Tax compliance, which was once considered a rigid and time-consuming process, is set to undergo a significant transformation with the Indian government planning to leverage data and technology to make it more voluntary, impersonal, and automated. This approach has already shown promising results in the past few years, with the government successfully testing it in various ways.
The government plans to intensify its interaction with taxpayers through various channels, including emails and text messages, to encourage more voluntary compliance. The tax authority will also focus on using data and analytics to identify potential issues and provide personalized nudges to taxpayers to address them. Key Steps
- Stepping up interaction with taxpayers through emails and text messages
- Implementing e-verification of transactions and tax return updating
- Enhancing data analytics capabilities to identify potential issues
- Providing personalized nudges to taxpayers
- Scaling up non-intrusive and data-driven measures
The government has already tested this approach in various ways, including the e-verification scheme. Under this scheme, the tax authority flags missing information or inaccurate data in people’s tax returns based on information received from third-party reporting entities such as banks, financial market players, and sub-registrars of property. The facility for updating tax returns within two years of the filing year enables taxpayers to come clean on their previously unreported or underreported income in the updated tax return. The government’s efforts to enhance tax compliance are driven by the strong direct tax revenue buoyancy in the recent years. The robust growth in direct tax revenue collection has enabled the government to cut the income tax rate and rejig slabs this year for the middle class, at a cost to the exchequer of ₹1 trillion this fiscal.
The growth in direct tax revenue collection has been robust in the three years after fiscal year 2022, with collections growing 20% in FY23, 25% in FY24, and 20% in FY25. Despite the tax rate cut announced this year, the growth is expected to continue, with projections indicating a growth of over 14% in the current financial year. Experts say that tech- and artificial intelligence-driven nudging is a key element of the tax department’s toolkit. By scaling up the tech, artificial intelligence, and data analytics-enabled nudging approach, the government can encourage more voluntary compliance. This can be achieved by sending personalized, transparent emails and SMSes about unreported transactions or errors to taxpayers, providing clear and educative instructions, and offering step-by-step guidance to minimize receiving of post-filing notices. A robust digital infrastructure with strong cybersecurity and a user-friendly e-filing portal with features like real-time chat support for multiple languages can also build trust among taxpayers. Moreover, collecting feedback through surveys and post-interaction ratings can drive continuous improvement. The government has been investing heavily in technology in recent years, with the finance ministry reporting that the department has invested over ₹3,530 crore on ‘information, computer, and telecommunications’ since 2020.
The government’s efforts to enhance tax compliance are expected to have a positive impact on the economy. By encouraging more voluntary compliance, the government can reduce the burden on the tax authority and minimize the risk of non-compliance. This can also help to increase tax revenues, which can be used to fund public goods and services. In conclusion, the Indian government is set to leverage data and technology to make tax compliance more voluntary, impersonal, and automated. This approach has already shown promising results in the past few years, and the government plans to intensify its efforts to enhance tax compliance. By doing so, the government can encourage more voluntary compliance, reduce the burden on the tax authority, and increase tax revenues.