Digital transformation of Indian tax administration

CBDT's 'Faceless e-Assessments' & CBIC's 'e-Invoicing'

1. Introduction

Around the world, the momentous advancements in technology, increased digitalisation and the unprecedented flow of information is causing the tax administrations across nations, to re-think and re-examine their conventional and traditional modes of administration to stay effective and non-obsolete and to engage in digital transformation through the introduction of new technologies and analytical tools and to transform into 'digitally mature tax administrations'.

The global tax landscape has been witnessing exponential changes, with tax administrations around the world continuously gearing up to keep pace with the rapid technological advancements to ramp up the effectiveness of their tax administrations.

The use of advanced data analytics, data mining and data processing technologies and automation capabilities, with a keen focus on efficiency, tax-risk management and data-based decision-making, has become a 'mandatory norm' across tax jurisdictions around the world.

According to the Annual Report of 'Forum for Tax Administrations' (FTA) consisting of 53 countries across the world, for the FY 2018-19, 'technology related spending' constituted a significant part of the overall budgets of many revenue bodies around the world, with some of these ranging from 10% to 15% of their total budgets. Various Empirical studies clearly indicate that tax administrations with a high spend on technology witness a correspondingly high rate of compliance. The use of technology has significant potential to improve revenue collection by automation of processes and provision of improved services to taxpayers.

2. International Best Practices concerning Digital Transformation of Tax Administrations:

Tax Administrations worldwide are in the midst of a golden era of innovation and digital transformation. They are continuously upgrading their old tax administration systems or are switching to new ones, in their constant endevours to capture and process the taxpayer-specific relevant information, data and financial transactions on real time basis, using advanced data analytics, data mining and artificial intelligence tools.

The modern-day tax administrations are retrieving and capturing data from business transactions as they occur on real-time basis and are performing advanced analytics and data mining processes, enabling augmentation of revenue collections seamlessly and without any friction with the taxpayers.

International Best Practices concerning Digital Transformation of the Tax Administrations:

In addition to these Data Analytics and Processing techniques, Cognitive Computing, Block Chain technology, Artificial Intelligence, and Robotics are prominent examples of technologies that some administrations are already using or exploring. These new technologies offer tax administrations not only further opportunities to improve their efficiency but also enable them to conduct risk-based profiling of the taxpayers and providing mechanisms for 'early warning systems' of potential tax defaulters. 

For every enlightened and curious mind, the Country Specific International Best Practices in Digital Transformation of Tax Administrations are being discussed as under:

(a) Russia: Integrated Risk Management System (IRM) & Make Tax Digital (MTD)

The Tax Administration Department of Russia, the 'Federal Tax Service' (FTS)  has introduced a new system 'Integrated Risk Management System' (IRM) and 'Make Tax Digital' (MTD), which enables it to engage with large business taxpayers to flag tax risks early so that they can be addressed upfront, minimising the risk of future disputes. The IRM system allows the FTS to directly interrogate the accounting information of participating large businesses. It uses a large number of multifactorial risk models built and applied to large data sets through the use of complex algorithms. The embedded data mining functions are able to quickly assess the taxpayer's current operations and predict the probability of future non-compliance. Where such risks are detected, the system automatically generates warnings visible to the taxpayer as well as the tax administration, allowing further enquiries and/or preventative action to be taken at early stages.

(b) Singapore: Leveraging Analytics Design & Digitalisation (LEA:D)

The Tax Administration Department of Singapore, the 'Inland Revenue Authority of Singapore' (IRAS) is aiming to redefine the experiences of both taxpayers and revenue authorities by leveraging analytics, design and digitalisation (LEA:D). The LEA:D initiative is also aligned with Singapore's Smart Nation and Public Sector Transformation initiatives. One of the desired outcomes of LEA:D is to create taxpayer-centred experiences by using an outside-in approach. By first understanding taxpayers' desires and preferences, IRAS seeks to provide convenient and customised digital services to taxpayers. IRAS also collaborates with different players in the tax ecosystem, such as software developers and banks, to increasingly integrate tax into taxpayers' natural systems, providing them with a more seamless tax experience and lowering their compliance costs. To support these digitalisation efforts, IRAS is also modernising its technology platforms and deepening staff competencies in taxpayer-centric service delivery.

