The Backdoor Entry Of Aadhaar Into Income Tax Law And Its Implications

The curious case of how our Prime Minister, when he was not the Prime Minister, strongly criticised the UPA government on the Aadhaar Card initiative and how, now that he is the Prime Minister, seems to be adamant on forcing every Indian to apply for and have an Aadhaar Card, seems to be foxing most people.

The NDA government has, since the time it came to power, suddenly discovered the hidden merits of the concept of the Aadhaar number and has started making it mandatory for various services.

The latest missile of the government in this regard is the quiet amendment made to the Finance Bill, 2017 when it was placed before the Lok Sabha for approval. Among several amendments made to the Finance Bill this one stands out. It is the insertion of a new Section 139AA with effect from July 1, 2017.

The section is as under:

The Section That Makes Aadhaar Necessary To File Taxes

139AA (1): Every person who is eligible to obtain Aadhaar number shall, on or after the 1st day of July, 2017, quote Aadhaar number -

• in the application form for allotment of permanent account number;
• in the return of income;

Provided that where the person does not possess the Aadhaar Number, the Enrolment ID of Aadhaar application form issued to him at the time of enrolment shall be quoted in the application for permanent account number or, as the case may be, in the return of income furnished by him.

139AA (2) : Every person who has been allotted permanent account number as on the 1st day of July, 2017, and who is eligible to obtain Aadhaar number, shall intimate his Aadhaar number to such authority in such form and manner as may be prescribed, on or before a date to be notified by the Central Government in the Official Gazette:

Provided that in case of failure to intimate the Aadhaar number, the permanent account number allotted to the person shall be deemed to be invalid and the other provisions of this Act shall apply, as if the person had not applied for allotment of permanent account number.

139AA (3): The provisions of this section shall not apply to such person or class or classes of persons or any State or part of any State, as may be notified by the Central Government in this behalf, in the Official Gazette.

Explanation - For the purposes of this section, the expressions -

• "Aadhaar number", "Enrolment" and "resident" shall have the same meanings respectively assigned to them in clauses (a), (m) and (v) of section 2 of the Aadhaar (Targeted Delivery of Financial and other Subsidies, Benefits and Services) Act, 2016;
• "Enrolment ID" means a 28 digit Enrolment Identification Number issued to a resident at the time of enrolment;

Implications

Applying for PAN, Need Aadhaar
Thus, as per the new section, any person who is “eligible” to obtain the Aadhaar number has to, on or after July 1, 2017, quote the same if he or she applies for a permanent account number (PAN - necessary to file taxes) and also quote it in the return of income.

Filing Return, Need Aadhaar
Consequently, for the persons who are covered by this amendment, if they want to file a return of income on or after July 1, 2017, it will be mandatory to quote the Aadhaar number in the return. It may be noted that in the income tax return (ITR) forms that we already have, there is a field for quoting the Aadhaar number where it is allotted. With this latest amendment, it has become mandatory for the affected persons to quote the Aadhaar number in the ITR form.

Sub-section (2) of the new section makes it mandatory for existing PAN holders who are “eligible” to obtain the Aadhaar number and to intimate their Aadhaar number “to such authority in such form and manner as may be prescribed, on or before a date to be notified by the Central Government in the Official Gazette.”

No Aadhaar, PAN Cancelled
The proviso to Sub-section (2) is the proverbial last straw on the camel’s back!

It says that if an existing PAN holder who is eligible to obtain the Aadhaar number fails to intimate the Aadhhar number then “the permanent account number allotted to the person shall be deemed to be invalid and the other provisions of this Act shall apply, as if the person had not applied for allotment of permanent account number.”

Thus, for example, if a person has got a PAN which was allotted to him, say, more than 15 years ago and who has been regularly filing his return of income for all these years using that PAN and who has been assessed also by the income-tax department for so many years, and such person does not intimate his Aadhaar number to “such authority in such form and manner as may be prescribed, on or before a date to be notified by the Central Government in the Official Gazette”, then the PAN will be deemed to be invalid!

No Aadhaar, PAN Cancelled, Pay Penalty
This provision is highly unfair and completely unwarranted. Readers may keep in mind the provisions of Section 272B(1) which mandate that if a person who is supposed to obtain a PAN as per the provisions of Section 139A does not do so, then he can be penalised with a penalty of Rs. 10,000.
So, the same person who had a PAN and who used it for 15 years can now suddenly be hauled up by an over zealous officer under Section 272B for not obtaining a PAN simply because his PAN (which, as mentioned above, was accepted by the income-tax department for 15 years) is now deemed to be invalid.
In any case, such a person will need to reapply for a new PAN. That new PAN application will require the Aadhaar number to be quoted. The new PAN will then have to be intimated to the bank, depository participant, mutual funds etc. The pain and the hassles that such a person would have to undergo is unimaginable and completely unwarranted.

Exceptions
Sub-section (3) provides the power to the government to notify “such person or class or classes of persons” to whom this section will not apply. This means that, the government reserves the right to exempt certain persons or certain class or classes of persons from the requirement of quoting the Aadhaar number in the return of income.

