How the Government’s Fintech Move With API Accerlerates Tax Planning for Individuals

Government initiatives to improve taxation in India with technologies such as blockchain and artificial intelligence have made e-filing taxes mandatory. Digitisation has provided tax authorities with the ability to proactively find leaks or any anomalies at the transaction level. Today's tax authorities have access to enormous amounts of data that they can use to identify and prevent frauds.

The ability to file documents online and be assessed from any part of the country simplifies the tax filing process by reducing the number of steps, bringing in standardisation and eliminating the chances of bias. Due to these benefits, the instances of tax evasion have decreased as more taxpayers are encouraged to pay their taxes willingly using these new and improved systems and procedures. The ease and speed that comes with digitisation in the tax system at which the government can process these returns and issue refunds are also tremendous motivators.

However, many individuals still struggle to understand, properly document and process their tax liabilities. And many businesses see new legislation and tax reporting requirements as creating unnecessary complexity and compliance costs.

What if filing tax returns could be as convenient as banking online?

Tax planning for individuals may be accelerated as the government prepares to share the income and tax liability data of individuals with tax and investment planning portals on a real-time basis. However, first, there might be a privacy hurdle to cross.

Income-tax planning is usually done towards the end of the financial year, which leads to chaos and a last-minute rush. Now, technology may come to the rescue. In a bid to streamline taxation, financial planning and filing, the tax department is planning to share taxation records, income data, and expenses of individuals with select e-return intermediaries (ERIs). ERIs are portals which provide tax-filing and tax-planning services to individuals.

Apart from the ERIs, the tax department will also share the information with financial service providers such as financial planners, banks, non-banking firms, and account aggregators. All these financial institutions will have to apply for the API (Application Programming Interface) licence, which is granted to select companies to get access to the income-tax data of individuals.

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This system aims to simplify financial planning for individuals by monitoring their spending patterns and recommending more effective investing options to reduce taxes. Notably, this was implemented between 2011 and 2015, when the Central Board of Direct Taxes supplied such information (CBDT). However, the service was discontinued after reports of misuse of personal income-tax data emerged.

How will this system work?

This would be done via an API license being granted to select companies. In simple words, external firms, like, say, a bank or your wealth management portal, would need to apply for a license with the government to be able to fetch income-tax data from the government systems. The tax department is planning mechanisms to ensure that taxation, financial planning, and tax filing are streamlined without much manual intervention.

Financial portfolio solutions will be derived from account aggregators, where each individual will be able to track all his account statements (banking, investments, taxes etc.) in one place. An Account Aggregator (AA) is a type of RBI regulated entity (with an NBFC-AA license) that helps an individual securely and digitally access and share information from one financial institution they have an account with to any other regulated financial institution in the AA network.

At present, account aggregator networks are working on building this system that provides portfolio solutions all under one roof for individuals, and it will take a few more months for them to come up with consumable solutions. Once the financial portfolio solutions are set up, individuals will be able to track all their banking, investments and tax account statements in one place.

In addition, there are a few important aspects related to this new system where government shares income data with intermediaries in real-time.

• Individual's Approval

  Personal income tax information is particularly sensitive data and cannot be shared without the individual's consent and authentication. Before providing any tax-related services, ERIs must first get your consent, and they do this using a one-time password-based mechanism to ask tax assessee for their authorisation. The agreement to share tax record information may be revoked at any time. After being approved, tax aggregators or financial services providers can automatically provide insights based on one's past financial transactions and even provide suggestions for ways to reduce taxes.

  Selecting a service provider that has invested in the right and secure systems is important. The quantity of data the Government is ready to disclose with ERIs might be subject to restrictions.

• Reduced Tax Complications

  Typically, in order to determine the tax liability and how much to invest to avoid taxes, an individual's financial information is collected from bank and share account statements prior to filing tax returns.

  The system is designed so that taxpayers can file their taxes with high accuracy and minimal fuss by having all the information already filled out for them. It enables people to declare taxes on all sources of income and ensure that nothing is overlooked. Through this, the income tax department hopes to improve the accuracy of "one-time no notice" tax filings for quicker processing and ease of access to taxpayers.

A tax aggregator that has obtained your consent on data sharing would be able to directly access your capital gains, interest earned, and investment details and help you avoid errors in calculating how much tax was deducted at source and other mistakes in filing returns. ERIs or financial institutions offering tax filing services wouldn't need to ask for a lot of information throughout the tax filing process because the data will be synced with the system.

How will the Government's move enhance tax planning for you?

Using tax deduction at source (TDS) mapping data gathered by the Income Tax Department, the system will offer individuals real-time tax-saving options based on their salary credits.

This system will allow the financial services companies and fintech platforms with income-tax information and tax-planning portals to offer automated insights and tax-saving investment solutions to the individuals based on their financial transactions over the years. In streamline holistic financial planning, these intermediaries will not only assist taxpayers in filing taxes and e-verify the returns but also invest or take valid action to enhance tax savings.

The system will follow your spending patterns and make suggestions for better ways to save that are more tax-efficient. You can simply select from the numerous options available straight on the tax aggregator's portal. The system will also alert individuals of situations where potential high taxes can be deducted, failing to required actions.

As the system is automated, the technology will take care of individuals' tax planning requirements. The user benefits from a seamless, technologically enabled, do-it-yourself service with professional assistance. For instance, when tax is deducted at source from fixed deposit interest, based on this data feed that your tax and investment web portal receive, a tax-planning solution could appear on your screen the very next time you log in, offering better investment avenues like mutual funds for tax saving. This is just one example of how the tax department's move may benefit you.

Therefore, such technological advancement will assist you in your tax planning and do note as you begin tax planning for FY2022-23, it's far more vital to make sure your tax-saving investments are in line with your financial plan.

However, if you are not sure about how to exercise your tax planning, save yourself from the last-minute stress and initiate your tax planning with the help of PersonalFN's Definitive Guide to Select ELSS (Edition 2022).

This Guide will show you how picking a worthy ELSS, a tax-saving mutual fund, could potentially maximise your wealth and act as an effective tool for tax planning. It includes:

• Why ELSS is a worthy option for tax planning

• Mistakes to avoid while investing in ELSS

• How to select the best ELSS for tax planning

• How have ELSS performed as a category

• Some of the best ELSS to invest in

• Who should consider investing in ELSS

• How should one go about investing in ELSS

If you are looking to exercise your tax plan and invest in tax saving funds for the year 2022, then get your free copy of To PersonalFN's Definitive Guide to Select ELSS (Edition 2022).

Warm Regards,
Mitali Dhoke
Jr. Research Analyst