Unlinked PAN with Aadhaar Result in High Tax Demands, Putting Firms in a Difficult Position

Numerous employers are facing difficulties due to Income Tax Department notices demanding unpaid taxes from employees who did not meet the May 31 deadline to connect their PAN and Aadhaar numbers, with some companies receiving tax demands for employees earning below the taxable income limit.

This April the revenue department mentioned that PANs will become inoperative when not linked with Aadhaar by May 31, requiring the tax deductions to be made at a more elevated rate, and refunds to be withheld. The same has kept an extension from an identical directive the previous year that such consequences of inoperative non-Aadhaar linked PANs were to be invoked from July 1, 2023.

The department as of March 31, 2024, has issued nearly 75 crore PANs or Permanent Account Numbers. A little under 11.5 crore PANs were not have been linked to Aadhaar by January this year.

Circular language is clear that this higher rate is subject to be applied merely in cases where the tax is deductible, the tax authorities during the processing of the withholding tax returns had applied higher rates even where the salary income is less than the set limit.

Issues are emerging from it for the companies as they are notifying the matters less than the limit only for the objective of issuing the salary certificates (Form 16) to such employees.

Many companies are seeking employees to link the PAN after receipt of the demand notices, and have been modifying their withholding tax returns, but there no clarity is there on the taxman’s stance in such cases.

These cases are not been considered by tax authorities and the demand is pending to get paid as the linking is after the extended due date. Various norms are also been filed in matters where the payments are less than the set limit, and hence no need to withhold the tax is there and the question of the higher rate is not applicable.

Tax experts said that a person can say that no loss is there to the companies as they may recover the amount from the employees the same shall not be easier to recover the tax in the cases where the salary of the employees is less than the limit or in the cases where the employees have left the company.

The Central Board of Direct Taxes (CBDT) had not responded to inquiries on the matter up until the point of publication.

Akhil Chandna, partner at Grant Thornton Bharat pointed out that for the FY 2023-24, they should deposit the outstanding tax amount if the employee’s PAN and Aadhaar remain unlinked after May. Subsequently, the employees must claim the TDS amount by filing or revising their tax return for 2023-24 for PAN-Aadhaar linkage.

According to Suresh Surana a CA, it mentioned that the employers might obtain the notices for the short deductions if they had deducted a taxes at 20% lower rate which shall be within the interest and penal consequences.

Mr. Surana cautioned that the employers are required to validate that all the employees have linked their PAN with Aadhaar to ensure the precise TDS (tax deduction at source) and prevent these notices. Where the employees had linked their PAN and Aadhaar on or before May 31, employers shall not be obligated for the short deduction. Linking PAN and Aadhar might not impact such demand notices.