Digital Transactions and Their Impact on Direct & Indirect Taxation Over the past years, online transactions have become a common aspect of life. Online shopping and mobile wallets to instant money transfer are some of the new ways in which people and companies prefer digital payments. This has not only sped up financial transactions but has changed the way governments monitor and collect both direct and indirect tax.
The Rise of Digital Payments The number of transactions that are conducted digitally has been increasing at a very high pace due to the penetration of the internet, use of smartphones and secure payment gateway. Efforts by government to facilitate cashless economies have also been significant. With the increased number of transactions shifting to the internet, it becomes simpler to track the income, expenditure habits and turnover of business. These factors directly related to the collection of the direct and indirect tax.
Better Monitoring of Direct Taxes The direct taxes are the income tax and the corporate tax in which individuals and business establishments are expected to state their incomes. In the past, transactions that involved cash were not usually recorded and this led to evasion of taxes. In digital transactions, each payment has an online footprint. This allows the tax authorities to strike a balance between reported income and real financial
operation resulting in improved adherence. Consequently, the collection of direct taxes has now been more transparent and effective.
Impact on Indirect Taxes Goods and services are subject to indirect taxes, e.g. GST. Digital transactions also give real-time reports on sales and purchases, which ensure that both business establishments and the tax authorities keep precise records. As an example, the payment made by a customer in a digital pay system is immediately registered, and the taxation element is automatically reflected. This saves on mistakes and simplifies filing of indirect taxes. Digital records can also enable businesses to claim tax credits in a more efficient manner, and the direct and indirect tax compliance process is further streamlined.
Reduced Tax Evasion Tax evasion has been one of the greatest problems for governments. Cash transactions ensured that underreporting of income or sales was hard to detect. This has been reduced to a minimum through digital transactions, as they are documented and can be tracked. This has resulted in a higher level of accountability and lessening the disparity between the anticipated and the actual collection of direct and indirect tax.
Benefits for Businesses and Individuals Online payments enable the companies to keep accurate records which are important in the tax returns. Rather than exploring heaps of paper-based invoices, online statements show a transparent path of income and costs. To the individuals, the online platforms will have reduced filing of income and purchases as the income and purchase can be automatically linked, and it is unlikely that the person will make many errors in payment of the direct and indirect tax.
Government Reforms Encouraging Digital Transactions Governments have implemented such measures as connecting bank accounts with tax identification numbers, the obligatory reporting of significant transactions and the use of e-invoices to empower the system. These measures are supposed to ensure that the process of collecting the direct and indirect tax becomes more precise and that the taxpayers find it easier to comply.
Looking Ahead The digital economy is strongly connected to the future of taxation. Tax systems are going to keep developing as financial operations go online. Mismatches in reported revenues and actual expenditures are already being identified using artificial intelligence and data analytics. These technologies will also enhance the monitoring and collection of direct and indirect tax in the long term.
Conclusion The digital transactions have transformed the tax environment by enhancing transparency, minimizing evasion and making compliance easier to the individual and business. They have eased the burden on
the taxpayers by facilitating easier and efficient payment of direct and indirect tax by balancing the gap between the taxpayers and the authorities. With technology ever growing, this digital transformation is likely to enhance the financial system further, and lead to a cleaner economy. This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this. Source From: https://www.akgvg.com/blog/digital-transactions-and-their-impact-on-directindirect-taxation/
