Over the last few years, there has been an increased use of technology by the tax authorities and taxpayers alike. This article points to the impact that technology will have on the Indian tax environment and how Indian taxpayers can use it to simplify their tax procedures.

Moving towards electronic scrutiny assessments (revenue audits)

Filing of tax returns, receiving queries from tax authorities and submitting responses have now moved towards the electronic mode of communication. The use of technology will further increase in the years to come, making almost the entire interaction through the electronic means. For instance, queries raised by the Tax Authorities and the submissions made during a scrutiny assessment (revenue audit) proceedings may soon be carried out online. The pilot project on electronic scrutiny assessments launched by the government is a step in this regard.

Specific and to-the-point discussions between taxpayer and Tax Authorities

Data-linkages between different arms of the government and the institutions in the financial system are enabling the Tax Authorities to capture better information about a taxpayer. In the times to come, we expect seamless assimilation of different aspects of taxpayer information such as bank accounts, incomes, expenses and investments through the key field of Permanent Account Number (PAN) and Aadhaar. This will result in particulars of a transaction and tax event becoming readily available to the Tax Authorities.

Data-linkages are expected to increase the tax compliance base, identify defaulters and make enquiries more specific and ‘to-the-point’. Under the Annual Information Return, considerable information about a taxpayer’s activities is being provided to the Tax Authorities. Using such streams of information, the government systems could have certain automatic triggers to capture transactions having values disproportionate to a taxpayer’s reported income and/or scale of operations. Suspicious transactions could be caught on time. Furthermore, enquiries from Tax Authorities would become more specific to the taxpayer thereby saving time and effort at both ends and bringing the enquiry to a logical conclusion.

In a recently launched ‘Operation Clean Money’ to deal with cash deposits during the demonetisation period, the government has expressly discussed the use of data analytics to identify potential tax evaders.

Opportunities for an in-house tax function

From a taxpayer’s perspective, the electronic form of data submission throws up significant possibilities for automation and reducing human effort to improve the efficiency of tax compliance and reporting functions. A number of routine tax compliances can be largely automated by linking compliance forms with the taxpayer’s accounting system. Interfaces could be developed where the compliance forms are auto-filled the moment an accounting entry is made. This could save the need for separate data compilation and collation for meeting compliance requirements.

Tax logic can also be built into the accounting system under a decision tree model. Presently, there are certain ERP packages where such functionality is available on a customisation basis. With the increased use of technology coupled with greater standardisation of tax matters, the tax logic can be built into virtually any accounting software and can be made available to taxpayers in a timely manner and at lower costs.

Even simplistic technology solutions can significantly aid an in-house tax function. An in-house tax team can develop a web-based portal to document the tax positions being taken in the past. This could significantly curtail the time and effort of subordinate staff in applying for a tax position and could also assist in training new employees. Furthermore, formula-based templates with adequate security checks could be developed for preparing computation of taxable income, advance tax workings, VAT payable positions net of input credit, to name a few.

Technology will play a significant role in bringing in more transparency in the Indian tax environment and will be a strong deterrent to unfair practices on the part of any stakeholder in the tax environment. It will also encourage voluntary compliance by making tax compliance and reporting an easy activity.

While it is certain that the tax world will use technology to greater extent, the pace of its implementation as compared to changes in the tax policies and procedures need to be gauged so that the taxpayer as well as Tax Authorities are equipped with appropriate technology at the appropriate time.