the Aadhaar number in lieu of PAN

* An individual entering into any of the specified transactions can quote PAN or Aadhaar number in the documents related to such transaction.

In order to give effect to the above amendments, the CBDT has specified that it would be deemed that a person who was required to quote PAN, but in its absence quoted his/her Aadhar number, has applied for allotment of PAN. Further, the documents and information collected during the allotment of Aadhaar will suffice for the purpose of allotment of PAN. CBDT has also notified that taxpayers can now quote ‘PAN or Aadhaar Number’ in the forms/ documents where earlier quoting of PAN was mandatory.

Convergence of PAN and Aadhaar is a welcome step which will avoid duplication of efforts and reduce the time involved in a fresh application for PAN. It will also help widen the PAN database and gradually reduce the gap between the number of Aadhaar holders and individuals who hold PAN in the country. In today’s times, digital platforms have emerged as a vital tool for ensuring good governance.

Collection and verification of authentic data from people and integration of different databases will enhance the administration’s efficiency in revenue collection and taxpayer’s experience. It is, therefore, important for individual taxpayers to ensure that compliances vis-à-vis PAN and Aadhaar number are understood and the relevant information in the PAN/Aadhaar database is duly updated.

Piyush Thakur contributed to this article.

Vikas Vasal is national leader-tax at Grant Thornton India. You can send your queries to vikas.vasal@in.gt.com

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