Like every other year, there are a number of “asks” the country (both individuals and corporates) may have from the Finance Minister this Budget — reducing corporate tax rates, doing away with dividend distribution tax and increasing the tax exemption limit to name a few. And as budgets go, something or someone may have to pay for these “asks” if they are to be granted.
Traditionally, reducing tax rates is offset by taking away incentives, increasing duties etc. But now, the Government has another tool in its chest that could potentially increase tax collections without any budget amendments — the tool is “digital.” The Government (and the tax administration) is going digital very quickly. The benefits of technology for the Government in the tax space are apparent — better taxpayer compliance, collection of fair share of tax, reduced administrative cost in collecting taxes and increased taxpayer satisfaction in tax administration.
With this intent (among others), the Government’s recent digital agenda has included a number of key initiatives.
Project Insight, a US$156 million project of CBDT, aims to widen the tax base using data mining techniques and advanced analytics on the large volumes of taxpayer data available. As a part of this project, the Government intends to use both traditional forms of data (such as tax reporting and financial statements) and non-traditional sources of data (such as social media profiles) to detect tax revenue leakages.
The Government is collecting extensive volumes of transactional-level taxpayer data a through the GST’s technology backbone. This has created and made available a web of PAN-linked taxpayer data and transactions, which could potentially help identify and plug tax leakages. This data when appropriately used would not only increase indirect tax collections but also provide a useful feed to the direct tax authorities for performing income reconciliations, validating expenditure claims and testing withholding tax compliances among other areas.
From an audit/assessment standpoint, the Government has been moving to an “e-audit” mode. The Income Tax Department is working on a new system of jurisdiction-free assessments where a taxpayer can be assessed by a taxman in any part of the country. The Tax Department is already communicating through emails and taxpayers are being encouraged to respond electronically as well. As we speak, the Tax Department is reconciling the TDS filing data of customers (Form 26AS etc.) with the income tax returns of vendors to identify cases of under-reporting of income — notices or communications are sent electronically in some cases where there are mismatches.
This shows that the direction and scope of e-audit stretch beyond GST (which is quite apparently technology based) and into the realm of income tax as well. All of this has and is expected to continue to reduce human interface between the taxman and the taxpayer — potentially leading to a “fairer” assessment and mitigating tax leakages. For companies, of course, the move to e-audit and the increasing use of digital by the tax authorities might mean shorter response time and enhanced need for sharper data that speaks for itself!
The Government has also recognized the impact that collaboration with other countries and also with the various tax and regulatory authorities in India can have (especially in the field of data). In its quest to get its hands on data from other sources (other than taxpayer reporting), the tax authorities have signed an MOU with the Registrar of Companies (ROC) for automatic exchange of information such as financial statements and returns of share allotment. In parallel, it has also been strengthening its reach to information from the global network through enabling provisions under tax treaties or agreements with countries for the exchange of information. The recently introduced country-by-country reporting regulations and the addition of Switzerland to the list of countries with which India exchanges information are a testimony of the Government’s focus in this direction.
There are several other initiatives that are adding to the mammoth digital wave the Government has been riding — linkage of Aadhaar with bank accounts, reporting of financial transactions by banks and the list goes on.
With the Indian tax administration going digital, it will be interesting to see what amendments the Government introduces in Budget 2018. While e-audits are currently only encouraged and partly in place, will this Budget see some timelines being announced around mandatory e-audits? Will we see a widening of the scope of Section 143(1) of the Income-tax Act, 1961, which provides for an “arithmetical” check of the income tax returns filed? Can we expect the Government to digitize some routine tax procedures around the issuance of tax residency certificates and nil/lower withholding tax certificates based on self-declaration electronically filed by taxpayers? Will the Government introduce more reporting requirements to enable analysis by the Tax Department?
Budget announcements aside, it is possible that the digital initiatives already rolled out may in any case contribute significantly to meeting the Government’s budget (through increased collection in the fair share of taxes). Therefore, even if a lot of digital initiatives are only introduced outside the Budget, they would have an indirect impact on the Budget given their proximity to tax collection.
As CBDT Chairman Sushil Chandra reportedly said in an interview “When there is higher tax buoyancy, the government will consider further tax rate cuts.” Given this direction of thinking, how heavily the Government is betting on its digital initiatives to add to its tax receipts may well be reflected in the tax cuts it announces this Budget.
For corporate India, the message is clear. It is time for tax functions to relook at their own ocean of data that has been brought into shape through digital GST compliance and appropriately deploy technology tools as an enabler to identify potential opportunities and ensure better and more accurate tax compliance. It is indeed time for tax functions of companies to catch up and bring themselves to the forefront of the digital evolution journey!
The author of the blog is Garima Pande, Partner, Tax Technology & Transformation, EY India.
The blog is co-authored by:
- Srirupa Saxena, Director, Tax Technology & Transformation, EY India
- Jayesh Bavle, Senior Manager, Tax Technology & Transformation, EY India