The 104.91% surge (7.78 crore) recorded by Central Board of Direct Taxes (CBDT) in the number of Income Tax Returns (ITRs) filed in FY23 as opposed to FY14 is largely due to strides in digitising the tax filing process by CBDT and the Central Board of Indirect Taxes & Customs (CBIC). Gross Direct Tax collections in FY23 amounted to ₹19.72 lakh crore, up 173.31% from FY14. GST revenue for March 2024 reached ₹1.78 lakh crore, showing an 11.5% year-on-year growth. In an interaction with Fortune India, Rahul Patni, digital tax leader at EY India, explains the benefits of technology in making the ITR filing process accurate and fast.

How does technology address the challenges caused by inconsistency and frequent updates in Form AIS, which are affecting taxpayers' ability to file their ITRs efficiently?

Technology can automate the reconciliation of data between Form AIS and a taxpayer's records, enabling the immediate identification and correction of discrepancies. This reduces manual work and errors. Additionally, technology can track updates to Form AIS, if allowed by the government through APIs, and promptly alert taxpayers, facilitating timely adjustments. As more tax data is processed, technology becomes more adept at managing complex cases, which benefits a wide range of taxpayers, including those with intricate financial situations, as well as both individual taxpayers and corporate return filers.

For a more user-friendly experience, AI-driven chatbots and virtual assistants can demystify tax terms, updates and errors identified using natural language processing. Looking ahead, AI could even help the government pre-scan tax filings and suggest pre-filing corrections, ensuring accuracy from the start.

How can AI improve the accuracy and comprehensiveness of prefilled data files to assist taxpayers in filing their income tax returns more effectively?

AI-driven automation can revolutionise the tax filing process by ensuring the accuracy and completeness of pre-filled data. By integrating data from various sources, such as e-invoices and financial institutions, AI minimises the need for manual data entry. Additionally, machine learning (ML) techniques are used to cross-check this integrated data against past tax filings and taxpayer details, quickly identifying any inconsistencies or errors.

Technology can also help to catch common mistakes like duplicate entries, prompting taxpayers to fix them before submission. Additionally, AI models can be deployed to learn from any corrections taxpayers make, refining the accuracy of pre-filled forms for future filings. This not only saves time but also helps avoid penalties from incorrect returns.

How can AI aid in pinpointing errors within the JSON utility file during ITR uploads, reducing hardships for taxpayers in rectifying mistakes and re-filing their returns?

AI can significantly transform this aspect of tax filing. While the e-filing platform currently assists in identifying any structural issues or incorrect data before submission, deploying an AI model can also cross-check the data in the JSON file against past data and other databases to spot discrepancies, such as income mismatches or incorrect tax credits. Moreover, AI can apply tax rules to identify errors in deductions or calculations, ensuring compliance with current laws.

For individual taxpayers, AI can simplify complex error messages, translating tax jargon into plain language, and suggest corrections, like fixing a PAN number based on the taxpayer's history. With AI assistance, including chatbots, the tax filing process becomes more straightforward, reducing the stress of potential penalties for errors. AI's proactive approach means fewer mistakes and a smoother tax filing experience.

How has the introduction of technology transformed the tax filing process in India and changed the way individuals and businesses approach tax filing compared to traditional methods?

It would not be an exaggeration to say that India has one of the best systems for individual tax returns. The returns are simplified and largely pre-filled, and processing happens at ultra-fast speeds. For example, last year, my ITR was processed in just 2 hours and 10 minutes after uploading. I have also consistently received refunds in under 7 days for the past few years. I'm not sure if any other country in the world can match this!

The CBDT reported in September 2023 that the average processing time for income tax returns after verification decreased to 10 days for the fiscal year 2023-24, compared to 16 days for 2022-23 and 82 days for 2019-20. This rapid processing ensures quicker acknowledgments and faster refunds, marking a significant improvement over traditional methods where processing could take months.

However, unlike for individual taxpayers, the infusion of technology in the return filing process has made the compliances for corporate tax filers more detailed.

Statements and transactional information, such as those in AIS and TIS (Taxpayer Information Summary), further require corporate tax filers to ensure that the values declared in their returns match these pre-generated statements to avoid future notices and potential litigation. Organisations now need to collate, maintain, and reconcile data at a transaction level. This is one of the challenges of integrating technology into the tax landscape for corporate taxpayers.

How has technology improved the efficiency and accuracy of tax filings for both taxpayers and the government, and can you provide data or examples of how error rates in tax filings have changed with the advent of technology?

In India, the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes & Customs (CBIC) have made strides in digitising the tax filing process, contributing to a likely reduction in error rates. Electronic filing systems streamline the process, reducing time and effort, and include checks to prevent common errors. Pre-populated returns minimise manual data entry errors. The government uses data analytics to cross-check filings against databases, while AI models detect patterns indicating errors or fraud. Globally, electronic filing has reduced error rates, with the IRS reporting less than 1% errors for e-filed returns compared to 21% for paper returns.

