More digital nudges weighed as taxman pushes compliance
Summary
- Experts say tech and artificial intelligence driven-‘nudging’ is a key element of the tax department’s new toolkit.
New Delhi: Armed with a heavy dose of technology, the income tax department is planning to step up its ‘nudging’—non-intrusive engagement with individuals and businesses—for tax compliance, while also gearing up its systems and field office to respond more effectively to taxpayer grievances, two persons informed about the development said.
The idea is to leverage data and technology, which will make tax compliance more voluntary, impersonal and automated, a strategy the department has already successfully tested in the last few years, said one of the two persons.
Accordingly, the tax authority will step up its interaction with taxpayers through emails and text messages.
“Stepping up information-led nudging for voluntary tax compliance and ensuring greater responsiveness by the department officials is a priority for this year. We are already using this approach of nudging in e-verification of transactions and tax return updating. It will be expanded," said the person, who spoke on condition of not being named.
Under the e-verification scheme, the department flags missing information or inaccurate data in people’s tax returns based on information the authority receives from its vast pool of third-party reporting entities like banks, financial market players and sub-registrars of property.
The facility for updating tax returns within two years of the year in which they were filed enables assessees to come clean on their previously unreported or underreported income in the updated income tax return.
The move to redouble these efforts comes after strong direct tax revenue buoyancy aided by the tech-led tax administration enabled the government to cut the income tax rate and rejig slabs this year for the middle class, at a cost to the exchequer of ₹1 trillion this fiscal.
Scaling up non-intrusive and data-driven measures is expected to help the department in further widening and deepening the tax base. The tax relief was possible because of the robust direct tax revenue buoyancy seen in the last few years.
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In the three years after fiscal year 2022 (FY22), which saw a sharp post-pandemic rebound in tax receipts, direct tax revenue collection—especially personal income tax revenue collection—growth was robust.
It grew 20% in FY23, over 25% in FY24, over 20% in FY25 and, in spite of the tax rate cut announced this year, is expected to grow at over 14% in the current financial year.
Experts said tech- and artificial intelligence-driven nudging is a key element of the tax department’s toolkit.
Scaling up the tech, artificial intelligence and data analytics-enabled nudging approach to send personalized, transparent emails and SMSes about unreported transactions or errors to taxpayers can encourage more voluntary compliance, said Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm.
“These communications should be clear and educative, offering step-by-step guidance and pre-filing instructions to minimize receiving of post filing notices. Parallelly, a robust digital infrastructure with strong cybersecurity and user-friendly e-filing portal with features like real-time chat support for multiple languages can build trust," said Maheshwari.
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“To ensure responsiveness, the department should mandate time-bound grievance redressal and clear escalation pathways. Collecting feedback through surveys and post-interaction ratings can drive continuous improvement," Maheshwari added.
The department has been making strong investments in technology in recent years. Data available from the finance ministry showed that the department has invested over ₹3,530 crore on ‘information, computer and telecommunications’ since 2020.
