Despite some early efforts, India is still some distance away from embracing digitisation in its entirety for tax administration
2017 promises to be a ‘new’ year in more ways than one. In India, we expect a new tax structure in the form of the GST, new currency and more important, newer ways of digital deployment. Globally, a new head of state in the world’s most powerful economy adding to the list of many such ‘new’ and pivotal developments. Closer home in India, the single most powerful theme that will impact the elite and the common man alike is digitisation—which can transform the way we live our lives and conduct our businesses.
Digitisation isn’t a new concept and you may heard and read enough about this “new way of being” for many months now, but, what is interesting is the voracity with which this emerging shift in mindset is being embraced by government and citizens alike. What seemed like a mere buzz word not very long back has now deemed to become an all pervasive aspect of our lives guiding the way we bank, shop, travel, eat to more complex tasks, like paying our taxes and filing returns.
The central ethos of this push towards technology is driven by the need to make systems and processes clearer, faster, simpler and more compliant than ever before. While the more routine aspects are fairly well understood, the text that follows aims to take a closer look at how digitisation would help achieve tax transformation.
Not paying the correct amount of tax creates an immoral burden on the honest taxpayer and a low base creates a real strain on the government’s resources. The ruling government has embarked on a series of measures to create a digital ecosystem to close the gap between the amount of tax to be collected in theory with how much is actually collected. A step in that direction are initiatives like “RAPID” (revenue, accountability, probity, information and digitalisation) to achieve the goal of ‘minimum government and maximum governance’ and make tax compliances more user-friendly, transparent, which will eventually lead to widening of the tax base.
From the perspective of integrating the direct and indirect tax regimes and achieving greater synergies, the government is also focusing on harmonising the working of the two central boards —Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC). GST may well be a game changer. Today, the state value added tax is not connected with an individual’s Permanent Account Number (PAN) resulting in discrepancies. Under the GST regime, the registration number would be PAN based and the details furnished in the GST return would also be reported to the Income-Tax department. Such interconnectivity would ensure consistency in data collection and reporting enabling a more harmonised and efficient tax compliance mechanism, while also widening of the country’s existing tax base.
Through digitisation, automatic exchange of information between countries is also seeing the light of the day and would hugely assist in integrating financial information of tax payers amongst countries. The recent requirement of country-by-country reporting (CbCR) mandated under the BEPS (Base erosion and profit shifting) project and additional disclosure requirement in the income tax forms such as details of pass through income, foreign assets, etc, would also help the tax authorities to keep a tab on the global transactions of the taxpayers.
Demonetisation has created a sudden thrust towards an increased use of online payment systems and the government has taken various measures to incentivise individual and business users alike. While incentivising users is vital, more thought and action needs to be provided towards infusing sustainability in these mechanisms. A simple example is that of the issue of interoperability for online wallets, i.e, currently transferring money requires both the sender and the receiver to be from the same company and transfers across platforms and companies are not possible. This creates a major hurdle in scaling up digital wallets that could otherwise create a reliable flow of transaction data for analysis and monitoring purposes.
Another key aspect is connecting large amounts of open data and using analytics to identify hidden relationships between individuals and organisations which could have otherwise not be traced. The UK, as part of an ambitious £900 million plus digitisation program, has created technology-led systems that enable access to more information, such as bank interest, income from other sources and other lifestyle indicators, at one single place to help identify any anomalies.
Like any other technology, there are always early embracers such as Singapore, Brazil and Mexico. But laggards, like India and in some cases the US, are still some distance away from embracing digitisation in its entirety for tax administration. For instance, Brazil has developed a sophisticated bookkeeping system called “SPED” that can pick up financial details directly from the systems of the tax payers and determine tax liability based on the collected data.
As a simple measure, the government can contemplate providing automatic alerts and reminders of various deadlines to increase convenience and better compliance. For real time collection and tracking information, the government should gradually enforce some form of electronic invoicing, as in the case of Brazil, which has successfully used this concept for checking VAT frauds. Ultimately, the aim should be to have an integrated database of financial and tax information of employers, banks and provident funds, etc, which can then automatically be populated to minimise the time and effort for filing a return.
In essence, automation and standardisation, timing and analytics are indispensable for creating a seamless digitised ecosystem. India is moving in the right direction for a technology-led tax administration system, however, the government needs to ensure that the implementation challenges are addressed on priority and we learn from the global leaders.
The author is partner – tax, KPMG, India. Views are personal