DOES INDIA’S TAX POLICE NEED A NEW WEAPON?

DOES INDIA’S TAX POLICE NEED A NEW WEAPON? Taxation can be fundamentally defined as the legally mandated levy paid by the people to their government for the welfare of the public and development of the facilities shared by the public (Muhammad Amir et al., 2011). The purpose of taxation is multifaceted comprising of generating revenue, uplifting masses from poverty, restricting circulation of harmful substances (e.g.: tobacco, carbon etc), and enforcing accountability of the government towards the public. All these scenarios indicate how essential it is for India to safeguard its tax reserve from fiscal leakage or non-compliance of taxation mandates by the public. A brief overview of the Taxation System in India. In India, taxes are broadly categorised into two sections (Nishant Ghuge, 2015) : • Direct Tax and • Indirect Tax || Direct Tax is the tax paid by the individual directly to the government. This is levied upon the income and/or profits made by the individual. Indirect tax on the other hand is the tax levied on goods and services instead which emanates from the public to eventually reach the government. Since 1975 India introduced the voluntary disclosure scheme to file direct taxes (Income Tax Department GoI, nd). The process has gone through years of amendment and digitalisation to now be coined as self-assessment of taxation. The idea behind this approach is straightforward. In a formal assessment system, the Inland Revenue assesses and calculates the tax based on the income tax form provided by the taxpayer; whereas, the taxpayer must calculate their tax due in the self-assessment system. This approach has a substantial impact on taxpayers' ability to comply with taxation laws (Gurpreet Kaur, 2016). The goals of the transition to a self-assessment system (SAS) are to encourage voluntary compliance, minimise the load on tax authorities of assessing tax returns, and improve revenue collection efficiency. However, the transition to SAS has generated concerns about taxpayers' competency, honesty, capability, and preparedness to bear the burden of calculating and ensuring the accuracy of their tax returns (Mulugeta Terrefe, 2016). The concern regarding the SAS is evident from the sheer volume of fiscal leakage India experiences due to tax evasion and avoidance both by the public and primarily corporate houses. Tax Evasion, Abuse, and the role of Automation. India ranks 4th in estimated annual tax losses owing to corporate entities (World Economic Forum, 2017).

Source : Statista, Available at: https://www.weforum.org/agenda/2017/04/which-countries-are-worst-affected-by-tax-avoidance/ || According to Tax Justice Network (2020), India loses over 10.3 billion USD annually owing to global tax abuse by MNCs and evasion by private individuals. An estimated 0.4% of India’s 3 trillion USD GDP is lost in taxes due to global tax abuse and evasion (The Economic Times, 2020). Of this entire loss of tax amount, over 10 billion USD is lost to corporate tax abuse by MNCs and over 200 million USD is lost to private tax evasion. The socio-economic impact of this fiscal irregularity is tremendous on the health and education sector of the country (Chandrappa, 2016; Sikka, 2010). The tax losses annually amount to almost 45% of the health budget and 11% of budget allocated for education in the country. Farzana et al. (2019) argued that self-assessment, and technological readiness are two of the most important determinants in abetting tax abuse and evasion. Base erosion and profit shifting, or BEPS, is the term used to describe what occurs when multinational corporations take advantage of inconsistencies, contradictions, or loopholes in the international tax laws to artificially shift profits to jurisdictions with low or no tax rates to reduce the amount of tax they must pay (OECD, nd). Estimated to be between USD 4 and 7 billion annually; funds that could be used for infrastructure improvements, pensions, healthcare, and education in the country. Purely domestic companies struggle to compete with global corporations that can reduce their tax obligations by moving profits offshore (OECD, nd). India has started implementing automation in its tax administration system to handle repetitive document processing, gather data, and decide whether taxpayers' tax forms are accurate (Rathi et al. 2021). Although automation has started enhancing the efficiency and accuracy of administrative processes concerning data processing and record maintenance, when it comes to identifying malpractices, these clerical automation techniques are not enough to tackle these scenarios as is evident from the extent of tax avoidance in the country. How Analytics and AI can help mitigate the problem. According to Cas Milner and Bjarne Berg (2017), artificial intelligence (AI) has a similar role in taxation to software that can automatically adapt to the input of various types of content and make decisions without guidance. Although it is currently thought that AI robots performing the role of tax accountants are unlikely, they are capable of several tasks, including assisting tax auditors in detecting errors, classifying accounts and transactions, assessing tax audit risks, and increasingly proposing advantageous tax strategies within the framework of intricate international laws (Huang, 2018). The tax regime in respect of income arising from digital economy is ambiguous and unpredictable, a situation that has been noted as a source of concern by both taxpayers and tax authorities (Income Tax Department Report, 2016). The ambiguities in taxation of income arising from the digital economy, and the ensuing tax disputes, are also a constraint for the taxpayers. These taxpayers may end up being subjected to inconsistent approaches on the part of assessing as well as appellate authorities. Huang (2018) proposes an illustration [See Figure 3] of an automated system than can enhance efficiency of data handling operations and can adapt to constantly changing risk environments while enabling and acknowledging constant information flow.

Figure 3. Source: Huang Z., 2018, Available at: https://www.scirp.org/html/6-2121281_86895.htm || KPMG has introduced an intelligent “Tax Service” software for Chinese companies to handle their automated tax compliance problems. The technology is capable of doing trend analysis, automatic preparation of VAT and corporate income tax returns, local additional tax calculation tables, quick detection of potential errors, risks, or abnormal conditions. The Indian government could use similar technologies by either inviting the established audit firms to employ their pre-existing technologies and maintenance workforce or could develop similar on demand automated systems to locate inconsistencies in tax returns of individuals (Kalyanakrishnan et. Al, 2018). The prediction capability of AI-based solutions can be used in deciding business strategy (Srivastava; Agrawal et al., 2018) . The Indian government should reinforce their tax policies with intelligent technology to reduce tax erosion and forecast avoidance probabilities to curb offshore profit migration. The introduction of a unified tax slab, GST in 2006 was a phenomenal policy as it eradicated the state-specific tax slabs within India and brought all previously divided tax-territories under the same umbrella. This improved governance and monitoring and can be leveraged as an excellent opportunity to implement analytics technique to enhance the supervision of the process. BIBLIOGRAPHY Aamir, M., Qayyum, A., Nasir, A., Hussain, S., Khan, K.I. and Butt, S., (2011), ‘Determinants of tax revenue: A comparative study of direct taxes and indirect taxes of Pakistan and India’, International Journal of Business and Social Science, 2(19). Agrawal, A., Gans, J. and Goldfarb, A., (2018), ‘Prediction machines: the simple economics of artificial intelligence’, Harvard Business Press. 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