Union Budget 2021 and tax administration 3.0: Ushering in next generation of reforms

Updated: Jan 18, 2021 2:01 PM

Union Budget 2021 India: The Indian tax administration is embracing this change wholly, and while there is expectation of more to come, international best practices and learnings can help guide the Indian and make it more adaptable and aligned to globally, facilitating international trade.

Budget 2021-22, Union Budget 2021Need for shift in approach – from burdensome compliances by taxpayers and resource intensive audits by tax department to a more collaborative approach

By Sumeet Hemkar, 

Indian Union Budget 2021-22: Tax administration is a very relevant topic of conversation world over. We are amidst a digital revolution in the world economy, and tax administration is not too far away from its throes. Adapting to the new normal by alleviating tax compliance, taking a comprehensive all-tax view and advancing compliance events to match the timing of actual transactions, seem to be the ideal way forward. The Indian tax administration is embracing this change wholly, and while there is expectation of more to come, international best practices and learnings can help guide the Indian and make it more adaptable and aligned to globally, facilitating international trade.

The OECD’s Forum on Tax Administration (FTA) recently published a discussion paper setting out the vision for digital transformation of tax administration as a result of increasing digitization of economy and of the society in general. The paper outlines digital transformation to achieve Tax Administration 3.0, allowing tax processes to be built into systems used by taxpayers to run their businesses, undertake transactions or communicate. The taxation process would therefore be closer to taxable events thereby removing the compliance burden resulting from the need to use different processes to deal with tax reporting. This would help to overcome limitations of tax administration that currently result in tax gaps, uncollected tax debt and increased compliance costs.

Need for shift in approach – from burdensome compliances by taxpayers and resource intensive audits by tax department to a more collaborative approach

Also read| Union Budget 2021: What taxpayers can expect from FM Nirmala Sitharaman on the personal tax front

Current tax administration system continues to have some significant structural limitations with respect to outcomes. Some of these limitations include:

*a heavy reliance on voluntary compliances such as record keeping, meeting reporting requirements etc; no built-in tax requirement systems such as for capital gains, rental income etc, instead taxpayers have to take additional active steps to understand and calculate tax liabilities as well as keep records for tax assurance purposes;

*the calculation, reporting and payment of tax is often done at the end of a tax period which is further subject to verification checks or in some cases through random selection, tax audits are conducted which often leads to a long gap between taxable event and payment of tax.

Innovative solutions to address the needs of digital economy

Digital transformation of tax administrations is the need of the hour and would go a long way in aligning the Indian regulatory requirements with those developed internationally – a case in point could be the country by country and master file reporting under transfer pricing. A digital transformation, based on the OECD report, is expected to entail:

(1) Taxation processes being embedded within taxpayer’s natural systems: Paying taxes will become a more seamless experience over time such that tax administrations and private sector organizations collaborate in delivering value to the taxpayer. Adapting taxation processes to fit in with taxpayers’ natural systems will facilitate compliance by design and “tax just happening”;

(2) Providing real-time tax certainty – Artificial intelligence tools and algorithms will support the characterization and assessment of liabilities and will increasingly support decision making;

(3) Transparent and trustworthy processes;

(4) Taxation being an integrated part of the government for all of its compliance or regulatory requirements, and one digital identity supporting a seamless connection between processes and data sources.

Increased focus on event based taxation during lifecycle of individual taxpayers

Current domestic tax systems often substantially increase both burdens and compliance risks for taxpayer and the tax administration. For example, a person faces many issues during different life events and changing circumstances such as while becoming an employee, enrollments are to be done in multiple government systems; while acquiring property, there are several isolated processes which may lead to high burden and also there are late tax settlements having potential tax risks; while working across countries, burdensome processes in registering for tax new jurisdiction having separate rules and processes for tax. Tax Administration 3.0 focusses on event based taxation such as taxpayer enrollment by birth, other life events or at the time of immigration – trusted national digital ID-system, property registrations being immediately available – platform for real estate agents which can support all aspects of completing transaction, pay as you earn (PAYE) taxation, automatic registration for tax on arrival. Under the Indian domestic law, one example is deduction of loan taken for higher education (under section 80E) which is allowed when certain conditions are met. The government should bring in more such provisions where taxation/incentives are aligned with life events of individual taxpayers.

India’s progress with leveraging technology to increase taxpayer services

India has been making efforts to align its tax administration to keep up with the advancement of technology and reduce latency. In the recent past, India has implemented reforms such as faceless assessment and appeal mechanism, digitizing the filing of returns, payment of taxes, submission of grievances, reporting of tax transactions, tracking and requesting of tax refunds, online compliance portals, GST-N portal and GST e-invoicing, etc. The interface between the taxpayers and the tax administration has also been made anonymous and online to promote greater honesty, reduced litigation etc. The government should work towards ironing out issues highlighted by stakeholders under these initiatives. One of the important themes to develop on further for the government is to integrate and leverage on the reporting under GST to start covering even areas concerning direct taxes. That should help in streamlining India Inc’s tax compliance obligations and leap frog the Indian requirements to a system similar to that envisaged under Tax Administration 3.0.

What next.. It is hoped that Tax Administration 3.0 will lead to the establishment of a common language, framework and endpoint, assisting tax administrations in their individual and collective consideration of the digital transformation journey. Improving ease of doing business has been a stated objective of the current government. Leveraging technology to enhance taxpayer service would certainly go a long way while improving voluntary compliance, and leading to an increase in tax collections through a fair implementation mechanism.

(The author is Partner with Deloitte Haskins and Sells LLP. Views expressed are personal.)

Do you know What is Finance Bill, Short Term Capital Gains Tax, Fiscal Policy in India, Section 80C of Income Tax Act 1961, Expenditure Budget? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Budget tilted towards supporting growth; FY22 fiscal deficit target of 6.8% realistic: Moody’s
2Uttar Pradesh Budget 2021: Thrust on healthcare and infra, FY22 deficit seen at 4.2%
3Bihar Budget 2021: State govt presents Rs 2.18 lakh crore budget, no new tax imposed