10 minute read 19 Apr 2022
Future of tax compliance

Digital transformation at the fulcrum of the new tax compliance order

Authors
Garima Pande

EY India Global Compliance and Reporting Leader

Passionate about engaging with businesses in reimagining, redefining and improving their tax frameworks. Love to paint, travel and spend time with my daughter.

Uday Pimprikar

EY India Partner and National Leader – Indirect Tax

Specializes in indirect tax and policy advisor on some of the marquee transaction operations in the country. Avid reader.

10 minute read 19 Apr 2022
Related topics Tax Tax compliance

Tax is in the spotlight with increasing digitalization, especially for compliances. 

In brief

  • In the aftermath of COVID, businesses are facing a variety of considerations to regain the momentum to pre-COVID normalcy.
  • In this scenario, tax has also emerged as a top priority for the Boardroom's consideration.

Aimed at simplifying the tax compliance landscape, the tax administration has introduced a flurry of transformational initiatives. They include the following:

  • E-way bill
  • E-invoicing
  • Launch of faceless assessments
  • Introduction of TDS and TCS on transactions involving goods
  • Incremental tax KYC requirements
  • New-income tax portal
  • New avataar of Form 26AS - AIS and TIS
  • Input tax credit reconciliation
  • Communication between taxpayers through GST common portal
  • Introduction of digital process under IGCR Rules, 2017
  • Proposed IT-driven customs administration of SEZs
  • Use of analytics in tax
  • Expansion of reportable matters

The above measures have demanded better management of tax compliance requirements and created a need for a better tax compliance framework.

Amongst others, it is notable how the government has, over the last two years, significantly increased the remit of TDS provisions with the object of bringing the entire supply chain of businesses directly within the reporting landscape. In addition, they have also introduced higher TDS rates for transactions with parties who have defaulted in the earlier periods (period to be reduced to one year as against the earlier requirement of two years). The Finance Act, 2022 pushes the envelope further by introducing TDS on transactions where one business party provides perquisite or benefit to the other for transactions involving virtual digital assets.

In the ongoing re-stabilization phase, the government's current focus is on:

  • Repairing public finances by expanding the tax base – this is expected to be augmented by unprecedented analytical insights drawn by cross-mapping significant amount of transactional level data being collated and analyzed by the tax administration through various tax and regulatory filings.
  • Encouraging economic growth Budget 2022 echoes the message of macro and micro economic focus, promotion of digital economy, fin-tech enabled development and increased investments to steer economic growth towards the Government’s vision called “Amrit Kaal” which aims to power India's journey from India @ 75 to India @ 100.

As the tax administration fast tracks its systems to capture details more than ever or pre-fill various tax returns by leveraging on data and technology, CFOs & Tax Heads might be required to formulate the right compliance strategies to handle increasing complexities.

Some of the prominent steps in this direction include the proposed amendments to restrict the availment of input tax credit (ITC) in case it is restricted in GSTR 2B of the taxpayer. The new conditions proposed with respect to availment of ITC necessitates strengthening the process for reconciliation of credits and demands close monitoring of vendor compliances on a regular basis.  Further, industry trend suggests that ITC mismanagement may lead to 5-7% increase in working capital requirement and may have an adverse impact of 1-2% on Profit Before Tax.

The Annual Information Summary (‘AIS’) launched by the Income Tax Department in November 2021, captures various additional data points sufficient for the tax administration to completely construct Profit and Loss Accounts of taxpayers. AIS requires taxpayers to agree or disagree with the transactions reported therein and Taxpayer Information Summary (‘TIS’) generated after considering taxpayer feedback on AIS is used to pre-fill the tax returns.

This is a clear statement of intent from the administration about their approach on the future of tax governance, the degree of control expected from taxpayers on their own data has just skyrocketed. What might appear daunting at first, certainly requires a systematic approach having the following elements with the right amount of discipline to ensure a ‘single source of truth’:

1. Integrated approach for tax compliances

Today, different tax compliance frameworks require similar information to be presented in different formats. The underlying business transactions connected to these requirements may be common, yet the same data gets interpreted differently by different teams to satisfy different tax compliance requirements. For instance, the valuation used to discharge GST on inter-company transactions may be compared with arms-length price accepted under transfer pricing regulations. Commonality of data between different filings can be identified using integrated compliance solutions. A data pool may be created to store common data which can be reprocessed through smart technological tools and packaged into the right form as required by different tax compliances. This might help save time and bring in efficiencies by establishing a single source of truth, transparency in tax data and thereby, reducing the risk of errors and inconsistent reporting. 

“Indian Government is extensively leveraging technology to extract & leverage data reported by taxpayers across multiple tax legislations and use the same to undertake targeted audits/ investigations with the taxpayers. Thus, it becomes imperative to ensure that all tax filings made under corporate income tax, withholding tax and GST should be made from a single source of information. 

Presently, harnessing the power of technology to deploy an integrated approach for tax compliances is no more a good to have option but has become mandatory for organizations to avoid surprises during tax audits and potential disruption in business.”

Vikas Aggarwal, 
Head of Taxes – APAC, Nokia

2. Critical to maintain cross legislation reconciliations

Extensive data sharing has been enabled between different Tax and Regulatory Authorities. Any mismatch between different reportings may be carefully examined by the Authorities. It is, therefore, important for organizations to maintain a robust reconciliation of data reported to different Authorities.

