How Technology is Transforming India’s Taxation System

“The taxpayer—that’s someone who works for the federal government but doesn’t have to take the civil service examination.”

SUMMARY

◆ The COVID-19 pandemic led to out-of-the-box ideas and models for revenue collection and taxation across the world;

◆ India used technology for taxation even before the pandemic;

◆ Post-pandemic, the new income tax portal made the filing of returns easier, resulting in a significant growth in the number of ITRs filled;

◆ With customs and GST evolving, it is easier to pay taxes now;

◆ Technological solutions come with an increasing reliance on private players.

Introduction

Despite not being traditionally considered a dynamic field, the fact is that tax- ation has seen enormous growth and evolution in the last many decades. From its very origin—as indirect taxes or tariffs on products to direct taxes 1 —the field has always been in a state of steady but constant flux. Tech-enabled solu- tions also raise the fear of job loss. This chapter will focus on the area of tax technology, which is the use of technology in taxation and will look at recent developments in India.

Tax technology is an umbrella term which refers to technological solutions in the field of taxation. Such solutions have been used by tax departments, asses- sees, tax consultants, corporations, and enterprises. There has been worldwide interest in incorporating new technology into taxation law. The Organisation for Economic Co-operation and Development’s (OECD) report, Tax Administration 2019: Comparative Information on OECD and Other Advanced Emerging Economies describes this succinctly:

The availability of new technologies, new data sources, and increasing international cooperation are providing new opportunities for tax administrations to better manage compliance, protect their tax base and reduce administrative burdens. 2

The digitisation of Value Added Tax (VAT) processes in several countries in Europe is a prime example of the advantages of tax technology. For example, the UK initiated a ‘Making Tax Digital’ campaign in order to revamp its VAT ecosys- tem. 3 The campaign led to the introduction of digital VAT records and the release and rollout of new campaign-specific software which can be used to file returns. The campaign was intended to ensure a seamless transition for business owners. In Spain, for instance, the system allows for digital scanning and submission of invoices, accounting details, as well as customs documentation. Italy and Poland are in the process of launching e-invoicing with draft laws being opened up for public commentary. 4

In direct taxation, the OECD report found a significant shift towards e-administration with more options for online filing of tax returns as well as online payments. Over forty administrations are either planning to, or roll- ing out, the use of Artificial Intelligence (AI) in the administration of taxes. 5 Private companies and government departments have worked together to bring about solutions and so the perception of them being mired in the past or being bureaucratic is untrue.

In fact, revenue departments around the world have been progressive. It is their willingness to embrace technology that has led enterprises to co-evolve. One of the factors that has driven the adoption of new technology has been the COVID-19 pandemic. Working remotely has necessitated out-of-the- box thinking and firms are now more used to the idea of working online. Departments have adapted to modern technology to ensure increased, or more efficient, revenue collection. For instance, when the Russian government man- dated the submission of transaction-level data along with VAT returns by the assessees, the domestic VAT revenues rose by more than 12 per cent—that’s a whopping US$ 4 billion. 6

However, the pandemic has taken a toll and not all professions have lent them- selves to remote work. While tax departments across the world have been proac- tive, overall tax collections have dropped in nearly every country. For instance, in June 2020, Brazil’s federal tax collection hit a sixteen-year-low while revenue in South Africa, for the fiscal year through July 2020, made an under-recovery of US$ 4.8 billion. 7 However, countries which have enabled more advanced taxation technology have reaped benefits and have been able to mitigate some challenges related to low tax collections. Let us look at India.

Experiments with Tax Technology

Indian tax authorities have adopted technology early. The focus of the Indian direct tax departments is: (i) expanding the taxpayer base; and (ii) ensuring that tax provisions are simplified.

Tax authorities have relied heavily on technology for the online application of tax registrations and the online payment of taxes. Processing of tax returns and even refunds does not need a physical interface. 8 The more friction-free this process is, the more the tax-paying base increases, especially for newer entrants in the workforce who may be unaware of legal and regulatory requirements of tax compliance. Authorities can also trim the fat and move to ‘limited assessments’ where reviews are done for specific and identified areas.

