India’s Tax agency plays key role in promoting adoption of digital public infrastructure initiatives: IMF

According to the International Monetary Fund (IMF) working papers, India’s tax agency has played a key role in pushing the adoption of digital public infrastructure (DPI) initiatives such as unique identification numbers for individuals. In India, the Permanent Account Number (PAN), which was created in 1972 and preceded the Aadhar card, is a unique, ten-character alphanumeric identifier assigned to all judicial entities identified under the Indian Income Tax Act, of 1961. The PAN was made required for all tax reasons. PANs, which were accompanied by a laminated identification card, were widely used in various areas of public administration.

This is apparent in the fact that much more PANs were issued than active taxpayers managed at any given moment (estimates suggest nearly 400 million were issued in excess of active taxpayers). ‘Stacking up the Benefits: Lessons from India’s Digital Journey’ is a working paper “stated that Aadhar, the successor to PAN, codified the requirement for a national identity solution beyond the boundaries of tax administration.

“In developing Aadhaar, it benefited from PAN’s many lessons, notably incorporating the use of biometrics to reduce tax and financial fraud,” the paper read.

“The number of PAN allottees increased exponentially following the out-sourcing of non-core activities (including allotment of PAN) performed by the tax administration on a public-private partnership (PPP) basis during the period 2003-04,” the paper added.

To improve the economy, efficiency, and effectiveness, ITD employed reputable private firms as managed service providers to process applications, collect, handle, and verify personal documents such as proof of ID, age, and address, clarify with applicants, print the laminated card, and mail.

The core functions of tax administration rely significantly on DPI initiatives, and Aadhaar is likely to change tax administration compliance activities by boosting register consistency among public entities. The continuing initiative to connect PANs to Aadhaar is expected to be completed by March 2023.

PANs that are not connected to Aadhaar will become inoperative at that time, signalling a broad shift to reliance on the platform that will affect practically all processes, from registration to filing, payment, and compliance casework. According to the IMF, widespread use of Aadhaar has the potential to greatly improve the use of third-party data for risk analysis and enforcement operations in tax administration.

The Goods and Services Tax Network is an example of a specialised DPI that has assisted in strengthening tax collecting capability while also providing a platform for innovation.