(c) Mexico: Servicio de Administraci�n Tributaria (SAT)

The Mexican Tax Administration Department has introduced a new digital platform  the 'Servicio de Administraci�n Tributaria' (SAT).

Currently SAT has expanded beyond enabling electronic filing, adding more services online and building databases of information about its taxpayers. The Mexican Tax Administration Department today uses its decade-long digitalization process in two ways: to conduct 360 degree profiling to learn more about taxpayers and also to send 'early warning signals' to the potential tax defaulters, conveying that tax audits (assessments) can be more severe and targeted because of the ready availability of relevant and taxpayer specific data, and thereby prompting voluntary compliance by such potential tax defaulters.

(d) United Kingdom: Advanced Digitised Approval based Assessments

The Tax Administration Department of UK, the 'Her Majesty's Revenue and Customs' (HMRC) has developed such advanced tax administration system that by FY 2020 the taxpayers in UK will not be required to file a tax return.

The tax authorities, based on the information and data concerning the income generation model of the taxpayers, processed by using advanced data analytics techniques, will suo-motto provide the taxpayers with the proposed tax calculations of the reporting period, and taxpayers will have the choice to accept or contest it.

 The refunds will be issued promptly instead of allowing them to build up over a tax cycle, and to keep accounts available online and updated in real time, providing a constant and clear picture of the taxpayer's tax position.

(e) Chile: Sales and Acquisitions Electronic Ledger and Pre-filling of VAT returns 

In Chile, electronic invoicing is mandatory for B2B transactions (since February, 2018) and about 99% of invoices are issued electronically, providing tax authorities with real-time information on the transactions. The SII has replaced the mandatory VAT ledger with the SAER, which is an electronic register where the tax administration systems register every electronic invoice and tax document issued (Sales Register - output VAT) or received (Acquisitions Register - input VAT) from the taxpayers. In addition, taxpayers are required to upload some information (e.g. invoices issued on paper) in order to reflect accurately their situation and transactions. Based on the data of the SAER, the SII provides the taxpayers with a draft form, which the taxpayers can adjust as necessary. The form contains information such as VAT codes related to invoicing, consumer receipts, credit note and debit note transactions; withholdings for reverse charge invoices; and excess credit from the previous period. Both initiatives represent significant improvements in VAT administration. Regarding the taxpayers, the draft form simplifies and makes the task easier for them, as it comes prefilled with the VAT due to be declared and paid. In addition, as the information is obtained from validated documents, there are fewer errors and inconsistencies in the VAT return process. Regarding the SII, these initiatives resulted in improvements in efficiency and accuracy of VAT inspections and audits due to automatization and better analytical capabilities, and in improvements in risk and fraud detection.

3. Digital Transformation of Indian Tax Administration

Where Does Indian Tax Administration Stands in Comparison to International Best Practices?

"Before embarking upon any new destination, it is wise and prudent to look back at the footprints of the journey made so far�.�

India has come a long way in its endeavour to automate tax administration and data processing. The Tax Administration Reform Commission (TARC), under the chairmanship of Dr. Parthasarathi Shome, has recommended extensive use of information and communication technology in administration and governance of taxation system. The Commission emphasised that technology is a critical enabler for the country in its quest to move to modern tax administration. It highlighted areas where technology could play an important role in facilitating and easing tax authorities' interaction with taxpayers and improving compliance. It also elaborates on use of technology in forecasting revenue.

Among the Government's Revenue Departments, the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC) have always remained pro-active in their approach of making use of modern technology in tax administration.

