From Manual to Digital: India’s Technology-Driven Compliance By Design

Compliance, at its very core, is to conform to a rule or regulation. Due to the increasing complexity and volume of tax regulations, it is becoming progressively more difficult and impractical to keep manual track of compliance with all such regulations affecting an organisation’s business. Therefore, compliance via automation emerged in the early 21st century as a business necessity and stimulated the requirement of compliance by design.

What is Compliance By Design?

“Compliance by Design” refers to the practice of integrating compliance considerations into the design and development process of products, services, or systems from the outset. E.g., being software built and conceptualized while considering all the regulatory requirements.

Rather than treating compliance as an after thought or separate process, compliance by Design involves proactively incorporating regulatory requirements, standards, and best practices into the design phase.

Compliance By Design – What Was The Need

Compliance By Design – What Was The Need

Using software and programs to comply with regulations was a revolutionary idea which received diverse opinions at its inception.

Despite the varied opinions, tax-tech compliance has become a standard in many industries over the years and is now seen as a necessity for organisations across the globe.

Compliance By Design

Simply, it is how an entity complies with its regulatory requirements via technology.

 

compliance by design system

 

compliance by design system

Moreover, it is a concept that emphasizes incorporating compliance requirements into the Design and architecture of systems and processes from the beginning. In the context of Indian tax administration, implementing compliance by Design means integrating compliance measures. It controls the tax administration framework, policies, and processes to ensure effective and efficient tax compliance.

Compliance by Design was perhaps the answer to accomplish the arduous compliance task.

Comprising technology for regulatory compliance

Advantages And Possibilities

Adopting the Compliance by Design (COD) approach has resulted in multiple advantages, mainly reducing regulatory fines and customer satisfaction scores. It has helped companies to streamline their business processes and keep up with the dynamic changes in the industry.

Advantages And Possibilities - Compliance By Design

Companies and even the government have started to take an automated approach to taxation in the past decade. The focal objective is to decentralise the tax-paying processes and ease the filing of tax returns.

Furthermore, not just the administrative procedures but even the litigation aspect of taxation underwent a change from manual to online. This helped taxpayers considerably cut the tax departments’ red tape and other bureaucratic problems.

There are various ways to adapt Compliance by Design. It is optional to acquire a customised integrated tax software directly to follow compliance by Design.

Configuring GST master data in Tally to calculate GST amounts on vouchers automatically or using essential software for filing tax returns are also examples of compliance by Design.

Advantages And Possibilities - Compliance By Design

Technological Leap

Indian Tax administration has been changing according to the changing business and economic environment. The technology revolution in the last decade has been better utilised by the Income Tax Department (ITD) to meet the interests of various stakeholders.

The Indirect Tax administration has equally focused on delivering better service in the changing environment, particularly after introducing GST. The successful implementation of GST is an example of this.

In the effort to focus more on shaping the compliance environment, revenue bodies and other government agencies and business parties are utilising technological developments. They are promoting further single developments to become more effective.

Examples of initiatives that build on these developments are certified cash registers, online bookkeeping and filing and e-invoicing arrangements.

Technological Leap

“Tax compliance by design” is about how this can be taken one step further by integrating these different initiatives so that tax compliance becomes a natural part of day-to-day transactions. Revenue bodies are already embarking down this road, but there could be benefits in doing this more systematically with a clear strategic vision.

Designing compliance (and service) into the business processes may take many forms.

Yet, based on the description so far, it’s been possible to identify a few characteristics.

Tax compliance by Design is:

  • More about getting it right than fixing what has gone wrong.  
  • About influencing the environment through co-operation with taxpayers and other participants.   
  • About building compliance into existing business processes.  
  • More about gaining and handling information rather than handling tax returns. Potentially achieved in many ways, there is no single best solution.

The “tax compliance by design” approach does not imply that only one Design is possible. The idea is that tax compliance can be designed into normal business processes but can also take different forms and shapes depending on the context and the solutions.

Two Distinctive Approaches

Two principal strategies for realising the “tax compliance by design” concept can be discerned. This study describes these strategies as “the secured chain approach” and the second as “the centralised data approach”.

In the first, much of the focus is on the business’s internal processes and how trusted intermediaries support these. Most of the data collection and processing into information about tax liabilities and their payment occurs within the business and the service providers that support it.

In the centralised data approach, much of the data collection involves third parties directly supplying information to the revenue body, and the revenue body will transform this into information about tax liabilities and payments that are fed back to the business.

Practical implementation of compliance by Design by the Indian Tax Authorities

The introduction of Form 26AS, Annual Information System Report (AIS), and Transaction Information System Report (TIS) enable taxpayers to file income returns easily.

AIS is a comprehensive view of information for a taxpayer displayed in Form 26AS.

Taxpayers can provide feedback on information displayed in AIS. AIS shows both reported value and modified value (i.e. the value after considering taxpayer feedback) under each section (i.e. TDS, SFT, and Other information). It has been designed to display complete information to the taxpayer with a facility to capture online feedback, hence increasing transparency.

compliance by Design by the Indian Tax Authorities 

It mainly enables

  • Voluntary compliance and enables seamless prefilling of return. 
  • Detects non-compliance.

AIS and TIS (Taxpayer Information Summary) have been designed in a way that they reflect complete information about the taxpayer in a concise report mainly covering

  • Basic information like PAN, Masked Aadhar Number, Name of the Taxpayer, Date of Birth/ Incorporation/Formation, mobile number, e-mail address and address of the Taxpayer.   
  • Taxes deducted and collected at source are commonly known as TDS and TCS.   
  • SFT information reported by specified third parties, namely banks, listed companies. 
  • Details of payment of taxes, i.e. whether advance tax, self-assessment tax or tax paid on demand.   
  • Other Information: – Details of the information received from the other sources, such as data pertaining to salary, Interest on refund, Outward Foreign Remittance/Purchase of Foreign Currency, etc.

