Home > TaxTech - Tax Technology & Innovation in India Last Updated: Dec 28th 2023
TaxTech - Tax Technology & Innovation in India
Over the past several years, TaxTech, a FinTech subgroup that simplifies and lowers tax costs, has risen significantly. Learn more on TaxTech definition, complexity in taxes and how taxtech solving & it's importance.
This document covers
- What is TaxTech?
- Why TaxTech Segment?
- Taxes & Complexity in India?
- Technologies involved in TaxTech?
- Room for Innovation
- Who are the leading TaxTech players in India?
1. What is TaxTech?
TaxTech is a form of technology and associated frameworks that are geared towards serving both individual, corporate taxpayers and the government institutions such as tax departments and regulatory bodies.
In general, tax statutes, rules, and regulations are defined by central, state, and local governments, which lag behind in employing technology and related frameworks.
In recent years, numerous startups have come to the rescue to add value, make it easier to get closer to taxpayers, and bridge the gap between government bureaucracy and rising taxpayer expectations.
2. Why TaxTech Segment?
FinTech in general focuses on frameworks and systems to automate and optimize conventional banking and financial services.
TaxTech, on the other hand, is primarily concerned with Direct and Indirect taxes and requires a complex, rigid, and comprehensive framework that must adhere to government tax regulations.
Fintech products and services are ephemeral, such as payments, loans, and buying/selling stocks, whereas TaxTech services are complex, including Income Tax Filing, GST Filing, TDS preparation, reconciliation, approvals, tax audits, what-if analysis, projections, predictions etc.
Due to the overall complexity, involvement of government, regulatory bodies, approvals, revisions, human-touch points, and lack of quality tax consultants at affordable prices, tax technology will be identified as a separate segment specialisation dubbed "TaxTech" that was previously assumed to be part of FinTech.
3. Taxes & Complexity in India?
Majority of us know only few taxes that we face directly, the segmentation of taxes in India is still large enough to have technology frameworks to bring ease to the taxpayer. Few of the taxes defined in the next generation taxes * are either in draft or near future possibilities.
Let's look at them in 4 major categories.
3.1 DIRECT TAX
- Individual Income Tax
- Corporate Income Tax
- Wealth Tax
- Gift Tax
- Securities Transaction Tax
3.2 INDIRECT TAX
- GST (including Central, State, Integrated)
- Customs Duty
Note: From 2017 on, Excise Duty, Sales Tax, Cenvat, and Octroi are subsumed under GST.
3.3 OTHER TAXES
- Property Tax
- Professional Tax
- Entertainment Tax
- Registration Fees, Stamp Duty, Transfer Tax
- Education Cess
- Entry Tax
- Toll Tax for roadways
- Municipal Tax
- Swachh Bharat Cess Tax
- Waste disposal Tax
3.4 NEXT-GENERATION TAXES *
- e-Commerce Tax
- OIDAR Tax
- VDA / NFTs / Cryptos Tax
- Currency Tax
- Currency Renewal Tax
- Carbon Tax
- Space Tourism Tax
- Space Transport Tax
- Sea Surface Development Tax
4. Technologies involved in TaxTech?
The majority of potential technologies have been incorporated by FinTech & TaxTech over the past decade and a half while some of them were implemented only at a surface level.
- RegTech (Regulatory Technologies)
- SecTech (Data Security Technologies such as SSL, Encryption, Data Vaults)
- Cloud (Web applications on Cloud to bring closer to taxpayers)
- Mobile (To utilising existing technologies to create secured apps, OTP, biometrics)
- Biometrics (to bring authentication and authorisation and to implement KYC norms)
- Big Data (to harness the potential possibilities in understanding taxpayer behaviour, detect breaches, tax audits, AI, and data analytics, tax predictions)
- Artificial Intelligence (AI to reduce the time to compliance, and detecting tax savings, and potential issues with the tax department)
- Digital Payments (to bring ease in paying taxes quickly)
- Integrations (Integrating taxes with Govt agencies including central, state, and local, Banks, Brokers, Exchanges, lending institutions like NBFCs, foreign entities to reduce fraud and revenue leaks for the government)
- BlockChain (to record and maintain traceability)
- Voice Technologies (to bring ease taxpayer services and to extend the tax advisory services)
5. Room for Innovation
While tax is a complex subject in and of itself, many startups are developing innovations to reduce the subject's complexity, tension while paying taxes, potential for tax savings, and awareness of the need to plan ahead to reduce tax exposure and taxes.
The private sector, including startups and other established businesses, performs a crucial role in demonstrating the technology that governments and tax departments may adopt to assist taxpayers more effectively.
The three stages of assessing the adoption of taxtech innovations in India along with their maturity as of 2023 are outlined below.
| # | STAGE | MATURITY |
| 1 | Centralised Tax Administration While India has achieved the automation and workflow aspects of centralised tax administration, it has yet to make progress in eliminating corruption, plugging tax collection breaches, and integrating its systems. | 60% |
| 2 | Paper-less Taxpayer Services As of 2023, both CBDT (Income Tax) and CBIC (GST+) have made phenomenal strides in developing unique systems to connect taxpayers digitally. But there is a long way to go in educating taxpayers to use such systems, and there are no support systems for taxpayers to develop trust in digital systems. Private taxtech companies like EZTax.in are attempting to bridge the gap between the taxpayer and government department automation. | 50% |
| 3 | Advanced Predictive Taxation This is the stage where the systems from central banks, banks, financial institutions, stock exchanges, brokers, NBFCs, registration departments (land, property, vehicle, assets), dealers, payment gateways, wallets, and currency exchanges are integrated to have predictive systems for tax assessment and tax collection in order to reduce administrative leaks and painpoints. | 10% |
6. Who are the leading TaxTech players in India?
The majority of businesses in India cater to large corporations or businesses. In India, companies such as E&Y, KPMG, and Deloitte come to mind.
However, none of these enterprises have ever targeted individual taxpayers or small and medium-sized businesses. While there are a few players, such as EZTax, ClearTax, and Cygnet developing systems/services, it will be a while before these companies play a significant role unless the Indian government provides a framework and support.