The taxpayer is at the centre of consideration. The income tax portal, released in June 2021, aimed at giving a seamless experience to taxpayers 9 —included infor- mational dashboards or interactive query responses. The step-by-step assistance on the portal can help bring new assessees into the fold. The initiative was successful with more than 6.63 crore income tax returns (ITRs) filed for AY 2021–22 on the new e-filing portal as on 15 March 2022—the due date for companies and taxpayers that are required to file a Tax Audit Report to file ITRs. 10

This amounts to an increase of over 16.7 lakh ITRs compared to the previous assessment period. Form 26AS can provide information on the amount of taxes paid or withheld, as well as refunds received. Refunds can be tracked through SMS alerts and automated reminders for ensuring that assessees have filed their taxes on time. 11 These are simple technological solutions which significantly aid taxpayers and definitely enable overall compliance. The earliest adoption of tax technology was in direct taxation. However, with customs and goods and services tax (GST) evolving, it is now easier to pay indirect taxes too.

The scope of the ‘GST Project’ cannot be overstated as it established a uniform indirect tax structure across the entire country. Its information technology (IT) platform—the Goods and Service Tax Network (GSTN)—is a boon to Indian businessmen as it provides a single-window portal for registration and filing of returns and making online payments. One of its most undervalued functions is the integration of the common GST portal with the tax administrations of both the Centre as well as States. 12

Improving the GST ecosystem includes the introduction of e-returns, e-way bills, e-invoicing, and secure business-to-consumer QR codes. The impact on collections is clear. According to the Finance Ministry, provisional net indirect tax collections for FY 2020–21 recorded a growth of 12.3 per cent. A 108.2 per cent of revised estimates of indirect taxes for FY 2020–21 has been achieved. 13

E-invoicing is a form of electronic billing used by trading partners—customers and their suppliers—to ensure that transactional documents can be maintained easily, shared, and monitored. This also ensures that various trade agreement terms are complied with. India has successfully introduced e-invoicing after seeing its success in the EU and Latin America.

The success of tax technology solutions such as e-invoicing has been but- tressed by the ready availability of solutions and products in India—often cus- tomised for niche needs—for instance, the automatic generation of e-way bills after a journal entry is posted, reconciliations between input tax credits, and case management software that can easily track litigation pertaining to specific tax areas.

Our tax departments have been working hard in the last few years to root out fake invoices or tax credits and rely on less labour-intensive methods. The GST department, for instance, uses advanced analytics and data-mining techniques to zoom in on problems in the system. 14

‘Project Insight’, the flagship project of the Ministry of Finance, aims at wid- ening the direct tax base by catching evaders using technology. 15 The ministry invested around H 150 crore for procuring software and tools for the analysis of assessment data. Under ‘Project Insight’, two new centres will be established. The Income Tax Transaction Interaction Analysis Centre is meant to improve tax administration by using data analytics, predictive modelling, and AI to flag dis- crepancies in data submitted by assessees. The Compliance Management Central Processing Centre will support voluntary compliance and issue resolution. 16

The ultimate aim of ‘Project Insight’ is to funnel data from various sources which will culminate in a ‘360 degree profile’ of a taxpayer. The data will identify compliance issues and reduce fraud through the use of predictive models and push for behavioural change. This is a time in India when the proposed use of technol- ogy perhaps exceeds its capabilities. For example, one of the stated objectives is to analyse both structured and unstructured data for identifying cases where an assessee has underreported their income. The sources for such unstructured data include social media platforms like Instagram, Facebook, and Twitter.

The technology to enable such tasks is as yet at a nascent stage and is unreliable for slapping liabilities on taxpayers. There is also the issue of privacy and consent for data use. As the scope of tax technology expands, it will be crucial to make an intersectional approach and ensure data protection is a key priority. There is growing understanding that data does not exist in a vacuum and can be more beneficial if shared. Recently, the direct and the indirect tax departments of India have signed memoranda of understanding (MoUs) for information exchange and plugging revenue leaks.