Pre-filed income tax return for certain taxpayers

Due to the implementation of a secured chain and central data approach, for taxpayers declaring certain heads of income (like salary, interest dividend, etc.), a mechanism and Design are implemented whereby their income tax return is prefilled. Upon verification, the same can be filed with a click.

For Litigation and Advisory

Design implemented not only in compliance but also in areas of litigation and advisory by using online portals and platforms for e-filing of appeals (saving time and cost and enabling representation from anywhere). Further, by systematic maintenance and designing of a knowledge portal by the tax departments and professionals, ease of advisory and decision-making has evolved and become responsive and efficient.

Transformative Technology in GST

The indirect tax system has approached complexity equally with a similar focus and has created a significant milestone during the successful implementation of the GST. Nationwide Goods and Services Tax – GST regime rollout during 2017 was one of the most significant Change Management projects.

Design and Technology in the GST Administration

Digitization and the use of Technology have been the backbone of GST Implementation. Continuous Improvement, monitoring, and regular system changes are the reasons for the success of the GST Administration.

Design and Technology in the GST Administration

Some of the technology initiatives in GST implementation include:

  1. Introduction of E-way bill
  2. E-Invoicing
  3. Automated Input Tax Credit Reconciliation
  4. Auto population of returns
  5. Automated Refund Workflow enabling
  6. Dynamic QR for B2C invoices and
  7. Mandatory matching with 2B for availing credits.

GST’s IT Infrastructure provides a common registration, return filing, and e-payment platform. E Invoices are generated through authorised invoice registration portals (IRPs). GSTN provides a shared IT Platform to all GST Stakeholders and integrates the Tax administration systems of the Centre and States.

Read more:-  E-invoicing: A Global Phenomenon

Information Exchange

Technology use has made the exchange of information between jurisdictions – various states and central government- better for the tax administration of interstate trade and uniformity of tax positions. Information exchange between Income Tax and GST through database integration helps in better tax administration.

These proactive initiatives have ensured –

(a) less human intervention,   

(b) maximum use of technology,   

(c) efficient handling of large volumes of data,   

(d) improved accuracy of data,   

(e) enhanced the speed in which the Department has responded to tax compliance/assessment,   

(f) end-to-end linking of data for effective tax administration and   

(g)reduced the reconciliation effort required for linking the payment records with tax return records.

voluntary tax compliance rate

Digitisation of tax information and increased digital payments, digital currency, e-commerce, and digital business transactions provide direct or indirect information to the tax administration. Data availability to the Tax Administration has increased manifold. Detecting tax evasion and tax fraud using technology tools is the new order.

Data analytics, forensic best practices, and real-time knowledge sharing are used to detect tax evasion and improve tax collection and compliance. These steps may help the Tax Department leadership spend quality time on policy-making, system design, implementation, and monitoring to face emerging challenges.

Tax realm

Moreover, due to the ease of compliance brought by technology, the return filling numbers are only increasing.

Adapting to Change: The Value of Compliance by Design in Tax Laws

Indian direct and indirect Tax laws keep changing regularly according to the demands of the social, economic, and business needs. Considering the size of the population, the number of transactions, the tax collected by both the direct and indirect tax authorities in India, and the complexities involved, “Compliance by Design” is the best model for tax administration.

Improving the Taxpayer’s confidence in the department and providing a better experience to the Taxpayer during the Tax compliance process has been possible due to these initiatives. India has set an example for better use of Technology for the facilitation of economic activities and efficient and effective Tax Administration.

Adapting to Change- The Value of Compliance by Design in Tax Laws

Pioneering a New Era

With technology and change, teething issues and glitches are bound to happen and are part and parcel of such initiatives.

Pioneering a New Era

Some key proposals to successfully implement and maintain Indian tax administration compliance by Design:

  1. Simplified Tax Laws and Regulations:- The tax laws and regulations should be clear, concise, and easily understandable by taxpayers.
  2. Transparent Tax Compliance Processes:- Transparency is essential to promote compliance. The tax administration should establish transparent processes for registration, filing returns, making payments, and other compliance-related activities.
  3. User-Friendly IT Systems:- Implementing user-friendly information technology (IT) systems is crucial for effective compliance by Design. The tax administration should develop and maintain robust IT systems that are easy to use, secure, and capable of handling the complexities of tax compliance.
  4. Risk-Based Compliance Approaches:- The tax administration should adopt risk-based compliance approaches to identify and target high-risk areas or non-compliant taxpayers.
  5. Education and Awareness Programs:- Conducting education and awareness programs plays a vital role in compliance by Design. The tax administration should regularly educate taxpayers about their rights, responsibilities, and compliance benefits. Awareness programs can help taxpayers understand the importance of tax compliance and reduce unintentional non-compliance.
  6. Collaboration and Stakeholder Engagement:- Collaboration and Engagement with stakeholders, such as tax professionals, industry associations, and taxpayers’ representatives, is essential for effective compliance by Design.
  7. Robust Compliance Monitoring and Enforcement:- The tax administration should establish robust monitoring mechanisms and enforcement measures to ensure compliance. Regular audits, data analytics, and risk-based examinations can help identify potential non-compliance and take necessary actions. Timely and effective enforcement actions against non-compliant taxpayers serve as a deterrent and promote voluntary compliance.

Timely and effective enforcement

Conclusion

Implementing compliance by Design in Indian tax administration requires a comprehensive approach that combines clear regulations, user-friendly systems, stakeholder engagement, and strong enforcement measures. Integrating compliance into the Design of tax administration processes and systems aims to foster a culture of voluntary compliance and reduce the burden on taxpayers and tax authorities.

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