India: First country to use AI/ML in tax assessment

India will soon become the first country to deploy artificial intelligence (AI) and machine learning (ML) in the tax assessment process, as the Finance Minister Nirmala Sitharaman has promised to adopt faceless assessment system from October this year.

According to official sources, the government is very particular about the deadline of the implementation. In this regard, the revenue secretary Ajay Bhushan Panday on last Saturday held a meeting of officials of the Ministry of Corporate Affairs (MCA) and various tax agencies.

The government has set the deadline of October 8, for the implementation of AI and ML for the assessment purposes.

Now data in the income tax return, statement of financial transactions and from other sources will be analysed as per the pre-defined risk criteria. “For example, if someone has deducted your TDS as Rs 1 lakh but you don’t show the income in ITR, then AI will pick it up for deeper scrutiny,” a source in the know explained.

For example, Alpesh’s (a fictional character) employer has deducted his TDS as Rs 1 lakh but he doesn’t show equivalent income in ITR, then AI will pick it up for deeper scrutiny. This scrutiny will be done using e-verification where a structured questionnaire will be sent to Alpesh using ML. If the answer is okay, the case will get closed. If not, AI will send the case to the officer for further investigation, which will proceed using the faceless electronic portal. Traditionally, the tax officer asks for docs and follows a line of investigation.

The government is also planning to integrate data from MCA, Central Board of Direct Taxes (CBDT) and GS) within a year -- which is likely to be announced in the next year’s budget.

“The government wants computers instead of human beings to do everything. So data integration is the key,” a source in the know told DH.

The sources added that the announcement in the budget about integration will depend a lot on the progress made on the integration of data. “It will take time as systems are very different,” the sources said.

However, many officials in the Finance Ministry believe that using AI and ML in the tax assessment purposes can be detrimental to the country.

“The whole objective of the faceless assessment is based on the premise that tax officers are corrupt and harass taxpayers. This is not only a biased notion but also undermines the genuine work of the tax department,” a senior government official said.

Assessees have been complaining about harassment due to two main reasons for years now - refund delay and unnecessary demands/litigation raised in scrutiny.

According to the sources within the I-T Department, “unachievable budget targets” are the culprits which force the department to delay refund, fearing action from ministry.

The sources within the tax department suggest that the use of AI and ML may lead to a situation similar to that was seen after the shoddy implementation of GST, as the government has been “hastily pushing for the move”.

“It is not clear how these advanced technologies will help solve these two issues. In fact, they pose a greater risk of high-pitched assessment because tax officer will not be interested in hearing out the assessee and will instead rely on computer data,” sources said, adding that it is a nightmare for complex cases.

I-T department has already been using AI/ML in the selection of cases for scrutiny.