AI in Tax Governance: Promise Meets Policy Gaps

Paper: GS – III, Subject: Economy, Topic: Taxation, Issue: AI Enhance Indian Tax Governance.

Context:

India faces a persistently low tax-to-GDP ratio and significant tax evasion.To address this, the Income Tax Department has deployed Artificial Intelligence through initiatives such as Project Insight to improve compliance and revenue mobilisation.

Key Takeaways:

AI in Tax Administration:

• AI in taxation refers to the use of machine learning algorithms, big data analytics, and predictive modelling to improve tax administration functions such as compliance management, fraud detection, and taxpayer services.
• It enables real-time monitoring of transactions, facilitates risk-based compliance systems, and promotes ‘smarter tax administrations’ through automation and data integration.

Project Insight:

• Launched in 2017 and fully operational by 2019, Project Insight (PI) aims to enhance voluntary tax compliance, reduce tax evasion, and ensure fair tax enforcement. The initiative comprises three main components:

Key Components of PI:

• INTRAC (Income Tax Transaction Analysis Centre): AI-based analytical engine, builds 360° financial profiles using multi-source data (banking, GST, property, securities).
• Compliance Management Centralized Processing Centre (CMCPC): Uses analytics outputs to ensure compliance.
• NUDGE Strategy (Non-intrusive Usage of Data): Behavioral nudging via SMS/email that encourages voluntary correction of tax returns.

AI in Tax Administration: Benefits and Challenges and Risks:

Global Best Practices:

• Countries like the USA, UK, Australia, and Italy have implemented AI-driven tax systems and used predictive analytics for fraud detection.
• They achieved higher compliance and revenue mobilisation.

Way Forward:

• Establish robust data governance and privacy protection frameworks.
• Ensure human oversight in critical decision-making processes.
• Develop transparent and explainable AI systems.
• Create independent regulatory and grievance redressal mechanisms.
• Balance efficiency gains with fairness, accountability and taxpayer trust.

Conclusion:

AI can significantly strengthen tax governance in India, but its success depends on embedding strong ethical, legal and institutional safeguards.

Source: (The Hindu)

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