Taxation Takes Multiple Digital Strides In India

Digital India, an initiative to transform India into a digitally empowered knowledge economy, has been in focus for the last few years. The Covid-19 pandemic has also proven and brought out the importance of being digitally enabled. The adaptability of governments and businesses to sustain in an environment where most of the country was under a lockdown, has clearly established that digitalisation will be the key to the future development. Hence, it is important how governments and organisations leverage technology even in the field of taxation to improve tax collections, and make it more transparent and simple for a taxpayer.

Tax authorities have shifted their focus from simply processing taxpayers’ data to proactively tapping sources of income. Evolving technologies such as blockchain, robotics process automation (RPA), and artificial intelligence (AI) mark the beginning of a new era where maximum transparency is ensured, there is increased efficiency in processes, errors are minimised and working is more efficient. The Prime Minister has stated that the “tax system should be seamless, painless and faceless”.

Faster, Stronger

We have seen multiple changes in recent years, the biggest being the move to e-filing of tax returns. E-filing has not only helped in faster processing of returns, but has also minimised the chances of errors, improved user convenience and enabled timely availability of information and updates. Plus, the add-on features of accessing the previous year’s returns, other tax-related information through Form 26AS, status of pending tax refunds, and more has been a boon for the taxpayer.

With the changing environment and requirement of transparency in taxation, the focus of tax authorities is to have an accurate and a detailed insight on the information of the taxpayer and to streamline and simplify the tax filing process. With this agenda, authorities have leveraged technology heavily. The recently launched income tax portal, E-filing 2.0, is bringing the government’s digital vision to life.

The new portal helps taxpayers experience a user-friendly interface and keep a track of the status of their tax compliances. It serves as a one-stop hub for all tax nuances, from filing of returns to tracking refunds, managing assessments, initiating rectifications and more. All this without the need to visit the tax office.

With the introduction of various technologies and data being integrated from different sources, the government has been mapping the details of each individual with their income. This is then used to facilitate pre-populated forms with all the details of the individual’s financial transactions.

Establishing electronic platforms for tax registration, filing, payment and assessment makes the processes clear and put more onus on the taxpayers to ensure correctness of information and to meet the prescribed timelines.

With all these improvements, tax filing has become faster and stronger.

Wider Tax Base

The government has taken several other initiatives to imbibe and promote digital ways of working to not only help the taxpayer but also increase compliance and broaden the tax base. A few of these changes are:

a. Introduction of Annual Information System (AIS). AIS captures the financial information available with the income tax department as displayed in Form 26AS.  It also includes additional information relating to interest, dividend, securities transactions, mutual fund transactions, foreign remittance information, etc. Thus, this digital document not only provides transparency, but also complete information on the taxpayer’s financial activities, which helps in accurate and complete disclosure in the tax returns. However, the onus still lies with the taxpayer to check for discrepancies, reconcile the numbers and dispute wrong disclosures, if any. Otherwise, one runs the risk of misreporting, leading to penal implications.

b. Validation/authentication of notices, requisitions, letters or orders received from the tax department. This online feature on the e-filing portal allows taxpayers to verify notices, requisitions, letters or orders that they may have received.

c. Introduction of faceless assessments, appeals, hearings and e-settlement scheme. This move will lead to paperless communication and reduced in-person communication. Having the documents on the digital portal shrinks the problem of physical storage and misplacing documents. While in some specific situations, it is easier to explain the facts to the tax officer in a physical hearing, faceless assessments do provide an opportunity for convenient and transparent interaction with the tax authorities.

d. Linking of PAN and Aadhaar. This has tackled the issues of individuals having multiple PANs and tax evasion, while also broadening the tax base.

e. Promoting digital transactions and reducing dependency on cash transactions. The government has granted special exemption for audit of businesses having high digital transactions. Accordingly, any person carrying on business shall now not be required to get the accounts audited by an accountant (and file a tax audit report) if the total sales, turnover or gross receipts do not exceed Rs 10 crore and cash receipts and cash payments during the year do not exceed 5 per cent of the total receipts or payments, respectively

f. Promotion of digital payments through different modes such as UPI.

Digitalisation Globally

Covid-19 forced tax administrations in various countries to close offices due to lockdowns and adapt to remote working. This impacted their day-to-day operations, as some were not able to carry out business as usual in all areas, including difficulties in dealing with paper-based communications and forms, physical audits, etc. A survey conducted by OECD in countries including Argentina, Australia, Germany, Israel, Japan, Switzerland, the US and a few others, indicated that this experience has led to around 60 per cent of the administrations considering changes to their previous strategy on digitalisation of tax administration processes.

Increased use of web portals, emails, app-based interfaces, etc., by taxpayers has shown a trend of replacing in-person communication with digital alternatives. This may result in a permanent shift in the preferred methods of communication. Close to 60 per cent of the administrations that were part of the OECD survey, increased their application of innovative technology to help ensure compliance and identify tax evasion/fraud. They indicated the use of data science and analytics techniques, while 30-50 per cent reported the application of artificial intelligence (including machine learning), robotic process automation and digital identification technologies.

Hence, it is imperative that we continue on the path of digital adoption to not only cope with the changing taxation landscape and technological advancements across the globe, but also to keep up with the pace of development. At the same time, it is only fair to expect tighter controls to be implemented by tax authorities to ensure that tax systems are adjusted to address the risks and challenges that arise from digitalisation.

Hence, as a taxpayer, it is important to keep a track of your investments in virtual currencies and crypto assets, manage your risks associated with remote working from multiple jurisdictions and ensuring complete/accurate disclosure of income sources and filing tax returns appropriately. Embracing and being part of this digital journey is important to remain compliant and contribute to the development of the economy.

Amarpal S. Chadha and Shanmuga Prasad

(The views expressed are personal)

Amrapal Chadha is Partner and India Leader, Mobility, and Shanmuga Prasad is Senior Tax Professional, EY