Developing a digital backbone for indirect taxation in India through tax technology

Developing a digital backbone for indirect taxation in India through tax technology

The Indian indirect tax ecosystem is entering a stage of technology development intending to advance the “Ease of Doing Business” philosophy. Utilizing this quickly spreading revolution, the government has also established and accepted numerous windows through which taxpayers may use technology and digital solutions in their enterprises. Technology adoption is becoming an essential aspect of our everyday life.

India has always worked to integrate tax technology into the ecosystem of indirect taxes. In Goods and Service Tax, one of the first industries to use the E-Way Bill infrastructure for transportation, technological adoption is currently being scaled out to provide solutions in all sectors of indirect taxes.

This illustratively includes processes to match input tax credit, e-invoicing, working of the GST network digitally, to adopting technology-based assessments [the scrutiny side of the table], which obtain and utilize business intelligence for effective regulation. 

On the Customs front, India adopted the faceless assessment system in 2019 to bring clearance for home consumption entirely online [where assessments of Bill of Entry are conducted nationally, instead of the home port of import]. It has now progressed to illustratively introduce complete digital solutions for obtaining benefits in regulation [like adopting a digital platform to regulate the Import of Goods at Concessional Rate of Duty [IGCR] Rules]. 

Businesses have also been compelled to pay closer attention to data and technology as a result of the adoption of digital technologies in tax compliance. For instance, they were taking an input tax credit now requires digitally linking the supplier’s and the recipient’s output and input returns on the GST electronic site. In order to achieve the necessary compliance, management must make sure that both their returns and those of the suppliers are appropriately submitted on the aforementioned portal. If not, there is a high chance of the input credit being denied, which would raise the business’s cash flow.

As a result of the growing use of technology, companies are now compelled to create electronic invoices with QR codes after reaching a certain level. This procedure entails a complex fusion of data uploading, validation, production, and circulation of the invoice. 

The goal is to achieve deeply ingrained compliance, where each aspect of the transaction may be monitored online without incurring time costs for physical audits and without requiring the shift through mountains of paperwork to ascertain compliance.

Faceless assessments have revolutionized the ecosystem’s Customs side by cutting dwell time in the clearing of imported items. When officials were unavailable for evaluation, or there were glitches in the computerized system employed for clearance, imported consignments would frequently become stalled. Bill of Entry(s) are now submitted electronically, and any Customs assessment officer nationwide can evaluate them using the online portal. Additionally, the accompanying import paperwork must be electronically submitted to the site so that the evaluating party may access them.

The method is now a little more effective than previously because there is no longer a requirement to file tangible documents. Every ecosystem has its growing pains, of course, but the digitalization framework has significantly sped up port clearance times, encouraging the supply chain.

The environment for indirect taxes is slowly being functionally supported by the deployment of digital processing and compliance. Along with utilizing technology to increase productivity, the government has increasingly embraced computerized systems to obtain “business intelligence” for evaluating corporate compliance. The application of business intelligence during the last year has resulted in a considerable number of input tax credit frauds being discovered and culprits being apprehended, demonstrating the effectiveness of this strategy.

In addition to raising government income through the assessment of related fines and the recovery of taxes that were evaded, the discovery of these questionable transactions has also caused an increase in reported collection numbers. Because human audits couldn’t capture or analyze the complexity of the transactions involved, the gaps that existed would have continued to be exploited for profit without this digital backbone, making it challenging to identify such violations.

Platforms themselves must work consistently and be readily available, even when the adoption of digital governance has prompted a parallel evolution of the stakeholders. The notion of efficiency and convenience should be achieved through digital platforms, and this should be done by making them practical and minimizing lengthy downtimes. Businesses must also be future-oriented to get the most out of the system because it has already started to alter. Tax functions must thus put their best foot forward to embrace this digital revolution.

Adopting digital transformation: The expansion of tax technology in India and elsewhere

The Third Industrial Revolution served as a foundation for the Fourth Industrial Revolution, which is now underway. As a reminder, the Third Industrial Revolution was the Digital Revolution, which started at the turn of the century and saw the widespread use of personal computers and the internet.

According to experts, the Fourth Industrial Revolution is a technological explosion or growth where the lines between the actual and virtual worlds would blur, and technology would become so ingrained in human life that it would be challenging to separate the two. The fact that we use smartphones to order food, call a cab, shop for groceries, make travel arrangements, and keep track of our health is proof of this. There is scarcely any area of our everyday life remaining that is unaffected by technology.

Over the years, it has been clear that when a revolution is underway or in process, it is rarely understood that it will be referred to as such. The generation didn’t fully understand they were living in an industrial revolution until the revolution had grown. As a result, it is also possible to consider this Fourth Industrial Revolution to be progressed. But the battle is far from over.

