Interim Budget 2019: Using technology to increase tax base and reduce rates

In the Interim Budget 2019 speech, Finance Minister Piyush Goyal has reiterated the government's aim to continue technology-led tax reforms.

Technology to increase tax base and reduce rates

The use of technology is the only sustainable measure to increase tax compliance, tax base and eventually, tax collections. It is only when the government has reasonable surety of tax collections, can it take the steps to reduce tax rates and lower the burden on existing tax payer base.  

According to government data sources, FY18 saw a 26 per cent rise in the number of income tax returns filed compared to last year, effectively adding 9.95 million new income tax payers. Estimates, according to statements of senior revenue officials, for new taxpayers to be added in 2019-20 is around 10 million. Consequently, there has also been a steady increase in tax collection year-on-year. This has allowed the government to reduce tax rates, for instance slashing the rates for companies having turnover below Rs 250 crore to 25 per cent and recent reductions in GST rates. Major contributors to these initiatives are technology-led reforms.

Digital tax administration and taxpayer experience 

It is not too far in history when individual taxpayers had to undergo several rounds of follow-up with the tax office to initiate refunds. With the set-up of Bangalore CPC, refunds for individual taxpayers are swift and relatively quite easy. 

The Finance Minister’s statement that the government has now approved a technology-intensive project to transform the Income Tax Department into a more assessee-friendly one is music to ears. It is proposed that returns will be processed within 24 hours and issued simultaneously. If the government is able to achieve this for corporate tax payers, on the lines of individual tax payers, it would be a giant leap forward in digital tax administration.

The first wave of e-assessments, particularly for small and medium-sized assessees, appears to have yielded results. It is proposed that within the next two years, almost all verification and assessment of returns selected for scrutiny will be done electronically through anonymised back office, manned by tax experts and officials, without any personal interface between taxpayers and tax officers. This will go a long way in increasing governance and quality of tax compliance.  

Needless to say, it is a big change from the current system, and a well thought out approach in implementation would be key.  Unlike GST, the government will have sufficient room to plan and work towards a successful implementation of this strategically important project.

What this means for companies 

With electronic filings and tax administrations in India, there has been a fundamental shift from quantity to quality. Corporates need to focus on quality of data being generated and consumed in tax filings and submissions.  

Governments are spending significant resources in building data warehouses and analytics capabilities to dissect returns filed. Increasingly, there is a need to reconcile data furnished to different authorities – at times, for companies, this can be a daunting task for no other reason but not having systems and people to support the same.

Corporates need to re-look at how data is recorded and generated from a tax lens, re-configure I-T systems to support what tax authorities and governments would ask. If these exercises are done manually with the help of excel sheets, there could be risks of sub-optimal data submission and audit defence.

Growing businesses and increased compliances, do not always result in increased headcount for tax function – progressive companies will expect their tax functions to do more with less. Secret to this would lie in use of technology to automate mundane tasks (take robot out of human) and use freed up time tax planning and analytics (things which robots can’t do yet in tax).

Views expressed are personal