  • Expenditure reported in the following reportings must be in sync:
    • TDS returns
    • Income-tax return
    • Tax audit return clause 34(a)
    • Inward supply as per GSTR 2A/ 2B and GSTR 9/ 9C
    • Financial Statements filed with MCA
  • On the same lines, revenue/income should be reconcilable in the following reportings:
    • AIS/TIS
    • Form 26AS
    • Income-tax return
    • Outward supply as per GSTR 1, GSTR 3B and GSTR 9/9C
    • Financial Statements filed with MCA

Efforts required to prepare cross-legislation reconciliations shall multiply with the increase in data volumes, which is inevitable given the Government’s increased focus on gathering transaction level data for widening and deepening the tax base. Hence, smarter ways of performing reconciliations must be explored by organizations, such as use of intelligent automation tools that can simulate and perform repetitive manual tasks which might help to substantially reconcile majority transactions curtailing the number of line items to a minimum where manual intervention is required. Quick and timely remedial action for any identified gaps is necessary to manage tax risks appropriately.

3. Tech infusion within the tax function — a pressing priority

Tech-enabled tax function is no longer a 'good to have' but a 'must have' attribute for the organization. Indian Tax Authorities have indeed been at the forefront with advanced use of technology. 

  • Some of these technology-enabled changes are:
    • Introduction of faceless assessment scheme
    • AIS/TIS form
    • Expanding scope of TDS/TCS provisions and other reportable matters
    • System generated notices under GST
    • Red flag reports and blocking of ITC, if availed in excess of auto-generated return

These changes depict how the Tax Authorities are being vigilant with the constant upgradation of technology.  With these significant changes in tax compliances and digital governance, next moves of the Tax Administration remain to be seen. The number of technological transformations, however, has posed challenges for organizations. This may be due to several factors, which include resistance to change, fear of the unknown, cost concerns, etc. However, this approach would lead to increased efficiency and better tax risk management in medium to long term, which the early adopters of technology in tax and finance function would readily agree.

Today, organizations are required to be front-runners to heighten their technology quotient rather than playing a catch up with government-driven changes. In present times to be effective, tax personnel should adapt and adopt technological capabilities along with technical knowledge. Technology could prove to be the foundation of a sustainable tax compliance space and give edge to organisations.

Nisha Gupta
Director - Global Transfer Pricing, Honeywell

Leveraging technology might help to unlock value, manage risk, improve efficiency, and provide value-added insights. Opportunities to use the new-age technologies, such as artificial intelligence, machine learning, cloud computing and data analytics must be identified and implemented sooner than later.

4.  Paradigm shift of the tax compliance function

With the onset of Pillar One and Pillar Two of OECD BEPS 2.0 currently slated to come into effect in 2023, the new order of tax compliances might get more involved globally. In order to keep pace with evolving legislative landscape, technology and talent upskilling demands, companies are increasingly preferring changes to their tax operating model through outsourcing/ co-sourcing activities within the tax function. The corporate world today is at an inflection point where building internal capabilities within an organization with the right mix of skills, people, data, technology and processes to cope up with the complex and dynamic environment can be extremely challenging for some. Hence, a paradigm shift in managing compliances may be explored by the organization whereby, the burden is moved on subject matter experts either fully or partially, and the tax function's focus is re-diverted towards strategic business and decision-making activities.

Tax and finance functions need to implement a transformation strategy that is holistic, flexible and has the scope to evolve and adapt changing talent, regulatory and tech landscapes. Working with a network of tax and finance specialists has enabled us to meet these objectives considerably increasing the technical and technology acumen.

Alok Mehrotra
Executive Vice President & Chief Financial Officer, Pramerica Life Insurance

  • Effective tax compliance today has moved beyond timely and accurate reporting to:
    • Building access to quality data and moving away from the desktop-based compliances to a platform based integrated approach to ensure correctness and consistency in tax reporting across tax legislations. Leverage data analytics and data reconciliation solutions for better tax risk management and planning 
    • Building talent capabilities to move beyond traditional tax technical skills to process standardization, data analytics, and technology skills

Tax compliances today consume the maximum data across any organization and internal stakeholders are expecting tax compliance functions to use this data to provide deeper insights into the business/ C-suite.  With the pressure to do more with less, companies might have a future-facing view and assess their readiness to transform. In addition, they have to consistently deliver on the rapidly evolving expectations from their tax compliance functions or engage with external partners to deliver these services.  With cost continuing to drive these decisions, there is an emerging recognition that through a technology led tax compliance managed services model, organizations can leverage the requisite core domain expertise and technology investments. The model may strengthen their tax compliance functions, with greater control on their capex and free senior management time for more value-added activities. 

Like it or not, the change is already here. Organizations must, therefore, identify the best approach that shall suit them to transform their tax function.

Summary

The pandemic has highlighted the need for tax compliance functions to be proactive in building resilience to withstand market disruptions and ensure business continuity, requiring them to make investments in technology and build people agnostic/risk-managed tax compliance/ reporting processes.

About this article

Authors
Garima Pande

EY India Global Compliance and Reporting Leader

Passionate about engaging with businesses in reimagining, redefining and improving their tax frameworks. Love to paint, travel and spend time with my daughter.

Uday Pimprikar

EY India Partner and National Leader – Indirect Tax

Specializes in indirect tax and policy advisor on some of the marquee transaction operations in the country. Avid reader.

Related topics Tax Tax compliance