Depending on how rapid and adaptable the globe gets during the next three to five years, there will be debates about some fresh technical developments that may or may not mark the end of the Fourth Industrial Revolution. The Fourth Industrial Revolution began much more recently than the Third Industrial Revolution, which is another distinguishing characteristic of this one.

This reflects the quick changes and improved flexibility of the users. Not only are consumers adjusting swiftly, but they also have daily expectations for newer, better technologies. With the arrival of robotic process automation (RPA), artificial intelligence (AI), machine learning (ML), cloud computing, and robotics, among other breakthroughs, the revolution got underway. The internet of things (IoT), edge computing, the digital twin, 3D printing, 5G, bots, and co-bots, to name a few, have emerged in their mature forms, and the list goes on and on.

Technology is becoming an increasingly important component of many company processes, including tax. Technology solutions that cater to taxes are referred to as “tax technology.” Though the idea isn’t really new, it has swiftly gained popularity. This is because tax technology has provided substantial benefits to all of its users, including businesses, governments, and tax experts. The development of the idea in India, its effects on taxes, and how associated parties’ responsibilities have changed with technology are all topics covered in this article.

The rise of tax technology

Others are well ahead in terms of employing and embracing technology for tax-related operations, whilst some nations are still catching up with the technological boom in the taxation arena.

Global developments

Worldwide instances of success include:

• The UK government’s Making Tax Digital (MTD) initiative has drastically altered how UK VAT is perceived. Businesses must comply with the system’s requirements to maintain digital VAT records and submit returns using MTD-compliant software. On April 1, 2021, Phase 2 of MTD was implemented, ensuring a smooth digital experience for VAT-registered firms;
• Spain has enhanced its monthly VAT filing requirements to include the electronic submission of all invoices, customs documentation, and accounting records. 
• The Gulf Cooperation Council (GCC) VAT is the most recent country to adopt a digital tax system. Businesses in the region have been obliged to speed up digital taxes due to the government’s usage of cutting-edge software for VAT compliances. 
• Poland wants to introduce e-invoicing in 2021, following Italy’s lead. E-invoicing, or e-faktura as it is known in Polish, is defined in a draft law that has been made available to the public. Starting in October 2021, the suggested system is anticipated to be implemented.

Indian solutions

On the other side, India has closely followed the events. The government promoted the use of technology in all tax-related areas even before the historic goods and services tax (GST) regime went into effect. Prior to customs and GST, the direct tax sector was the first to utilize technology. The implementation of numerous initiatives by the government, including e-returns, e-registrations, e-way bills, e-invoicing, and QR codes, even after the introduction of the GST, represents significant turning points in the process of digitization.

Following in the footsteps of several other EU and Latin American nations, India has likewise effectively introduced e-invoicing. The availability of tax technology solutions and products, such as the automatic issuance of e-invoices and e-way bills whenever a journal entry is recorded, reconciliations between input tax credits, and lawsuit trackers, has been a factor in the development of tax technology in the Indian market.

India has always been on the front edge of technical advancements, and private companies are to thank for introducing the greatest tax technology to the nation. Additionally, businesses have embraced these fresh, improved solutions with speed. Business dependence on technology and digitalization has increased as a result of COVID-19, which has further hastened this adaption. This is a result of the lockdown’s ability to teach businesses how to operate efficiently with a lot of technology and remote work.

The changing face of tax

Businesses, the government, and tax advisors all now play different roles as a result of the radical changes in digital tax compliance and digital governance.

Organizations face difficulties during the technology transformation or digitalization process. This is because of a number of things, such as reluctance to change, aversion to the unknown, financial considerations, and intrinsic job instability. For instance, when the GST was implemented, there was complete pandemonium among the organizations since it was unclear how things would turn out. Additionally, the tax compliance staff had a sense of job insecurity as a result of the extensive use of tax compliance software. But with time, the procedure became more efficient.

India has kept up with technological advancements, and private companies are in charge of introducing the “best in class” tax technology solutions to the nation.

The Goods and Service Tax Network (GSTN) is unstable, particularly during seasons when there are a lot of returns to file, and organizations still have to contend with ongoing digitalization initiatives like e-way bills, e-invoicing, QR codes, and updated HSN standards. From a technological standpoint, organizations must overcome challenges with data quality and consistency, skill development for tax staff, and process improvements for tax technology.

According to a report, 93 per cent of businesses utilize numerous enterprise resource planning (ERP) systems, which means that instead of using data effectively, more time is spent on data cleansing and structuring.

Traditional tax teams were expected to possess both tax knowledge and a thorough knowledge of the law. However, today’s tax professionals must also have technical skills in addition to their technical understanding. Building a high-performing tax function in such a situation is challenging and costly.

The idea that tax teams should always be in-house and that tax as a function cannot be outsourced like the legal or IT divisions has undergone a seismic change as a result of routine daily problems that limit the productivity of tax people.