Both these departments have formulated specific directorates to deal with computerisation-related initiatives and have benefitted significantly in terms of improved compliance, enhanced processing and increased taxpayer satisfaction.

India has been active in leading OECD member countries on the BEPS initiative and has also been an early adopter of automatic exchange of information.

3.1 Key Technology Oriented Initiatives introduced and implemented in the Indian Income Tax Administration System by CBDT:

3.1.1 Income Tax Business Application (ITBA)

Very recently the ITD application, which was nearly two decades old, has been substituted and replaced by a new flagship business application, Income Tax Business Application (ITBA), module in the e-Filing portal of the Income-tax department website with URL https://www.incometaxindiaefiling.gov.in/home of the with enhanced capabilities. The new application is intended to comprehensively cover all core processes of the department, including those which were not covered by ITD.

The revolutionary ITBA application facilitates and support, an entire gamut of 'e-services' including:

1. e-Registration;
2. e-Filing of ITRs;
3. e-Proceedings;
4. e-Payment of Taxes
5. e-Nivaran
6. e-Sahyog
7. e-Submission of Responses to Outstanding Demands
8. e-Filing of Rectification Application u/s 154 of the Income Tax Act

Gone are the days when the Income-tax Department had to organise camps on the return-filing due date to facilitate filing of returns, and taxpayers had to queue up to obtain stamped acknowledgements. From return filing on hard copies until only a few years ago, e-Filing of Income-tax and TDS returns and their e-Processing by Central Processing Unit (CPC) and generation of e-Refunds, has now become the order of day for most taxpayers.

3.1.2 360 Degrees Risk Profiling:

The Revenue Authorities, now-a-days, also use technology for risk profiling of taxpayers and transactions to conduct targeted assessments, with specific and pin-pointed enquiries, using the 360 degrees profiling of the taxpayers.

The rapid digital transformation of the Indian Tax Administration system is resulting in a seamless assimilation of different aspects of taxpayer's information such as bank accounts, incomes, expenses and investments through the key field of Permanent Account Number (PAN) and Adhaar.

These data-linkages are expected to increase the tax compliance base, identify defaulters and make enquiries more specific and 'to-the-point'.

Under the Annual Information Return (AIR), considerable information about a taxpayer's activities is being provided to the Tax Authorities. Using such streams of information, the tax administration authorities are having automatic triggers to capture transactions having values disproportionate to a taxpayer's reported income and/or scale of operations. Suspicious transactions could be caught on time. Furthermore, enquiries from Tax Authorities are becoming more specific thereby saving time and effort at both ends and bringing the enquiry to a logical conclusion.

3.1.3 Faceless e-Assessments:

The newest and brightest feather in the 'Digital Indian Tax Administration Cap' is the introduction of the 'New Scheme of Faceless E-assessment 2019' encompassing within its fold the use of new technologies like 'machine learning', 'artificial intelligence' and 'advanced algorithm-based data analytical tools', in the conduct of these 'faceless' and 'jurisdiction-less' e-assessments.

(a) Faceless Assessments: These assessments are being referred to as 'Faceless' because these completely eliminate the physical interface between the assessee and the assessing authority and instead involves the complete electronic interface in the conduct of assessments exclusively in electronic mode via the 'e-Proceedings' utility of the e-Filing portal of Income-tax department's website, and the review and examination of the assessment orders using 'automated examination tool' involving therein an algorithm for standardised examination of draft assessment orders, by using suitable technological tools, including artificial intelligence and machine learning, with a view to reduce the scope of discretion.

(b) Jurisdiction-less Assessments: These assessments are being referred to as 'Jurisdiction-less' because these are conducted by a Team/Group of Expert IT Officers at multiple-level assessment units viz. National e-Assessment Centre (NeAC), Regional e-Assessment Centre (ReAC), Verification Unit, Technical Unit and Review Unit, and shall not be conducted by an individual jurisdictional Assessing Officer. The cases shall be assigned by NeAC to an assessment unit in any ReAC based on 'automated allocation system' involving therein an algorithm for randomised allocation of cases, by using suitable technological tools, including artificial intelligence and machine learning and as such shall be location agnostic.

