How has technology impacted the tax landscape?

The world has witnessed a complete transformation in the last decade. Digitalization & technological advancements have been instrumental in this transformation. Businesses and industries have evolved rapidly over the last few years again due to technological advancements. What coincides with such rapid development are opportunities as well as threats for tax functions around the world to keep up with the pace of globalization and to increase transparency in transactions.  

Governments around the world are leveraging technology to build robust tax systems to increase efficiency, mitigate / reduce tax evasions, increase transparency, widen the tax base etc. Taking cue from this, the Ministry of Affairs has also risen to the opportunity to digitalize the tax systems in India.

Tax Technology and India

The first step towards technological advancement was initiated way back in 2003 when India outsourced the allotment of PAN to UTI. The idea was to outsource certain non – core activities in order to accelerate digitalization even though the department was low on in house capacity. Thereafter, the department facilitated E-filing of tax returns and E-processing of these returns by the Central Processing Centre (CPC). The introduction of the E-filing system helped eliminate the cumbersome and time consuming physical filing of tax returns. The refund procedure was also automated and taxpayers were pleasantly surprised to find refunds credited to their bank accounts earlier than usual.

Another measure which was introduced was Auto populated forms being generated based on income information of the taxpayer available at the end of the department. Thus, the forms are partially pre-filled and only certain additional information needs to be filled in by the taxpayer before submitting the form. Such pre-filled forms ensure that correct and fair information is being submitted to the department and additionally also enable taxpayers to self-file their tax returns quickly. The concept of Form 26AS was also introduced in which income earned & TDS deducted on such income was made available to the taxpayer.

With an intention to widen and deepen the tax base as well as deal with tax evasion, the department undertook to create a 360 – degree profile of taxpayers by amalgamating several fragmented databases into a single one. This database enabled the department to have complete information about taxpayers. A more comprehensive and detailed report is available with the Income Tax Department and non – filers or taxpayers defaulting or providing inaccurate information are identified and accordingly notices are issued.

The interface of the income tax department has also been made user friendly and taxpayers can launch their grievances and expect their queries to be resolved without visiting the Income Tax Department. With a view to further boost and encourage taxpayers confidence, the Income Tax Department launched the CP-GRAMS of the Prime Minister where taxpayers can upload their tax related grievances and incase these remain pending beyond 30 days, the department shall be taken to task.

The Income Tax Department also enabled the e-assessment function in 2017. In 2019, they came up with ‘faceless’ and ‘jurisdiction less’ assessments. Through this function the department intends to bring about complete transparency in concluding assessments.

On 13th August 2020, Prime Minister Modi launched ‘Transparent Taxation – Honoring the Honest’ which is an extension of the scheme launched in in 2019. The objective and intent of this platform was to achieve Faceless Assessment, Faceless Appeal & the Taxpayers Charter. The Faceless Appeal & Taxpayers September 2020.  Charter has been implemented with immediate effect whereas the Faceless Appeal becomes effective 25th

As per the provisions of the scheme, the taxpayers shall not be attached to any specific jurisdiction for their assessments, thus eliminating all human interfaces. The computer shall randomly decide who gets to handle the cases & will completely eliminate the need to build relations with tax offices. 

In the Budget Speech 2020, the Hon’ble FM had announced that in order to ease the process of allotment of PAN, online PAN would be allotted on the basis of Aadhaar without filling up of any detailed application forms. The FM formally launched the facility for instant allotment of PAN. This allotment process is paperless and e-PAN can be allotted to applicants free of cost. The launch of this step is yet another step by Income Tax Department towards Digital India.

All of the aforesaid measures ensured that the direct tax regime was digitized thus enabling large and accurate information to be collected and completely eliminating the process of manual verification and checking.

Tax Technology around the Globe

Governments across the world are stepping up to enforce and strengthen the tax administration of their countries. This has become imperative bring transparency to attract foreign investors to make their countries attractive for doing business. Apart from this tax administration in various countries are also looking for innovations to effectively manage their tax function in order to reduce revenue leakage as well as build robust systems to effectively manage the large volumes of data that can form a basis for better decision making & policy formulation.

Almost all countries around the world have done away with manual filing of returns and adopted e-filing of tax returns. This facilitates greater collection of data and also more accurate information.

India has signed Tax Exchange Information Agreements with various countries around the world. These agreements enhance transparency and ensure full and true disclosure of tax related information between countries. 

The Organization for Economic Co-operation and Development (OECD) has clearly emphasized the need to bring about transparency in tax related information. Therefore, the Country – By – Country Reporting (CbCR) was introduced and is expected to have a significant impact on the tax function.

Base Erosion & Profit Shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. The BEPS Project has been initiated by the G20 countries and also effectively encompasses other OECD Member States. The idea behind the implementation of BEPS project was to bring coherence, transparency and substance to international tax rules.

The introduction of Country – By – Country Reporting (CbCR) was the beginning to ensure transparency in the tax function. CbCR will widen the reporting requirements for organizations in different tax jurisdictions. Tax administrations have access to all the relevant information from MNEs located across different countries. As a matter of fact, the MNEs operating in different tax jurisdictions pose challenge in the escaping of tax and risk of potential revenues at stake.

What Next?

Now with the COVID – 19 pandemic, there will been a paradigm shift in landscape of businesses. Businesses will need to evolve in order to sustain and adopt new practices. Infact, there could be a possibility of new set of business arising which would never be heard of in the past.   It would be interesting to see how the tax administration would respond to these. Additionally, though, most of the tax administration is more or less automated, there are certain areas in which face to face interaction between the taxpayers and the department continues. How would these be addressed going ahead – would video conferencing between the taxpayer and the department be introduced and become the new normal? It is but a matter of time to see what comes up next.

A simplified and unambiguous Direct tax code with stable tax law along with wide tax base and honest tax compliance holds the key to a robust implementation and success of digitization of Tax laws and its administration.  

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