Tax reform through digital sophistication

The National Board of Revenue (NBR) offers a variety of electronic services through its website, including applying for a tax identification number (e-TIN), making tax payments, and filing tax returns.

NBR also has an e-learning portal to educate people about VAT through several e-learning courses. All of these services aim to simplify multiple tax processes and improve digital interaction between the state and taxpayers.

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While the successful launch of these websites will digitally transform the country, the government should also focus on improving the efficiency of overall tax processes and stakeholder satisfaction.

The time it takes to conduct tax compliance processes is an important metric for assessing the ease and efficiency of paying taxes. China, for example, has continuously improved this key figure.

According to Paying Taxes, a study by PwC and the World Bank Group, it took companies in China around 138 hours to meet their tax obligations in 2018. This was a continuous improvement from 142 hours in 2017 and 207 hours in 2016.

Compliance time has also improved in India as the technology used for the new goods and services tax system (GST) begins to stabilize.

According to the study, it took companies in India about 254 hours to comply with tax regulations in 2018, compared to 278 hours in 2017. For India, the introduction of the GST was a bold move considering the scope of implementation and the number of people affected Company considers.

The aim was to facilitate 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 standardization and simplification of processes.

According to the study, it took companies in Bangladesh around 435 hours to meet their tax obligations in 2018. As the NBR moves towards the new VAT system, it is expected that these metrics will improve in the years to come.

Several sets of technologies are available today to improve tax compliance and management processes. Depending on the technologies used by both payers and administrators to comply with tax regulations, tax systems can be divided into different categories. At one end there are tax systems where both the payers and the administrators use a minimum of technology.

At the other end of the high digital sophistication, both payers and administrators work with a range of fully automated real-time tax reporting and compliance processes.

As digital sophistication increases with a higher level of technology adoption, it is expected that the simplicity and efficiency of tax payment will improve.

Some countries have started evaluating and piloting the next level of cutting edge technologies for tax compliance management, such as blockchain technology.

In Kazakhstan, for example, the use of a blockchain-based system to manage part of the VAT revenue has reached the final stage of implementation and is showing promising results.

The UK tax authority has started evaluating blockchain technology as part of its broader transformation plan to digitize tax compliance processes for businesses. Such use of advanced technology is expected to provide greater flexibility, for example by facilitating the shared payment of VAT. Similarly, the European Commission’s Taxation and Customs Directorate-General has started to study the use of blockchain technology as a potential foundation for the digital single market.

While the security and reliability of blockchain technology are very attractive for managing tax compliance, a broadly applicable solution has yet to be developed.

However, the move to a more digitally sophisticated tax compliance system has already been a significant achievement for the tax authorities who have embraced the technology.

Tax authorities should assess the appropriate level of technology for their organizations, taking into account the complexity of their tax system, the availability of technology infrastructure and the digital maturity of their taxpayers.

The introduction of a new tax administration technology requires considerable planning and coordination and we encourage tax administrations to consult fully with their taxpayers and other tax administrations already on the way of technological change.

The employment of human labor will change dramatically in the years to come. Quite a few classic jobs should be performed by individual freelance service providers instead of regular employees. This creates additional tax compliance requirements as these individuals must comply with service related taxes such as value added tax.

On the other hand, Artificial Intelligence (AI) and robotics will automate many manual labor-intensive activities in the coming years. The taxes generated from labor-intensive activities are likely to decrease in the short term due to the higher degree of automation.

Agile tax authorities that can react more quickly to these changes can do better in such situations. Instead of being affected by AI-driven disruptions, the tax authorities are relying on AI to improve the quality of tax assessments and prevent tax evasion. Such technology-based initiatives are expected to improve overall tax collection in the coming years.

It is also important that a responsible tax authority educates taxpayers about the new tax system.

With the rapid growth of the economy, it is expected that tax collection will increase in the future. NBR has also taken some transformational initiatives to make its tax collection and compliance processes more technology-oriented. An additional focus on digitization will help to further improve citizen-oriented services and improve the country’s tax rate.

The author is a partner at PwC. The views expressed here are personal.

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