This is a welcome and revolutionary transformational move by the Indian Income-tax administration authorities, and is a part of the overall vision & initiative of Digital India.

For easy and better understanding of the worthy readers, the above stated procedure of 'E-assessment' proceedings as per the new scheme of 'Faceless e-Assessment 2019' is being explained diagrammatically as under:

3.1.4 Document Identification Number (DIN):

In order to eliminate the personal discretion of individual income-tax officers in issuing any particular Notice to the assessees, the CBDT vide its Press Release and Circular No. 19/2019 dated 14.8.2019 have mandated that w.e.f. 1.10.2019, all notices, summons, orders and other communications from the Income-tax authorities shall be issued only through a centralised computer system or cell and all such notices and communications shall mandatorily contain a computer generated 'Document Identification Number' (DIN), and any communication issued without such 'DIN' shall be considered as nonest in Law.

Procedure for Authenticating all Notices/Requisitions/Letters/Orders received from Income Tax Department using DIN:

Step 1: Visiting the 'e-filing portal' in Income Tax site:

The assessee has to visit the 'e-filing portal' in the Income Tax site by visiting the link:

https://www.incometaxindiaefiling.gov.in/home

Step 2: Clicking the hyperlink 'Notice/Order Issued by ITD' under the tab 'Authenticate' located at the bottom-left side of the 'e-filing' portal, as shown below:

Step 3: In the new window, two search options viz.

1. Document Number; or
2. PAN, Document Type, Assessment Year & Date of Issue

will appear.

The assessee is required to choose any one of these search options, based upon his convenience and ready availability of the required information needed for the authentication of the Notice/Requisition/Order received from the Income Tax Department.

Step 4(a): If the assessee chooses the search option of 'Document Number', then he has to fill in the 'Document Identification Number (DIN)' mentioned in his Scrutiny Notice/Requisition/Letter/Order, corresponding to the field 'Document Number' and the 'captcha code'. After filling in the 'DIN' and the 'captcha code', the assessee is required to click the 'Submit' radio button.

Step 4(b): If the assessee chooses the search option of 'PAN, Document Type, Assessment Year & Date of Issue', then he has to fill in the details of his PAN, Document Type, Assessment Year & Date of Issue of such Notice or Requisition.

After filling in such details, the assessee is required to fill in the 'captcha code' and click on the 'Submit' radio button.

Step 5: Authentication of 'Notice/Requisition/Letter/Order':

The system will authenticate such Notice/Requisition/Letter/Order and the assessee can easily check and confirm whether such Notice/Requisition/Letter/Order has been issued by authorised and competent Income Tax Authority or not.

Useful Reference: For more details and complete understanding of the nitty-gritties and nuances of the Digital Transformation Initiatives including the New Scheme of Faceless e-Assessments 2019, the recently published Book titled "Guide to e-Assessment with Real-time Case Studies & Suggestive e-Submissions�, authored by the author of this article - Sh. Mayank Mohanka (FCA), and published by Taxmann Publications, may be referred.

3.2 Key Technology Oriented Initiatives introduced and implemented in the Indian Goods & Service Tax Administration System by CBIC:

3.2.1 GSTN Portal:

Following the footprints of CBDT, the CBIC is also making rapid inroads in the digital tax administration initiatives and one such path breaking and revolutionary digital initiative is the development and creation of the 'State-of-the-Art GSTN Portal Network' at the website gst.gov.in with embedded functionalities of online registration, electronic filing of GST Returns, compliance and invoice level matching of suppliers and recipients for seamless flow of Input Tax Credit (ITC), e-payment of taxes, e-Refunds, e-Way Bill generation.

