Role of Technology in the Tax Function of India

Role of Technology in the Tax Function of India

While the technology, of course, has an ever-increasing presence in every aspect of our professional as well as personal lives, tax professionals have been divided over its use in their field considering the necessity of analytical, technical and interpretational skills. However, there is now a growing, if sometimes grudging, an acknowledgment that the tax function cannot remain immune to the intrusion of technology and across industries the tax functions are now at the horizon of adopting this compelling change. This is further reinforced by the fact that the tax authorities can be said to have stolen a march over taxpayers by their push for digitization and the use of big data analytical tools in their quest to ensure compliance, transparency and control evasion.

In exchanging views with various stakeholders in the tax field, the common theme that seems to run through the discussions is the expectation that sooner rather than later, self-assessment of tax would be a defunct concept, as every business transaction goes online. What the future looks like is that the systems of the tax authorities would hold data on every business transaction and would be able to assess a significant proportion of the tax liability for business in real-time. The GSTN is an example of such a scenario, and while it is agreed that the system is not yet robust enough, the thought process of the authorities is crystal clear. 

Similarly, the BEPS initiative can be said to be another factor forcing the adoption of technology – the transparency in reporting required on implementation of the recommendations and the availability of information to global tax administrators necessitates prioritizing standardized and consistent reporting. It would, therefore, be a brave or foolhardy tax professional that insists on refuting the role of technology in his domain. 

Most corporates have been struggling with the data requirements of the GST regime, and of course, there are further challenges like the new e-invoicing system on the horizon. The increased reporting requirements have already added significantly to the burden on tax professionals. Tax functions have been evaluating multiple solutions for streamlining the processes/reducing the efforts, but due to the evolving compliance requirements, these solutions often constitute only a partial answer.

All corporate functions today struggle under the pressure of managing budgets & having lean teams, or what is simplistically called Doing More with Less. Consequently, qualified tax professionals are often stuck in undertaking routine compliance activities, manual maintaining tax records with not enough bandwidth for value add, tax planning/strategy related work. 

At this moment, aside from massively expensive ERPs, the extent of digitization can be said to be primarily limited to extensive use of excel spreadsheets. While there are some knowledge management tools and tax software, these are mostly not scalable or standardized except to a minimal operational extent. In most cases, even the ERP systems are not optimally geared towards providing inputs for tax compliances. As of now, there is not a significant amount of automation or use of data analytics except by a very few. Even within entities of the same group, there are often a variety of tools and processes in use, and this does not lend itself easily to the use of robotics or analytics. Furthermore, tax data comes in from many different sources, entailing chasing for data, review, reconciliations, and corrections. Unless processes are standardized, automation would be unlikely to pass the cost-benefit test

Of utmost relevance is the fact that tax is an outcome of other processes, such as SCM, P2P, and R2R. The output of these processes forms the input for the tax professionals, and it is of prime importance for them to be able to have confidence in this data. However, it is most often seen that the tax professional does not have enough confidence in or is unable to rely on these data inputs – consequently, tax automation projects either never take off or start on the wrong foot. In optimal workflows, the concept of Right First Time is one of the driving factors, and the same applies to tax automation processes/workflows too

If the input data i.e. the data in the system is robust, automation of tax processes can be a success to a large extent. The solutions available in the market today can address automation of the tax processing, but they cannot assess the correctness of the inputs, and that is precisely where automation projects hit roadblocks. There are of course several technologies now available, such as Robotic Process Automation (RPA), Machine Learning, Neural Language Processing (NLP), Predictive Analytics, etc. All of these enable a different level of automation or cater to different capabilities. Similarly, something like process mining which is now being used by many organizations to analyze their business processes and identify trends and patterns, can provide an insight to management and enable them to bring in process efficiency. 

There are multiple tax tools or solutions, which would be based on these technologies. What would be useful for a tax professional is to understand the basics behind these, enabling him/her to at least understand the value add that each can offer and the feasibility thereof. While tax functions may not find benefit in all of these, they need to identify which of these could provide them the right level of cost-benefit from an organizational standpoint. 

Ideally, for a tax function setting out on the automation journey, it may be useful to at the outset segregate the activities they deliver between transactional and analytical. Where a digital maturity assessment is undertaken by the organization, this would provide valuable insights on what processes are the most time-consuming, require most manual intervention, are most repetitive or are bottlenecks, create fragmented data, and whether these can be resolved through digital solutions. 

Transactional processes are naturally most capable of being standardized, and consequently, lend themselves much more easily to automation. These are also the most time consuming and comparatively less value-adding. Several organizations have implemented RPA tools for taking on repetitive or standardized activities. There are multiple such tools available, and these can offer significant benefits especially where a high volume of transactions is involved and for easy storage and on-the-go access to data. The tax function should evaluate the end-to-end processes, including the processes that are the data source for tax, enabling appropriate process improvements and implementation of checks & balances to address input dependency. RPA solutions will free up substantial time from repetitive activities, as also significantly do away with the possibility of manual errors. These are also comparatively easier to implement while being scalable too. Half the automation battle can be won if input data & processes are robust.

Subsequently, in the next stage, tax functions can evaluate as to what tools from the AI spectrum or what level of automation provides them the most value-add. The tax technology domain has a high end, customized solutions as well as normal generic ones, and it will be up to the tax functions to appropriately assess what options would serve the best. It may also be noted that technology is one of the key factors that can deliver substantial value from centralizing or outsourcing of tax compliance activities. A multinational group may find it financially much more attractive to centralize basic tax compliance activities and implement appropriate technologies, than a case where each entity manages its technology aspirations separately. In other words, it makes more sense to implement a tool at the SSC and service 4 geographies, rather than implement 4 tools at as many locations. There are a few organizations that are already working on these lines and many more that are evaluating similar strategies. 

When we discuss a technologically enabled tax function, it is but natural that the tax professional of the future needs to be technologically savvy. Aside from his/her core functional skills/tax technical skill sets, he/ she will be well advised to know about data analytics and digital tools, if not proficiency. He/ She will have to often assume a functional consultant role, to play a key role in technology implementation or change management. In-depth understanding of the entire finance ecosystem, cross-functional process evaluation, and the ability to understand and communicate requirements in technological terms would be valued skill sets. It is also incumbent on tax leaders to make their teams future-ready, assessing and addressing reskilling needs. A digitally mature tax function would probably also need to count dedicated IT specialists among their teams.

The Big4s have of course been at the forefront of evaluating and developing technological solutions for the tax field, and are quite advanced on the digital journey, especially as they address the primary concerns re data security. However, there are many other players too, including relatively smaller ones, who understand the needs and are innovating solutions for these. It is a given fact that at this moment the cost is a huge factor in decision-making for adopting high-end technological solutions/tools, but with relatively smaller players getting into the field, it would be logical to expect a rationalization in the cost structure shortly

At the same time, it is pertinent to note that management’s decision-makers’ need to consider the long-term benefits of a tool rather than the upfront costs i.e., consider technology adoption as an investment. For instance, the management could also consider undertaking a tax technology transformation value proposition (‘TVP’) analysis wherein the cost of implementation can be leveraged against the cost of optimization, reduced indirect costs, increase in efficiency and the risk mitigated. In a nutshell, the initial outlay may be high, but the benefits likely to be derived therefrom are sure to extend long enough in the future to make the adoption an easier decision

Worth dwelling upon – a digitally progressive tax function is no longer an aspiration, but an inevitable evolution.

Thank you, Mr. Pankaj Vasani, my mentor and an exceptional business leader and a finance expert, for guiding me through this piece.