Why India’s supreme court allowed linking Aadhaar with PAN

Into the tax net.
Into the tax net.
Image: REUTERS/Mansi Thapliyal
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The supreme court’s verdict on India’s Aadhaar Act, pronounced last week (Sept. 26), walks a fine line between an individual’s right to privacy and the interests of the state.

Put differently, your unique 12-digit Aadhaar number can no longer be demanded by corporate entities for services like getting a new SIM card or opening a bank account. However, the apex court has upheld, among other things, the need to link Aadhaar with your permanent account number (PAN).

The linking, it is hoped, will weed out fake PANs from the system and also make it obligatory to quote the PAN number in financial transactions such as the sale of property or while depositing large amounts in a bank account.

In effect, the supreme court has endorsed section 139AA of the Indian Income Tax Act, introduced in Budget 2017. The section makes quoting of the Aadhaar number mandatory while applying for a PAN card and for filing income tax returns. In cases where a PAN has already been allotted, it is mandatory to link the existing PAN with the Aadhaar number.

The supreme court, in its judgment, systematically evaluated and found merit in the various arguments for linking PAN with Aadhaar.

Weeding out fake PANs: While pronouncing its verdict, the supreme court acknowledged that there is a “legitimate state interest” behind eliminating fake PANs from the financial system. This can be done by way of linking PAN cards with the biometric-based Aadhaar, which is backed by a robust technology that safeguards against duplication.

In India, this is a pressing need.

A report by the central board of direct taxes, the authority mandated to collect income taxes, has said it has detected 10.52 lakh fake or duplicate PANs belonging to individual taxpayers. While this amounts to just 0.4% of the total PANs allotted in the country, in absolute terms it is too huge a number to be ignored.

Document verification: The supreme court also took cognisance of the fact that verification of data or original documents while applying for PAN happens in less than 0.2% of the cases. The linking of Aadhaar with PAN would allow 100% seamless verification of data entered in PAN applications.

Tax compliance: It has been observed that, in many high-value transactions involving the sale or purchase of property, individuals do not quote their PAN despite having a valid number. This is typically done to conceal the transaction from the taxman.

In the absence of a PAN, the law permits an individual to submit a declaration while conducting such transactions. This has led to deliberate avoidance in quoting of PANs, even when the individual had a valid PAN card number.

With the mandatory linking of PAN and Aadhaar, it is hoped that such transactions can’t be covered up.

Easy financial trail: India is a signatory to the Inter-Governmental Agreement for Improving International Tax Compliance and for implementing international laws such as the Foreign Account Tax Compliance Act (FATCA) and the Standard for Automatic Exchange of Financial Account Information.

Under these agreements, it is the obligation of the Indian government to share information with other jurisdictions on financial transactions. Due to linking of PAN with Aadhaar, a smooth flow of information with other jurisdictions is possible.

As a PAN is the single identity proof for several transactions, an Aadhaar-linked PAN would provide an easy financial trail. This would help curb black money and keep a check on money laundering.

India’s central government has been taking measures to uncover shell companies and fictitious directors serving on various companies’ boards. It is proposed that the unique director identification number (DIN), which is allotted to directors, be provided by all directors. Non-confirmation of such details would lead to deactivation of the DINs.

The linkage with Aadhaar is also user-friendly. Tax returns filed on the e-filing portal can be electronically verified with an Aadhaar based verification code sent to the mobile number of taxpayers. This eliminates the need to send a copy of the signed tax return form to the Income Tax department or to obtain a digital signature certificate.

Also, the government recently introduced an instant PAN allotment procedure based on Aadhaar. Any person with an Aadhaar can obtain PAN instantly online without any payment.  A one-time password is sent to the Aadhaar-registered mobile number of the applicant and a PAN is allotted immediately.

With the supreme court ruling, it seems that the CBDT deadline of March 31, 2019, for linking Aadhaar with PAN, will be enforced.

(Nilesh Bhagat is a director with Deloitte Haskins and Sells LLP and Sandeep Chhugani is a manager with Deloitte Haskins and Sells LLP.)