3.2.2 e-Invoicing:

Very recently, CBIC have issued five Central Tax notifications on 13.12.2019 i.e. Notification nos. 68/2019, 69/2019, 70/2019, 71/2019, 72/2019 �Central Tax, mandating the preparation and issuance of 'e-Invoices' by a certain specified category of registered persons in GSTN portal by inserting sub-sections (4), (5) and (6) in Rule 48 of CGST Rules 2017, as under:

(i) The functionality of 'e-Invoicing' in the GSTN portal shall be available and effective from 1st January, 2020 on optional basis.

(ii) In case of B2B supplies made by the registered person, whose aggregate turnover in a financial year exceeds one hundred crore rupees, this e-Invoicing mechanism shall be mandatory with effect from 1st April 2020.

(iii) In case of B2C supplies made by a registered person, whose aggregate turnover in a financial year exceeds five hundred crore rupees, to an unregistered person, the e-Invoice shall have QR (Quick Response) code.

(iv) The undermentioned portals shall be used for the purpose of preparation of these e-invoices w.e.f. 1st January 2020:

(a) www.einvoice1.gst.gov.in;
(b) www.einvoice2.gst.gov.in;
(c) www.einvoice3.gst.gov.in;
(d) www.einvoice4.gst.gov.in;
(e) www.einvoice5.gst.gov.in;
(f) www.einvoice6.gst.gov.in;
(g) www.einvoice7.gst.gov.in;
(h) www.einvoice8.gst.gov.in;
(i) www.einvoice9.gst.gov.in;
(j) www.einvoice10.gst.gov.in.

3.2.3 Document Identification Number (DIN):

In keeping with the Government's objectives of transparency and accountability in indirect tax administration through widespread use of information technology, following the footsteps of CBDT, the CBIC vide its Notification No. 122/41/2019-GST has mandated a system for electronic (digital) generation of a Document Identification Number (DIN) for all communications sent by its offices to taxpayers and other concerned persons.

The CBIC in exercise of its power under section 168(1) of the CGST Act, 2017/ Section 37B of the Central Excise Act, 1944 has directed that no search authorization, summons, arrest memo, inspection notices and letters issued in the course of any enquiry shall be issued by any officer under the Board to a taxpayer or any other person, on or after the 8th day of November, 2019 without a computer-generated Document Identification Number (DIN) being duly quoted prominently in the body of such communication. The digital platform for generation of DIN is hosted on the Directorate of Data Management (DDM)'s online portal "cbicddm.gov.in"

The Board has also directed that any specified communication which does not bear the electronically generated DIN and is not covered by the specified exceptions, shall be treated as invalid and shall be deemed to have never been issued.

This measure would create a digital directory for maintaining a proper audit trail of such communication. Importantly, it would provide the recipients of such communication a digital facility to ascertain their genuineness.

4. Concluding Remarks:

"The only thing which is constant is the change!!

In order to make these path-breaking, radical and revolutionary initiatives of the CBDT and CBIC aimed at ensuring digital transformation of the Indian Tax Administration System, effective and taxpayer friendly, it is essential and crucial to ensure the commensurate and supporting IT infrastructure to enable seamless and smooth data transfer, incorporating standardization in the conduct of assessments by assessing authorities by implementing Standard Operating Procedures (SOPs) to do away with the subjective-ness and arbitrariness in making additions and disallowances in 'e-assessments' and fixing proper and effective accountability in cases of high pitched assessments.

All the stakeholders involved i.e. the taxpayers, the tax professionals, the assessing authorities, the regulatory bodies CBDT & CBIC, the Finance Ministry and the Government should embrace these radical, revolutionary and path-breaking digital reforms in good and positive spirits and should work collectively and cohesively to make these initiative a grand success.

"Innovation means replacing the best practices of today with those of tomorrow." - Paul Sloane