Reforming tax through digital sophistication
The National Board of Revenue (NBR) provides several e-services, including application for tax identification number (e-TIN), tax payments and tax return filing, through its website.
NBR also has an e-learning portal to educate people about VAT through multiple e-learning courses. All these services are aimed at simplifying multiple tax processes and improved digital interactions between the government and taxpayers.
While the successful roll-out of these websites will digitally transform the country, the government should also focus on improving the efficiency of the overall tax processes and stakeholder satisfaction.
Time spent on performing tax compliance processes is an important metric for assessing the ease and efficiency of paying taxes. China, for example, has been improving this metric continuously.
According to Paying Taxes, a study by PwC and the World Bank Group, it took businesses about 138 hours to comply with tax obligations in China in 2018. This was a continuous improvement from 142 hours taken in 2017 and from 207 hours in 2016.
The time required for compliance has improved in India as well, as the technology adopted for the new goods and services tax (GST) system has started stabilising.
According to the study, businesses in India took about 254 hours to comply with tax requirements in 2018, compared to 278 hours in 2017. For India, the introduction of GST was a bold move, considering the scale of implementation and number of businesses affected.
The objective was to free up the movement of goods, services, and tax credits across the country and make it easier to do business. GST is also expected to drive significant standardisation and simplification of processes.
According to the study, businesses in Bangladesh took about 435 hours to comply with tax obligations in 2018. As the NBR is moving towards the new VAT system, such metrics are expected to improve in the coming years.
Multiple sets of technologies are available today to improve the processes of tax compliance and administration. Depending upon the technologies deployed for tax compliance, both by payers and administrators, the tax regimes may be classified into different categories. At one end, there are tax regimes where both payers and administrators use a minimal amount of technology.
On the other end of high digital sophistication, both payers and administrators work with a set of fully automated real-time tax reporting and compliance processes.
As digital sophistication increases with a higher degree of technology adoption, the ease and efficiency of paying taxes are expected to improve.
A few countries have started assessing and piloting the next level of cutting-edge technologies for administration of tax compliance, such as blockchain technology.
For example, in Kazakhstan, the use of a blockchain-based system for administering a portion of VAT receipts has reached the final phase of implementation and started showing promising results.
The tax authority in the UK has started evaluating blockchain technology as part of its broader transformation plan to digitise tax compliance processes for businesses. Such use of sophisticated technology is expected to provide greater flexibility, such as facilitating split payment of VAT. Similarly, the European Commission’s Directorate-General for Taxation and Customs has started to explore the use of blockchain technology as a potential foundation for the Digital Single Market.
While the security and reliability offered by blockchain technology are very attractive for the administration of tax compliance, a widely applicable solution has yet to be developed.
However, the move to a more digitally sophisticated tax compliance system has already been a significant success for those tax authorities that have embraced technology.
Tax authorities should assess the appropriate level of technology for their organisations, considering the complexity of their tax system, the availability of technology infrastructure and the digital maturity of their taxpayers.
The introduction of any new technology for administering tax will require significant planning and coordination, and we encourage tax administrations to consult widely with their taxpayers and with other tax administrations that are already further along the path of technological change.
Employment of human workers is going to change significantly in the coming years. Quite a few traditional jobs are expected to be performed by individual freelance service providers instead of regular employees. This will create additional tax compliance requirements as these individuals will have to comply with service delivery related taxes, such as VAT.
On the other hand, artificial intelligence (AI) and robotics are going to automate a good number of manual labour-intensive jobs in the coming years. The taxes earned from labour-intensive activities are likely to fall in the short term due to the higher degree of automation.
Agile tax authorities that are able to respond to these changes faster will be able to perform better in such situations. Instead of getting impacted by AI-driven disruption, tax authorities are embracing AI to improve the quality of tax assessments and prevent tax evasion. Such technology-led initiatives are expected to improve overall tax collections in the coming years.
It is also important for a responsible tax authority to educate taxpayers on the new tax system.
With the rapid growth of the economy, tax collection is expected to grow in future. NBR has also undertaken quite a few transformation initiatives to make its tax collection and compliance processes more technology driven. Additional focus on digitalisation will help in further improving its citizen-centric services and improving the country’s tax-to-GDP ratio.
The writer is a Partner at PwC. The views expressed here are personal.