Who Does This Apply To

Now coming to the main issue of the requirement of quoting the Aadhaar number in the return of income. As stated earlier, it is applicable to those persons who are “eligible” to obtain the Aadhaar number.

To know who is eligible to obtain an Aadhaar number, one must look at the Aadhaar (Targeted Delivery of Financial and other Subsidies, Benefits and Services) Act, 2016.

Section 3 of this Act is as under:

Every resident shall be entitled to obtain an Aadhaar number by submitting his demographic information and biometric information by undergoing the process of enrolment:

Provided that the Central Government may, from time to time, notify such other category of individuals who may be entitled to obtain an Aadhaar number.

Thus, there is a reference to “resident” in the section that lays down who is entitled to obtain the number. The term “resident” is defined in Section 2 of this Act as under:

• “resident” means an individual who has resided in India for a period or periods amounting in all to one hundred and eighty-two days or more in the twelve months immediately preceding the date of application for enrolment;

No Artificial Entities, Only Individuals
Thus, it is clear that only individuals are eligible for the Aadhaar card. Therefore, this clearly removes any doubt that anyone may have had about the status of all artificial entities such as companies, partnership firms, LLPs, Trusts etc. These entities are not entitled to an Aadhaar number and are therefore not covered by the new section 139AA.

What About Non-Residents?
Secondly, the definition of “resident” refers to an individual who has been physically present in India for 182 days or more (whether at a stretch or in bits and pieces) during the 12 months immediately preceding the date of application for enrolment. This last part of the definition is very important as it is likely to cause a lot of problems.

There is a common perception that “non-residents” are not entitled to the Aadhaar number. Based on this perception, as soon as the news about the new Section 139AA surfaced in the media, many people started advising that “NRIs” are not covered by this amendment because they are not eligible to apply for Aadhaar.

However, this advice may be relooked at by the concerned NRIs. First of all, one must be aware that the term “Non-Resident Indian” does not exist in the Income-tax Act. It is also not referred to in the Aadhaar (Targeted Delivery of Financial and other Subsidies, Benefits and Services) Act, 2016. This term is generally referred to with reference to the Foreign Exchange Management Act. Under the Income-tax Act, the reference is always to a person “Resident in India” or to a person “Non-Resident in India”.

The definitions of all these terms are different under the respective laws. Under the Income-tax Act, residency is determined with reference to the number of days of stay in India during the financial year. Under FEMA too it is determined with reference to the stay in India during the financial year. However, under FEMA, the intention of the person is also relevant. Now, under the Aadhaar (Targeted Delivery of Financial and other Subsidies, Benefits and Services) Act, 2016, the test of residency is with reference to number of days of stay in India but NOT with reference to the financial year. It refers to the 12 months immediately preceding the date of application for the Aadhhar number. This difference is likely to cause problems for many people. It may so happen that an NRI may come to India on November 1, 2016 and stay here till March 31, 2017. He then goes back to his home in USA. He once again comes to India in May 2017 and stays here for say 60 days and goes back to USA.

Now, under the Income-tax Act, he may continue to be a non-resident for tax purposes for both financial years 2016-17 and 2017-18. Under FEMA too he may continue to be an NRI. However, under the Aadhaar (Targeted Delivery of Financial and other Subsidies, Benefits and Services) Act, 2016, he would become a “resident” the moment he completes a total stay of 182 days or more in India in June, 2017. Now, would such a person therefore become eligible to obtain an Aadhaar number? If yes, would such person get covered by the new section 139AA?

Thus, NRIs need to be very careful about this new provision.

That’s Not All
Apart from the problems mentioned above, there are operational issues also which will affect even those people who already have an Aadhaar number.

Readers would be aware that even today, when a person logs on to the income-tax department’s e-filing portal (www.incometaxindiaefiling.gov.in), a window pops up immediately exhorting the tax payer to link his Aadhaar number to the PAN. Last year, the e-filing facility made it possible for a tax payer to generate an Electronic Verification Code (EVC) through the Aadhaar number and use EVC that to e-verify the e-return filed. If one did this, there was no need to then send a physical ITR-V to the Central Processing Centre of the Income-tax department. This was a great feature and many people have availed of this facility. As per the statistics provided on this portal, as many as 1.02 crore tax returns were e-filed using the Aadhaar linked EVC facility.

Now, there have been a number of practical difficulties in linking one’s Aadhhar number to the income-tax e-filing portal. Small discrepancies in the full name of the tax payer or discrepancies in the date of birth etc result in a mismatch. At the time of linking the Aadhaar number to the PAN, the software verifies the details in both databases and if there is even a small mismatch, the linking fails.

Similarly, in many cases, after marriage, a lady may not bother to change her surname (and in some cases even the name) in the Aadhaar database but may get it changed in the PAN records. In such cases, the linking of the Aadhaar to the PAN has failed in the past. In all such cases, therefore, it would become mandatory for a PAN holder or a PAN applicant to ensure that the name, surname, address, date of birth all match in both records. Whichever needs to be changed must be changed immediately. Otherwise, at the time of filing the return of income, there will be a problem.

Backdoor Entry

To sum up, I would say that:

Ameet Patel is a tax expert and Partner at Manohar Chowdhry & Associates.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.