10 Years of Tax Digitisation in India on the Occasion of Tax Filing Season

By Archit Gupta, Founder and CEO, Clear

It has been a decade since the process of filing income tax returns online was made mandatory in India. Since then, income tax digitisation has rapidly evolved. The shift towards a paperless and technology-driven approach has helped streamline tax processes, making them accessible and user-friendly for taxpayers. Data analytics and automation have played a crucial role in detecting potential tax evasion and ensuring a fair and just tax regime.

In this article, we take you through the journey of tax digitisation in India and appreciate how this move changed the course of tax compliance for the better.

Journey of digitisation of income tax return filing

The journey of tax digitisation in India has been nothing short of transformative. Online filing of income tax returns was first introduced in 2004 on a voluntary basis and thereafter made mandatory for companies and taxpayers subject to audit under the Income Tax Act. Later it became compulsory for taxpayers with an income exceeding Rs.5 lakh to file their returns online. Manual filing was no longer an option. This was accompanied by the digital processing of refunds directly into the taxpayers’ bank accounts as against the former process of sending cheques by post.

During this period, the government also introduced the TRACES portal for TDS operations. The Form 26AS was made available digitally to taxpayers. Statements such as the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) have also been made available very recently to taxpayers so that they have their complete financial picture in one place. These statements deter non-compliance by making taxpayers aware that the department already has their data. Post filing of the income tax returns came the e-verification option for taxpayers, doing away with the hassle of printing and mailing ITR-V acknowledgement to the tax department.

The digitisation of tax compliance did not come to a halt after tax filings were taken online. In 2019, the government launched the faceless assessments scheme. This scheme eliminates the human interface between the taxpayer and the income tax department and has resulted in higher efficiency and transparency. It further eliminates unnecessary paperwork and reduces the time taken to process assessments. It also makes both taxpayers and department officers more accountable as it seeks to eliminate fraud.

What’s next in the future of tax digitisation?

The government is definitely making use of digitisation to widen the taxpayer base and increase revenue for the exchequer. Going forward, we can expect more reforms backed by technology to fulfil this initiative. At present, due to the extraction of financial data linked to a taxpayer’s PAN and the interlinking of tax systems, the government is able to find out all about an individual’s investments, spends and earnings and more. The government may soon use this data to bring more persons under the income tax net.

The future of tax digitisation could also see advanced data analytics and artificial intelligence being used to track patterns of tax evasion and crackdown on defaulting taxpayers. Real-time reporting for businesses could become a possibility, similar to how it’s being done under the Goods and Services Tax. There could be mobile filing options made available to taxpayers for convenience and ease of use.

The government may also look at the use of blockchain technology in tax compliance for better transparency, verification of digital identities, identification of discrepancies, real-time tax reporting, and secure data sharing.

Leveraging digital filing solutions to stay clear of tax notices

Recently, the income tax department sent one lakh notices to taxpayers for under-reporting their income. Most of these notices were pertaining to the previous financial years, which goes to show that the government is now tracking past data to crackdown on defaulting taxpayers.

The numbers of notices sent out could increase as the government leverages AI and data analytics to detect mismatches in current and previous tax data filed. This pushes taxpayers to ensure the accuracy and authenticity of their tax data reported. In a digital world, there can be no errors and mismatches that go unnoticed by the regulator. The liability does not end the moment a tax return is filed, as a taxpayer could receive a notice even a few years down the line. Hence, the solution for taxpayers is to leverage digital filing solutions offered by SaaS platforms.

The advantage that SaaS platforms offer is end-to-end digitised and automated filing, with very minimal manual intervention. Right from Aadhaar authentication to pre-filling income sources including capital gains/losses, uploading Form 26AS, tax computations, and e-verification, everything is done with a click of a button. Capital gains for individuals may run into 1000s of line items, and using an online solution not only reduces time spent but also improves accuracy.

Extending digitisation to indirect taxes in India

While income tax digitisation has evolved tremendously over the past decade, it is interesting to see how the government has also been taking indirect tax compliance digital. The introduction of the Goods and Services Tax (GST) paved the way for multiple other tech-enabled compliances, such as e-invoicing and e-way bills. And now, from the digitisation of individual compliances, the regulator is moving to digitally transform the compliance ecosystem as a whole.

The government has started interlinking direct and indirect tax data, e-invoices with e-way bills and the GST returns, and more, to remove all loopholes for tax evasion. There is also automated scrutiny of returns enabled to detect data mismatches between the GST returns and statement of input tax credit.

Digitisation has made all of this possible and has opened a host of possibilities in tax compliance, with endless benefits. The future of tax digitisation is exciting and could revolutionise tax systems across the globe. India has made significant progress in tax digitisation and we could witness many more digital reforms in the years to come.

TaxTen years of Tax Digitisation
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