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.