The government (through an amendment to the Finance Bill 2017) has proposed to make Aadhaar, the unique number issued by the Unique Identification Authority of India, mandatory for filing income tax returns as well as applying for a PAN card, and failing to declare Aadhaar may lead to the PAN card being deemed invalid.
Hence, effectively from 1 July 2017, unless a PAN is linked with the Aadhaar, it may not be considered valid. Accordingly, “whenever a PAN number is required to be quoted for any transaction (e.g. property purchase, bank account opening etc.), such PAN number will have to be linked to an Aadhaar number. This move comes in a series of measures adopted by the government with an intention to curb tax evasion. The fact that many persons were found with multiple PAN cards by the Income Tax Department perhaps prompted the government for this change,” says Parizad Sirwalla, Partner and Head, Global Mobility Services, Tax, KPMG in India.
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According to her, in the short run, this may pose practical challenges specifically for foreign nationals or other individuals who may not have an Aadhaar number. Also, this could result into an additional compliance for such individuals. However, the long-term impact would need to be assessed after the government notifies the specified category of persons who would be excluded from mandatory quoting of the Aadhaar number.
Whatever be the case, experts say this decision is yet another step taken by the government to make Aadhaar a powerful and necessary document. Also, contrary to general perceptions, this does not reduce the importance of other documents like PAN card at least at present.
“The UID is of high importance to the people below the poverty line. The UID card will help them become part of the formal banking system, which can be treated as the first step to democratize finance. The Aadhaar system does not collect other information such as economic status, bank account details, etc., and does not hold any data about any day-to-day transactions of individuals such as banking transactions, travel, hospital visits, etc,” says Adhil Shetty, CEO, BankBazaar.com.
The PAN card, on the other hand, is used to determine the total income and the tax payable. It is applicable to anyone who conducts business in India, and for which they may have to pay tax on. So the two documents serve two different purposes. “In a nutshell, PAN is a way for the Income Tax Department to keep tabs on your financial dealings whereas Aadhaar’s main purpose is to create a centralized database of each citizen residing in India. PAN is a very useful tool to estimate the total tax revenue being generated in the country and to be used as an identification document is not its primary job. Aadhaar authenticates a person’s identity as it is linked with the name, photograph, and biometric data,” informs Shetty.
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Will Focus On Aadhaar Make PAN Card Redundant?
As mentioned in the mission statement of UIDAI, Aadhaar has always been aimed at providing all resident Indians with a unique identity. Especially when the Aadhaar penetration is much higher, almost 112 crore as compared to only 25 crore PAN card holders, the government would definitely want to leverage it for unearthing black money, tracing benami transactions and increasing the overall taxpayer base. But it does not mean that PAN will be out of the picture immediately, say experts.
Currently, the aim of the government is to link maximum possible financial transactions to Aadhaar and then map Aadhaar to your PAN. This will help the government relate a particular transaction to a real identifiable person eliminating/reducing the benami transaction. It will then compare those transactions with the income reported in the tax return of the identified person, and if there is any discrepancy, it can immediately be called for further investigation.
However, “slowly and steadily, the government is inching towards giving Aadhaar the status at par with social security no. in the US. The time, therefore, may not be too far when Aadhaar may completely replace PAN and you may be able file your tax return just by mentioning your Aadhaar number. This may also mean that majority of your tax-related details will be auto populated in your tax return form and you may just have to cross check the details and approve them. Though this is a long-time bet, but can’t be ruled out completely,” says Chetan Chandak, Head of Tax Research, H&R Block India.
There are also some security concerns as third-party agencies are involved for collecting data for Aadhaar. However, experts say that the UIDAI itself has clarified that the usage of private agencies is commonplace in most government systems, including the Passport system of India, which also collects demographic and biometrics data. From this perspective, usage of private agencies/companies in itself is not against any government practices. Moreover, there are legal statutes in place that prevent third parties from holding the Aadhaar data. They are only allowed to collect and transmit the encrypted data to the UIDAI servers and receive acknowledgements.
As far as data integrity is concerned, UIDAI has implemented strong security and data protection measures, which makes it impossible to steal data. Each electronic file containing resident demographics and biometrics is strongly encrypted at the time of enrolment, i.e., even before saving any data to any hard disk. “The Aadhaar system is said to be one of the few systems in the world implementing high level of security, traceability, and data protection at each level, i.e., from data submission to data access. It is designed in such a way that neither the “purpose” of authentication nor any other transaction context is known to the Aadhaar system itself. As they say, this design was precisely to create a “zero-knowledge” system to protect privacy. If users still have concerns related to security, the biometric locking feature is provided allowing Aadhaar holders to lock their biometrics and unlock only when needed, ensuring that only the Aadhaar holders can use their biometrics,” says Shetty.
Experts say that the government has appointed the best suitable agencies after all the due diligence and validation, which is bound by the service terms agreed between the government and the agencies. Further, UIDAI is making all efforts to make it more secured. For instance, it has already clarified that all devices that use Aadhaar authentication will have to follow its new encryption standards starting June 1st. This means adding another layer of security to the hardware.
“Apart from this, UIDAI has recently come out with new specifications and asked manufacturers and vendors to go for STQC certification, as per the new standards. From June 1, all the devices should be on the new specifications and the existing devices should be upgraded as per the new norms. But ultimately every system (including social security no in the US) is prone to some or other risk of error or mischief, and Aadhaar is no exception. Hence, be it a government agency or a third party managing it, there will always be a risk of human error or mischief,” says Chandak.