Modern Taxation In India: Driving Digital Transformation In Finance
More information is being captured now at every level in order to ascertain hidden wealth and income levels of people
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When we think of Modern Taxation in India, we inevitably think of Goods and Services Tax (GST) because this has been the biggest tax reform implemented in the country since Independence. Long overdue GST has, in a single stroke, unified and subsumed about 17 different indirect taxes into a more manageable five slabs. The immediate impact of this as we know has been to remove cascading tax since the GST mechanism focuses on tax on the value add while ensuring that previous tax already paid on inputs is credited back at every stage.
A relatively minor but equally effective revolution is taking place in the direct tax structure as well with compulsory electronic filing of tax returns for those earning over Rs 5 lakhs. More information (in terms of income cash flows and declaration of net worth) is being captured now at every level in order to ascertain hidden wealth and income levels of people.
So far as GST is concerned, the whole system works on the GST Network (GSTN), the digital platform where the information pertaining to input sales, purchases are uploaded and the tax returns filed. Since the original invoices are uploaded on the platform, the system ensures that there is total transparency in respect of the income and expenses of every enterprise. A company can claim the input tax credit on the basis of the information with regard to what and how much it has sold so that it is in its own interests to provide the correct information. What does this mean? It means that the government or the tax administration can cross-reference the information at the source for every entity in the chain and for every transaction. There is immense transparency and chances of under-invoicing or over-invoicing are minimized to a great extent.
At present GSTN is a platform for electronic filing of returns with inputs of various source data. Since GST is a new concept in India and it is still in the process of settling down it will take a while before we can reap the full benefits of what it is intended to do – widen the tax base, raise the tax to GDP ratio, reduce prices for consumers of goods and services, simplify the tax and compliance structure and usher in transparency.
We have already reached the first two levels in the digital transformation process, to wit, electronic filing of returns and electronic accounting, where the original invoices and other data with respect to sales and purchases are being submitted according to a determined schedule.
We have to take this logically to the next levels.
Electronic matching: The next step in digital transformation is when the government will start to match the returns filed with data collected from banks, and other sources and match that with what is being actually earned and what is being declared. A beginning has already been made in this respect in the form of Project Insights, that has been initiated by the Ministry of Finance. The scope of this project is to collect information from every source – banks, financial institutions, social media, and then analyze this data putting it through various stages to understand what is happening, why it is happening culminating with prescriptive measures to resolve the problem. The intent behind this is to plug the leaks in the system. In fact, the Ministry of Corporate Affairs and the Central Board of Direct Taxes have already reached an agreement to start sharing data and information, so that what is filed as part of corporate compliance is in sync with personal data.
Electronic auditing: The availability of more information through the digital platforms and the exchange of information will result in a change in the quality of auditing that is at present prevalent. Again, this requires data analysis and a robust sharing mechanism between the different agencies involved, and this will mean integration between the financial system intermediaries and the economic ecosystem. This will result in electronic audit assessments to which the taxpayer has to respond. We can see this happening on a limited basis with respect to TDS filings.
We will give you a simple example in respect of direct taxes. At present, if an ordinary middle-class taxpayer has property in Mumbai and Delhi, files taxes in Mumbai (where he is a resident) and does not disclose his property in Delhi, lack of information sharing between the states means that the tax authorities may remain ignorant about the Delhi property. However, the tax department is already working on assessments, which are jurisdiction-free.
Electronic assessment: The final level in the digital transformation will be when the government itself will be assessing the tax liabilities of taxpayers based on the real-time information sharing and without the need for tax forms and filings. The department could send notices to the citizens and it is up to them to respond as to whether the tax calculations are correct with sufficient proofs in case there are corrections to be made.
It may take years to get to the last stage, but it would be a logical reality considering the rapidity with which tax reforms are being implemented. The fact that it is working in the case of TDS on salary and other income is already proof that this model is workable, only it has to function on a larger scale with digital information sharing and data analytics being key to it.
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