Many employers are in a fix over demand notices from the Income Tax (I-T) Department for short deduction of tax on the income of employees who had not complied with a May 31 deadline to link their PAN and Aadhaar numbers, with some firms reporting tax demands even for workers earning less than the taxable income threshold.

The Revenue Department, this April, said that PANs will become inoperative if not linked with Aadhaar by May 31, necessitating tax deductions to be made at a higher rate, and refunds being withheld. This marked an extension from a similar directive last year that these consequences of inoperative non-Aadhaar linked PANs were to kick in from July 1, 2023.

As of March 31, 2024, the department had issued about 75 crore PANs or Permanent Account Numbers. By January this year, a little under 11.5 crore PANs were yet to be linked to Aadhaar.

“While the language of the circular is clear that such higher rate is applicable only in cases where tax is deductible, the tax authorities while processing the withholding tax, returns have been applying higher rates even where the salary income is below the prescribed threshold,” Anita Basrur, partner, at Sudit K. Parekh & Co. LLP told The Hindu.

“This is creating unnecessary issues for the companies as they have been reporting cases below the threshold limit merely for the purposes of issuing salary certificates (Form 16) to such employees,” she noted.

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

“It is seen that the tax authorities are not considering such cases and the demand still remains as payable since the linking is after the extended deadline. Many grievances have also been filed in cases where payments are below the prescribed threshold, and thus there is no requirement to withhold tax and the question of higher rate does not apply,” she pointed out.

“While one may state that there is no loss to the companies since they may recover the amount from the employees, it will be difficult to recover the tax in cases where salary of the employees is below threshold or in cases where employees have left the organisation,” Ms. Basrur emphasised.

Queries to the Central Board of Direct Taxes on the issue had not elicited a response till the time of going to press.

Akhil Chandna, partner at Grant Thornton Bharat suggested: “For financial year 2023-24, they should deposit the outstanding tax amount if the employee’s PAN and Aadhaar remained unlinked after May. Thereafter, the employees should also claim the TDS amount by filing or revising their tax return for 2023-24 subject to PAN-Aadhaar linkage”.

Suresh Surana, a chartered accountant, said that employers may receive notices for short deductions if they have deducted taxes at a rate lower than 20%, which would also be subject to interest and penal consequences.

“Employers must verify that all employees have linked their PAN with Aadhaar to ensure accurate TDS [tax deduction at source] and avoid such notices. Where employees had linked their PAN and Aadhaar on or before May 31, employers would not be liable for short deduction,” he said. However, linking PAN and Aadhar subsequently may not impact these demand notices, Mr. Surana cautioned.