India's Transition to Algorithmic Tax Governance

India faces significant challenges with its low tax-GDP ratio and high tax evasion, averaging a 16.36% tax-GDP ratio from 2001-22, the lowest among emerging economies. Annually, around 4.3% of tax revenues are lost to evasion. The application of Artificial Intelligence (AI) is being explored to enhance tax revenue mobilization and governance.

Project Insight (PI)

Launched in 2017 by India's Income Tax Department (ITD) and fully operational by 2019, Project Insight leverages AI and data analytics to improve tax administration and compliance. Its objectives include encouraging voluntary compliance, reducing tax evasion, and ensuring equitable tax enforcement.

• Components of PI:
  • Income Tax Transaction Analysis Centre (INTRAC): Utilizes AI to process financial data and generate comprehensive taxpayer profiles.
  • Compliance Management Centralized Processing Centre: Uses behavioral nudges to encourage correct tax filings.

Benefits of Using AI in Tax Administration

• Improved risk profiling and detection of tax evasion.
• Prioritization of evasion cases based on severity.
• Automation of routine tasks, allowing focus on complex issues.
• Enhanced taxpayer services through smart chatbots and scam prevention.

Since 2020-21, over one crore revised returns have been filed with an additional ₹11,000 crore in taxes. The NUDGE campaign led to significant corrections and additional tax declarations.

Operational, Ethical, and Legal Challenges

• Data Provenance and Quality: Ensures accurate identification of evasion without false positives.
• Algorithmic Bias: Prevents socio-economic or geographic biases in tax enforcement.
• Explainability and Due Process: Ensures transparency in AI decision-making and provides taxpayers with avenues to challenge decisions.
• Data Privacy and Security: Protects sensitive taxpayer information from exploitation.
• Lack of an AI ombudsperson and external audits raises concerns over the fairness and trust in the tax system.

India must balance the development of a modern tax intelligence system with ethical considerations to maintain taxpayer trust and improve tax governance.

Contributors: Sthanu R. Nair from IIM Kozhikode and Ranjith Gundaboina, a professional in AI applications in financial services.