How has the user experience improved with the introduction of e-filing platforms and other technological tools for individual taxpayers and businesses, and what feedback do taxpayers generally provide regarding the usability and accessibility of these tools?

The experience of taxpayers and tax professionals has significantly improved across all tax laws. Technology tools and initiatives such as e-filing and faceless assessments have minimised the need for physical visits to tax offices. The platforms are now user-friendly, with clear instructions and step-by-step guidance. This speeds up the tax process, facilitating faster submission and processing, which results in quicker refunds. Taxpayers appreciate the convenience and efficiency of these tools, reflected in higher compliance rates and positive feedback.

What are some of the most popular digital platforms and software used for tax filing in India, and what features make them effective?

In India, several digital platforms and software simplify tax filing by offering user-friendly interfaces, step-by-step guidance, and automated data import. They provide real-time error checking, personalised tax planning, and support for income tax, GST, and TDS, ensuring accurate and timely compliance.

What are the main challenges faced by taxpayers in adapting to new technologies for tax filing, and how are these being addressed?

Taxpayers today grapple with multiple issues, such as the sheer volume of data provided by the Government tax platform, at a transactional level. AIS & TIS forms run into several hundred pages, with no tools provided by the Government for data reconciliation. Furthermore, the demand for data and information is steadily increasing, necessitating the management of large volumes of data.

Individual taxpayers face several challenges when adapting to new technologies for tax filing, such as digital literacy levels and limited access to reliable internet or necessary devices, especially in rural areas.

For corporate tax filers, the use of technology has become a necessity, as their tax departments heavily rely on its outputs. Organisations must continually update their tax solutions and processes to align with changes in the law, as well as maintain and reconcile data at the transaction level before filing returns to prevent future litigation. Concerns over data breaches, cyber threats, and technical issues like system glitches or slow performance can also frustrate users. Language barriers further complicate the process, as not all e-filing platforms support regional languages.

Solution: To address these challenges, educational campaigns and training programs are essential to improve digital literacy. Robust customer support through helplines and chatbots helps guide taxpayers through the e-filing process. Strong cybersecurity measures and data privacy awareness campaigns alleviate security concerns. Continuous system monitoring and upgrades ensure reliability, fostering trust and confidence in the technology.

How might advancements in blockchain, AI, and machine learning impact tax administration and compliance?

Blockchain ensures secure, immutable transaction records, reducing fraud and ensuring accurate reporting. AI automates compliance processes by pre-filling forms and validating information, easing the burden on taxpayers and improving accuracy. ML algorithms identify compliance risks from historical data, helping tax authorities focus audits more effectively. AI models streamline audits by analysing large datasets quickly, leading to faster resolutions.

Imagine a future where business and tax processes are fully automated—a system where blockchain, AI, and automation seamlessly collaborate. Smart contracts execute business transactions, automatically handle tax calculations and payments, and maintain flawless, immutable records, ensuring transparency through decentralised ledgers. Using this data, technology tools can verify and generate compliance data for GST and withholding taxes, leaving no room for errors. Credits due flow smoothly through the system, minimising the need for reconciliations. This setup not only reduces fraud but also enhances transparency for all parties, including the government. While these technologies offer improved efficiency, accuracy, and fairness, we must also ensure they respect privacy, ethics, and include human supervision.

How has technology affected tax compliance rates in India?

Technology has dramatically increased tax compliance in India by simplifying the filing process, enhancing transparency, and reducing errors. The shift to e-filing income tax returns and the implementation of GST with its centralised online platform have made compliance easier and more efficient. Automated tools assist businesses with accurate tax calculations and timely filings. Data analytics and AI models enable tax authorities to spot discrepancies, while digital payments create a clear audit trail. Cross-departmental sharing of data further tightens compliance, making the entire tax system more robust and effective.

The Union minister for Finance and Corporate Affairs, Nirmala Sitharaman, also stated, “Over the last ten years, the direct tax collections have more than trebled, and the return filers swelled to 2.4 times."

This is supported by the fact that the total number of returns filed in FY23 showed an increase of 104.91% from FY14. Returns filed by individual taxpayers have been on an upward trend, with a growth of 90% in FY 2020-21 compared to FY13. As of October 2023, 53 lakh first-time filers submitted their returns for FY23, according to CBDT.

For April 2024, the GST collections breached the landmark milestone of ₹2 lakh crore and stood at ₹2.10 lakh crore, which is the highest ever, representing a 12.4% year-on-year growth.

Digitising tax filing

ITR filings double of FY14 due to tech by CBDT: EY India