Picture this: The government has abolished the system of filing income tax returns and income tax assessments for salaried individuals because all your income and investments are digitally linked to a central electronic system through entities and organisations you financially interact with.

Your income from salary is known through your employer. Income from investment is known through banks, mutual fund companies, stock exchanges, demat account providers, and other financial service providers. Capital gains on the sale of a house or profits made by selling jewellery or gold are also gathered electronically from the entities you sell to. Income from other sources is also known through money transfer transaction details.

The interlinked ecosystem eliminates the requirement of filing income tax returns by individuals because the tax authorities automatically pick up your financial history. And so they know your tax obligations. The authorities automatically deduct your income tax according to your total income and investments. This makes filing returns or appeals redundant.

While this may be impossible anytime soon, India’s income tax assessment system may have taken a few steps towards this future. The government’s initiative to reform income tax assessments started over emails taxpayers had to send to specific tax officials. Along with the system, the government also launched a portal.

Tax-specific technologies may make it possible to answer the mandates of the global digital economy with changing tax data flows, data analytics and data requirements. The new digital tax function might evolve at great pace to become a strategic component of enterprise transformation. Tax authorities are increasingly becoming digital and getting closer to the source data to better understand taxpayer trends and ensure better compliance, according to an E&Y study.

Enterprise tax functions cannot continue to remain blindfolded due to lack of access to and visibility on their own source data and ability to assess trends and issues accessible to tax authorities. There is a need for the tax functions to undertake timely and accurate compliance and go digital to be able to undertake more value-adding functions for the business, the study says.

A new system introduced by the Indian government in 2019 started using artificial intelligence to allot cases randomly to tax officials in any part of the country. It was done to keep their identity unknown to taxpayers — a system native to India yet very effective. It has come a long way since then. For example, at present, assessees can file their income tax returns themselves if they are savvy enough.

Last year, the government introduced a system of faceless appeals that changed taxpayers’ experience. It eliminates frequent personal interactions, thus saving time and drastically cutting down chances of corruption. The new system aims to ease compliance for all taxpayers, and the industry did welcome the initiative.

According to PC Mody, Chairman of the Central Board of Direct Taxes (CBDT), the focus is to provide maximum ease and transparency to taxpayers. The new system provides transparency, consistency, and efficiency that a taxpayer is entitled to, yet individuals aiming to take advantage of the system will be taken care of.

As part of the initiative, income tax return forms are automatically pre-filled with income and taxes paid to the income tax authorities. While this, they believe, is for the benefit of taxpayers such that they can discharge their tax obligations fairly and properly, it could just be the beginning of a journey that would achieve the impossible scenario where individuals need not file returns.

***

Net direct tax collection

Rs2,46,519.82 crore in Q1 FY22

Rs 1,17,783.87 crore in Q1 FY21

Growth 109%

Assessment Orders Issued 106,734 cases till April 2021

Number of Taxpayers 1.46 crore

Faceless Assessment System

• Selection done through systems using data analytics and AI
• Abolition of territorial jurisdiction
• Automated random allocation of cases
• Central issuance of notices with document identification number
• No physical interface and need to visit income tax office
• Team-based assessments andreview