An MoU was signed between the Central Board of Direct Taxes and the Central Board of Indirect Taxes in July 2020, which would allow them to exchange data on request as well as spontaneously. 17 This would be over and above the regular exchange of data already taking place.

In fact, a Data Exchange Steering Group was also established to monitor data sharing and enable process improvements. 18 The scope of information exchange agreements can expand to trade with partner nations.

India was one of the first countries to adopt the Common Reporting Standard on the Automatic Exchange of Information developed by the Group of Twenty and the OECD nations and committed to the automatic sharing of information by 2017. 19

Naturally, the greater the data ecosystem, the more the risks associated with the safe storage and handling of data. This will be covered briefly in the next section.

The Tax Administration Reform Commission (TARC), headed by Dr Parthasarathi Shome, was set up to look at the best global practices in taxation and recommend reforms that would improve efficacy and efficiency. TARC has made multiple suggestions about the extensive use of information and communication technology to improve compliance and help forecast revenue. 20 These include ( inter alia ) the implementation of a system for online tracking of dak/grievances/ applications for refund, the promotion of e-payment for the purposes of taxation, and the initiation of a data warehousing and business intelligence project (which is closely integrated with the Directorate of Intelligence and will provide inputs to the Directorate of Risk Management).

The steps taken by the Government of India are in line with the natural pro- gression of taxation using technology. The first step is when departments enable electronic filing of returns, and the provision to submit source data online along with the returns. The next step is when this data is cross-referenced with other sources 21 in order to ensure that automated audits can be generated.

India can be said to be at this stage, with more and more improvements made every day. The acme of digitisation in tax function will be reached when the tax can be assessed not by submission of forms, but by automatic analysis of the source data. However, this requires significant advancement in many technologi- cal fields, including natural language processing (NLP), which is still a while away.

An analysis by Ernst and Young 22 finds that several countries are ahead of India in this matter, with Russia, Mexico, and parts of South America already being in the ‘e-audit’ stage and France starting a completely online e-assessment.

Challenges in Tax Technology

Any technological change is received with a certain reticence, and this is no dif- ferent. At a base level, there is resistance to change and to moving away from established systems that have worked well for decades.

There are also very practical concerns, such as the increased cost of adoption of technological solutions. The adoption of e-invoicing, for example, means the firm has to incur costs in training personnel. There are also more indirect but critical concerns, like the fear of job loss once the systems are technology enabled.

The rollout of GST in India shows that challenges in implementation can lead to temporary chaos. With time, the issues may have reduced, but there are still hiccups. The challenges for businesses range from technological (such as the instability of the GSTN during peak periods like filing or frequently updated digitalisation schemes) to those related to taxation law (including changes in the taxation law or amendments to the Harmonised System of Nomenclature codes).

Tax technology requires trained personnel for the collection of consistent and accurate data. Mandated process improvements are also required. According to sources, 23 over 90 per cent of companies use multiple enterprise resource planning systems in order to meet their compliance requirements, which leads to inconsis- tently structured or unclean data.

Evolution of Tax Teams

There will be an impact on the nature of tax teams. In the past, expertise and understanding of the law were requisite, but now it is essential that they also have technological prowess. While significant investments need to be made in software, there is an understanding that building and maintaining an effective tax function is very expensive and will have implications for building tax teams.

A fundamental question that needs to be asked is whether in-house or out- sourced tax teams are better. Technology is, of course, a key driver behind out- sourcing and enables the effective and efficient management of workflow and teams. Such a shift can mean that a company’s internal tax teams focus more on strategic and longer-term decisions, while the everyday processes and tactical decisions are made by outsourced teams.

These tax consultants also rely on technological innovations such as robotic process automation and the use of AI in the form of NLP. This enables the use of scale when it comes to offering services, such as tax compliance, which are labour-intensive and can be easily automated.

This heralded the onset of tax-process outsourcing, where grunt work is taken care of using a mix of technological automation and human oversight. For instance, in audits or reviews of tax functions, eliminating redundancies in pro- cesses, tax process enhancement, and simplifying taxation, is possible.

