Summary – Digitisation and data are enablers of tax simplification; utilisation of data and advanced technology for better tax collections and policymaking would set up a virtuous cycle that fosters economic growth, with positive impacts on taxpayer morale.
Digitisation of tax systems is a priority for the tax administrators of the Commonwealth. While several tax authorities are in various stages of digital maturity, they follow a broadly common path, towards digitisation and simplification. Digitisation is cost effective, significantly improves operational efficiency, user-experience, scalability and security which is a win-win for taxpayers and tax authorities alike.
Automation through digitisation is the bedrock of all simplification initiatives. This transformation of manual tax returns to electronic enabled automation and computer aided processing in real time. Most countries have transformed operations from manual to electronic filling of tax returns and focus on data collection and linkages from third-party sources. Several countries have developed unique digital identities that help in digital verification of the taxpayer and enable cross linkages of data from various sources.
On the front end most tax jurisdictions have started to offer pre-filled tax return forms and allow electronic payments of taxes as well as refunds. Few countries have mandated electronic billing of transactions and making this data available to tax authorities increases the transparency of operations and increased levels of voluntary compliance of businesses.
India for example has a tax base of about 80 million taxpayers and over 99% of the tax filing is done online. They have also brought down time for processing returns and refunds to 10 days or less. Mauritius has successfully converted over 90% of its taxpayers to electronic filing. Maldives has achieved 95% e-filing and 96% e-payment amongst its tax base. Furthermore, individual taxpayers below a certain threshold do not require to file returns in Maldives. Barbados is actively pursuing digitisation to modernise its tax systems by leveraging widely available digital access, use of emerging technologies such as blockchain and plans to undertake taxpayer education programmes at scale.
One of the outcomes of a digitised tax administration is that tax authorities have become producers and owners of copious amounts of good quality data. This has enabled data driven decision-making leading to tax authorities setting up data analytics units to analyse and use this data effectively.
Effective utilisation of this data has the potential to inform audits, tackle tax-evasion, adopt better enforcement and further ease the tax compliance process leading to better tax-payer service and enhancing revenues for tax authorities.
Given the importance of data, it was discussed that data security and ensuring the quality of data is crucial. Secure pathways to exchange data between government departments and external parties is also critical. It is essential to be able to assure the taxpayer that this data is safe and will not be misused. Data protection laws that require consent to share, sharing data only on a need-to-know basis, and anonymised data are some of the ways to ensure data protection.
Emerging technologies, such as machine learning, blockchain, artificial intelligence, and the use of robotics could be leveraged to quickly analyse large volumes of data that can be used across the board for better evaluation and policymaking and better enforcement and data analytics.
Some countries have developed unique digital tax identities that help identifying and linking data on a taxpayer from multiple systems and intermediaries to get a complete picture. However, some countries are on the path of developing one that suits their country context.
Sri Lanka is strengthening its digital public infrastructure. It currently has separate digital identities for various government agencies such as one for property purchase and another one for the registration department. They are now working towards a single unique digital identifier aiming to link all available data on a taxpayer. They are keen to learn from jurisdictions who have successfully implemented such measures (e.g. India, Malaysia, Australia).
Third Party Data & Intermediaries
Taxpayers rarely come forward to share data. This necessitates accessing data from third parties such as transaction data from banks by tax authorities. Using this data for pre-filling income tax returns helps with accurate tax calculation and minimises compliance errors. It also helps the taxpayer understand what data is available with tax authorities.
For example, in Mauritius, compliance improved reportedly by making the taxpayer aware of the type of data that was available with the authorities. They have, since then, achieved 99% electronic filing in the island state and report better taxpayer experience. However, they also emphasised that measuring compliance rates constantly is critical.
Third party data is used in India successfully for presenting the taxpayer with their Annual Information Statement (AIS) which is a comprehensive summary of the taxpayers’ financial information, pre-filled using third party data from banks, credit card companies and so on. Any mismatches between AIS and taxpayer returns are noted for quick reconciliations.
However, third party data may not always be available. In some countries the tax authorities may not have access to such data from banks and other intermediaries due to data privacy laws or other competing policies. In low-income countries third party databases may not be available due to limited resources. As an alternative, leapfrogging to leverage huge data available through mobile networks should be considered.
There are challenges with technology and its maintenance are resource intensive. Digital systems need to be installed and updated frequently. Further, migration from legacy systems, training requirements for a skilled workforce could be expensive. Some countries may need to be supported with resources to drive the transformations while others may face challenges of up-killing staff, manage resistance to change due to the fear of job loss.
Further, political resistance from lobbying groups can also delay adoption of tech and slow down digitisation
A holistic approach to tax systems
Digitisation and simplification efforts should adopt a holistic approach as far as possible, covering technology, policy, and regulatory considerations while balancing tax administration and taxpayer needs. The stated objective of tax simplification is multi-faced to ensure a good customer experience, high early compliance rate and to enable accurate collection of taxes. This approach would help future tax systems to remain flexible and agile to adopt to changes effectively while keeping the taxpayer at its centre.
The UK has various teams embedded across His Majesty’s Treasury (HMT) and His Majesty’s Revenue & Customs (HMRC), to determine the future direction for tax systems and to put in effective strategies to adapt to evolving technologies.
Digitisation cannot be a onetime exercise as sources of income and its taxation are not static. Digitisation should therefore be progressive, iterative and speak to taxpayers with different requirements of digitised products.
Mauritius has used digitisation to make their IT forms interactive as against using one standard form for all taxpayers. Depending on the type of customer the form asks for the relevant information only thus making the process less onerous and time efficient.
The UK shared its experience of running the Office of Tax Simplification (OTS) between 2010 and 2022. Since 2022, the principles of OTS have been embedded into the UK’s tax administration. During its tenure, OTS deployed expertise from both private and public sector. This provided both administrators and policymakers a certain breadth and depth of research and evidence, generated over a period of covering multiple stakeholders. It supported informed decision-making and set the tone for future reforms.
Recommendations: A holistic approach to the architecture of tax administration – digitisation, data and technology
- Leveraging artificial intelligence and machine learning for ensuring the quality of tax data. This is a potential area for further knowledge sharing between the private sector and tax authorities.
- Experience in building and implementing scalable digital tools (e.g. unique identifiers), software systems (e-filing, portals, etc.) can be shared with peers through structured exchanges.
- Active support on customising software to suit respective jurisdictions could be provided through joint work with peers from the Commonwealth. This could be facilitated and done in a safe environment without any requirement on exchanging any data and avoiding any conflict of interests.