(Gagan Kumar, Custodian, Krishnomics Legal)
Introduction
Tax departments all over the world play a very important role in sustaining the economies of countries, being responsible for collecting revenue that ultimately funds the development of the nation, optimum revenue collection depends largely on the efficiency and effectiveness of tax administration. Therefore, having an efficient tax administration system becomes crucial for fostering economic stability and creating a tax-savvy destination for taxpayers. With the turmoil in most of the countries in the region, one of the attraction points for any investor apart from political stability is the fairness of the system. For the last decade, the Government of Bharat has invested heavily in technology which has borne fruits, be it Direct Benefit Transfer, Unified Payments Interface or FASTag, technology has ensured that the last person of the society is benefitted. With the advancement of technology, it is natural that AI can now be used for bringing about efficiency in tax administration and Bharat can be a world leader and torch bearer in this area. The use of AI can make Bharat a preferred jurisdiction for businesses.
AI and Tax Administration
Technology has always been a helpful tool in tax administration, with the advent of Artificial Intelligence (“AI”) and Machine Learning (“ML”), the debate on the extent of integration of these technologies in the field of tax compliance has become more relevant than ever. More than 80% of the 58 tax administrations report that they are already using or in the process of implementing technology to reduce human interference and increase efficiency by freeing up resources as per the OECD Tax Administration 2023 Comparative Information on OECD and other Advanced and Emerging Economies [1]. However, AI and ML come with their own drawbacks with regard to data privacy and their inherent probabilistic nature. Tax departments all over the world are now endeavouring to find the perfect extent to which these technologies can be deployed. Nevertheless, one cannot deny the numerous benefits AI poses to the administration and compliance of tax from the perspective of both the taxpayers and the authorities. With the use of predictive AI, now the authorities can assess the quantum of incompliance and the viability of initiating proceedings against such incompliances. Tax departments can obtain reports on the probability of succeeding in litigation before pursuing the same before various forums, thereby saving the cost and time for both the assessee and the department. For instance, by analyzing historical data and identifying patterns, AI can predict future compliance and litigation issues, allowing authorities to address them proactively.
AI and Transfer Pricing
Transfer pricing (“TP”) refers to the pricing of goods, services, or intellectual property transferred between related entities within a multinational corporation. As simple as it may sound, arriving at the Arm Length Price (“ALP”) involves a complex procedure that may vary depending on the jurisdiction. With the increase in multinational transactions, an effective transfer pricing strategy is the need of the hour for all the companies engaged in such transactions. With an increase in the OECD recommendations, compliance requirements by tax authorities around the globe are getting complex and intricate.
As discussed, TP compliance can be lengthy and burdensome, in order to achieve cost and time-efficient TP documentation, companies are resorting to AI technology. There has already been a positive development in the realm of TP documentation through the advent of various AI software [2]. Through the integration of AI in TP proceedings, tasks that were traditionally complex and time-consuming are now streamlined as AI can analyse bulky data and information with ease and provide an accurate breakdown of such data.
Through the analysis of historical data and performance of companies, AI can provide comprehensive information that will be beneficial in arriving at the most appropriate method for the purpose of calculation of ALP and shortlisting the most appropriate comparables for the TP study. Technology-driven transfer pricing policies accompanied by automated benchmarking and AI-based Function, Assets, and Risks (FAR) Analysis, companies can avoid penalties and assessments from tax authorities. With the help of predictive AI, companies can predict the ALP on a quarterly basis by analysing the market indicators such as currency fluctuations, demand and supply, etc, on a real-time basis and can alter ALP based on such changes in the market conditions.
Use of AI by Tax Authorities, Bharat
Tax compliance, particularly in Bharat, is an arduous task that requires enormous time and effort. In a world of increasingly complex and burdensome tax compliances, Bharat is working towards digitalising and streamlining tax compliance with the intention to curb corruption and bring transparency to the tax assessment process. With the integration of AI and ML for tax processing in 2019, Bharat was one of the first countries to use AI for tax assessment and the initiative proved to be a game-changer during the COVID-19 period. Despite the devastating aftermath of the COVID-19 pandemic, in the year 2023 as per the ‘Ministry of Finance Year Ender 2023 [3],’ the Department of Revenue achieved significant milestones in enhancing the efficiency and integrity of the Goods and Services Tax (GST) system wherein the GST collection for April 2023 broke all records of previous collections and achieved the highest ever tax revenue collection at Rs 1.87 lakh crore, thanks to the data analytics and artificial intelligence.
Furthermore, recently in an interview with the Indian Express, Central Board of Direct Taxes (“CBDT”) Chairman Nitin Gupta emphasised the benefits of integration of AI that around 44 lakh emails have been sent to taxpayers in December 2023 for mismatches between their declared income and financial transactions based on technology-based risk assessment. Mr. Gupta further highlighted that the higher direct tax revenue estimates, as outlined in the interim Budget of 2024-25 banks mainly on the technology along with other measures being taken to curb revenue leakages.
With better revenue collection and budget management through AI and ML, Bharat can stand at the global stage as a leader in efficient tax compliance. For instance, Project ADVAIT (Advanced Analytics in Indirect Taxes) rolled out by CBIC in 2021, is a flagship analytics project for Indirect Taxes, ADVAIT used capabilities of big data and AI with a threefold objective of enhancing Indirect Tax revenue, increasing taxpayer base, and supporting data-driven tax policy [4]. Therefore, at this juncture it is justifiable to say there has been a healthy development towards the integration of advanced technology into the tax administration, however, there is still a long way to go in terms of awareness and training of the use of AI models to Income Tax department personnel.
Conclusion
Integration of AI and other technologies as already seen from the example of Bharat, will significantly increase efficiency and more importantly, it will reduce the burden on already overwhelmed tax departments, necessitating in optimum allocation of resources. With easier and quicker identification of the likelihood of tax evasion and efficient assessment proceedings with minimal human interference, AI as a tool has the potential to help tax departments achieve their goals and in turn, increase the overall welfare of a state.
[1] OECD, ‘Comparative Information on OECD and Other Advanced and Emerging Economies’, 2023 (https://doi.org/10.1787/23077727).
[2] Aibidia TXM, TP Genie and KPMG’s TPAD are some of the leading software working in the field of AI and TP compliance.
[3] PIB, ‘Ministry of Finance Year Ender 2023: Department of Revenue’, 27.12.2023 (https://pib.gov.in/PressReleasePage.aspx?PRID=1990977).
[4] PIB, ‘Both direct and indirect tax departments employ data analytics, big data and Artificial Intelligence/Machine Learning in tax administration to make it more effective, free of official discretion, business and taxpayers friendly’, 27.03.2023 (https://pib.gov.in/PressReleasePage.aspx?PRID=1911271).