In fact, an interesting outcome of the advent of tax technology has been a change in the nature of tax consultants, who will now be required to provide assistance in more complex cases of tax planning—as opposed to primarily being engaged in filing matters. The field of tax advisory—like many others—will see seismic shifts with the advent of generative AI. Various use cases are being worked on: 24 increasingly competent chatbots that can formulate complex tax advice or AI-based classifiers that can automate capital allowance classifications which can then be reviewed by humans.

The Road Ahead

Private players in tax technology play a crucial role in the development of new technology. But when it comes to a function like taxation, which is enmeshed in governmental machinery and reliant on state authority for proper execution, the way forward would be for private players to work in close association with depart- ments. This would enable them to better predict upcoming changes in policy to tailor solutions, while also ensuring that government departments have reliable vendors in case they need customised technology.

Revenue departments around the world will have to take pre-emptive steps by rolling out new technology or upskilling staff. This will have to be priori- tised soon. The nature of tax policy in the near future will be contingent on how ‘future-proof’ the steps taken by government departments are.

There is also huge scope for collaboration across the ecosystem. As small and medium enterprises start the process of tax and bookkeeping automation, tech- nology solution providers can work with them to ensure that the most relevant products are built out. There are numerous touch points in the Indian taxation system, both indirect and direct, which may be a challenge to solution providers but can also serve as a great opportunity.

An interesting outcome of such collaboration can be new and expanded career options for chartered accountants or lawyers otherwise geared for traditional roles in the field of taxation law. However, given the limited State capacity for advanced technological development, and as we move towards digitisation of taxation, there will be an increasing reliance on private players. This was seen in the formation of the GSTN, where the complexity of the project meant the enlisting of private entities like Infosys and Wipro.

Infosys designed and built the GSTN, while Wipro created the Tax Information Exchange System for inter-State business. This means that State functions are being delegated to private players and decided by the market. Even after GST was launched, private players continued to be entrenched and responsible for administration, with limited or no accountability.

With India’s poor data privacy laws, the implications of State dependence on the private sector in the space of public taxation are worrying. 25 It would be prudent for the relevant government departments to work closely with the pri- vate sector in order to develop solutions that are effective but also protect citizen interests. One way forward may be the introduction, of what the OECD refers to as, ‘compliance by design’. 26 It defines this to mean that taxation departments should refer to technological developments as well as the way modern companies are structured in order to ‘incorporate tax compliance into the systems businesses use to manage their financial affairs’. 27 For example, revenue departments can work with software companies to integrate accounting software with tax rules to ensure the pre-filling of returns.

If secure chains of information are added, for example, e-invoicing or using secure portals like GSTN or electronic cash registers—a simpler tax administration is possible for assessors and assessees. Businesses need to read the writing on the wall and ensure their tax functions are not left behind amid the digital revolution. This would involve re-training and upskilling of their tax teams in important areas like change management and technological adoption.

Companies must turn to tax technology to enable data-driven decision-making, which would ensure they maintain margins. At the same time, the tax function can identify areas of improvement in current processes and find efficient solu- tions. With the increased focus on data privacy, a key area for businesses would be effective data management for online filing and compliance needs. For instance, there is a necessity for awareness of legislations like the Data Privacy Bill, 2022 and appropriate investments in data storage, servers, and data analysts.

Both governments as well as private enterprises will benefit from a more comprehensive use of technology for the collection and analysis of data and information.

Brazil introduced a real-time reporting system which is now being emulated by a number of countries in South America. 28 Corporations are starting to use web-based platforms enabled with various AI functionalities to store and process data, as opposed to Excel spreadsheets. This allows for exponentially quick data entry, manipulation, transformation and review.

As collaboration software becomes more prevalent, it is easy to image a scenario in the near future, where the revenue department gets access to accounting data of firms in real time, with taxation obligations being calculated automatically. To be successful in this endeavour, companies should ensure that their business processes are effectively tied in with their tax technology solutions of choice. This will give them a competitive edge that goes beyond merely meeting the regulatory requirements of the country.

Can Technology Drive India’s Taxation?