Tax challenges associated with digitalization in India

As the world moves toward digitalization, it brings with it some critical tax challenges. If you look at the OECD framework, it started as a part of an initiative to tackle domestic tax base erosion and billions of US dollars in lost revenue by sharing profit with multinational companies. Digital companies alone are liable for a significant chunk of that lost revenue.

Looking at the current revenue shortfall due to the COVID-19 crisis, the Indian government is exploring ways to widen its tax base. But there should be intensive measures and clarifications in place to ensure that no confusion on applicability or enforcement. It would be a good idea for the government to engage with industry associations and experts to come up with a clear set of rules and a framework. Such collaboration can not only help the government to include the digital economy in the current tax base but also to achieve its policy objectives.

Dip in GST collections

While we have seen a dip in GST collections of states, recent reports say that SGST requirement is projected to swell to Rs 4.1 trillion in this fiscal year. We can consider this as an indication that governments will heavily crackdown upon businesses that evade taxes and resort to tax frauds. Companies should start looking at tax technology options to streamline their operations, centralize their tax data and reduce audit risks. In the upcoming GST Council Meet in June, it would be great to see the GST Council encouraging businesses to adopt of automation of taxes and expedite major initiatives around tax technology like e-invoicing, which can be an excellent way to curb tax evasion.

Rise in e-way bill generation and clearance of GST and customs refunds

Although there are challenges like labour shortage, lack of demand, social distancing affecting the workforce, with eased restrictions, we can see improvement in economic activity. There is a rise in the e-way bills generated, but it is yet to pick up the pace and match the pre-COVID numbers. The clearance of GST and customs refunds should help the smaller taxpayers.

However, COVID-19 lockdown has reshaped priorities for all of us as well as businesses, made us rethink how technology has a crucial role to play from something as uncomplicated as a video conference to the automation of complicated taxes. This transition period would be an excellent opportunity for businesses to re-evaluate their strategies and be better prepared for whatever comes next.

By Manjula Muthukrishnan, Managing Director, Avalara Technologies Pvt. Ltd., Indian operations of Avalara, Inc.