CFOs and tax executives from other industries have come to tolerate and even promote outsourcing the whole tax function to professionals, including compliance, consulting, and litigation. A critical factor in the shift in this thinking is technology. Outsourcing tax functions lowers costs, streamlines procedures, incorporates professional advice, and frees up tax staff members’ time to make more strategic decisions.

The changing nature of the tax consultant

Tax consultants have little knowledge of RPA or the use of AI for taxes less than ten years ago. However, because of the technological upheaval, tax advisors are becoming more familiar with and utilizing these technologies in their everyday work.

Even in the consulting industry, intelligent automation has carved out a place for itself. Additionally, tax consultants are expanding the scope of their work beyond tax compliance, litigation, and counselling to include assisting customers in making strategic decisions.

Tax process outsourcing has expanded the range of career options available to tax advisors. Globally, tax consulting companies work with their customers on projects like tax process enhancement and tax function health check-ups, which have the goals of locating tedious and unnecessary steps, recommending efficient tax function models, and streamlining the complete tax procedure.

The fact that the job of a tax expert might evolve much further should not be shocking. Tax advisors would need to upgrade their skills sooner than anticipated since the dynamics of tax technology would change.

The government’s aggressive attitude

It won’t be overstating things to suggest that the regulatory environment throughout the world has been a major factor in forcing firms to use tax technology. We still haven’t let go of the stereotype of a slow-moving, inert government. The difficulty of embracing technology has been met head-on by modern revenue departments. The revenue departments’ readiness to incorporate technology into their daily operations is what has compelled businesses to raise their technology quotient.

Worldwide developments

Increased revenue collection is the overriding goal for revenue departments as they enhance their use of technology. The Russian government’s requirement that VAT assessees provide transaction level data along with their VAT filings in 2015 serves as a prime illustration of this. As a result, domestic VAT receipts climbed by more than 12 per cent, totalling $4 billion.

The COVID-19 epidemic is another element that helped make the government more proactive. It was challenging to reanalyze audit and assessment techniques when working with remote workforces. The revenue department had to make sure that collections did not fall off at the same time. Governments worldwide experienced a considerable decline in supplies, notwithstanding the aggressive efforts that were adopted.

For instance, in June 2020, Brazil’s federal tax collection hit a 16-year low for the month. The South African Revenue Service also recorded a $4.8 billion under-recovery for the fiscal year that ended in July 2020. Governments should be commended for eschewing their preferred method of conducting physical audits and evaluations in favour of technology.

Indian responses

Even the tax officials in India did not allow the epidemic to interfere with their work. In fact, India was one of the select few nations to implement a significant change like e-invoicing in the midst of the epidemic. Additionally, the introduction of business-to-consumer (B2C) QR code regulations, GST yearly reports, GST assessments, and GST departmental audits were all made possible owing to the technology-based infrastructure known as GSTN.

As a result, starting in October 2020, India saw a record-breaking amount of GST income collected. The provisional net indirect tax collections for the financial year (FY) 2020-21 saw a gain of 12.3%, according to the Finance Ministry’s recently announced collection numbers. This means that 108.2% of the revised indirect tax forecasts for FY 2020-21 have been met. This in itself is a triumph.

While the epidemic was going on, the Indian GST administration launched a vigorous campaign against bogus tax credits and invoices. To find the gaps, it primarily relied on advanced analytics and data mining methods. Additionally, a memorandum of understanding (MOU) for the exchange of information to find revenue leaks in the system has been signed between the indirect tax department and the direct tax department.

India has inked a few agreements for the sharing of information with several nations in addition to within its own borders. This can only suggest that the government will depend more on data.

Recognizing the direction of taxation

Tax technology stakeholders are eager to automate and digitize the tax function in this new era. The development of technology also makes it possible for the tax system to become entirely digital. However, as was already mentioned, the government would be more in charge of the technological revolution.

A variety of tax technology solutions are readily available, which benefits the cause. Preemptive measures like technology acquisition and implementation and the recruiting of talented technologists by revenue agencies show that technology will overtake the tax industry sooner than one may expect.

Enterprises would have to understand that they needed to be flexible in order to keep up with the pace of the technology transformation on the commercial front. Following are some crucial issues that require immediate attention:

• Increasing the technical proficiency of tax teams; 
• exercising control over data management; 
• establishing procedures that link tax to technology; and 
• comparing the pros and cons of creating internal tax technology teams vs hiring outside consultants.

The world of tax technology offers countless opportunities. One needs to be adaptable and ready to change as and when necessary, even if that means every day. Tax technology may prove to be the cornerstone of a long-term tax compliance market and provide businesses with competitive advantages. If one takes a close look around, it is clear that technology is now the foundation of every company activity and no longer just a value addition.

Edited by Prakriti Arora