Artificial Intelligence in Indian Taxation: Redefining Compliance, Administration, and Policy

Artificial Intelligence in Indian Taxation: Redefining Compliance, Administration, and Policy

Dr. G. Purushothama Chari
Professor, School of Business, Woxsen University

Abstract

Artificial Intelligence isn’t just a buzzword anymore—it’s changing how governments run, especially when it comes to taxes. These days, AI handles everything from catching tax fraud to streamlining the way people file returns. In India, big projects like Project Insight, the GST Network, and Faceless Assessments are already shaking things up.

This paper takes a closer look at how India is weaving AI into its tax system. It pulls in examples from around the world and breaks down what’s happening on the ground in India. You’ll see how AI is making it easier to spot fraud, keep an eye on compliance, help taxpayers, and cut down on red tape. But it’s not all smooth sailing—there are real hurdles with tech infrastructure, regulation, and thorny ethical questions.

In the end, the paper looks ahead: how will AI keep changing tax administration in India? Can it make the system more transparent, efficient, and fair? That’s the big question.

Keywords: Artificial Intelligence, Tax Administration, GSTN, Project Insight, Compliance, Digital Governance, India, Machine Learning

1. Introduction

Artificial Intelligence isn’t just some far-off idea anymore — it’s already shaking up how governments work all over the world. When it comes to taxes, AI steps in to help people follow the rules, crack down on fraud, and make sense of massive piles of data (OECD, 2021). India’s tax system is famously complicated, full of layers and loopholes, which makes it a headache but also a perfect testing ground for AI-powered upgrades. The Indian government has kicked off a bunch of projects that use AI to tighten up compliance, cut down on delays, and make everything more transparent. These efforts fit right in with the National Strategy for Artificial Intelligence (NITI Aayog, 2018), which puts AI front and center in the push for better governance and smarter economic management.

2. Global Insights on AI in Taxation

A bunch of countries have already brought AI into their tax systems and seen real results. In the US, the IRS uses AI to review partnership returns and runs its Paperless Processing Initiative. Thanks to this, they’re catching more fraud and speeding things up. Over in Australia, the Taxation Office has its Smarter Data Program. They use AI to pre-fill millions of tax records every year, which means people stay more compliant without jumping through hoops. Europe and Canada are in on this too, rolling out AI tools for fraud detection and risk profiling that help automate compliance checks and cut down on delays. When you look at the bigger picture, AI isn’t just a fancy upgrade — it’s making tax systems more transparent, efficient, and user-friendly everywhere it’s used.

3. India’s AI Journey in Tax Administration

India’s been rolling out AI across its tax system in some pretty big ways. Take the Goods and Services Tax Network, or GSTN. It uses AI to spot mismatches in tax returns—GSTR-1, GSTR-2A, and GSTR-3B—so tax officials can catch fake claims faster and keep people honest. Then there’s Project Insight from the Central Board of Direct Taxes. It pulls in big data, checks financial transactions, and even keeps an eye on social media to track down tax evaders and pull more people into the tax net. On top of that, the Faceless Assessment and Appeals system uses AI to assign cases automatically. That means less human bias and more transparency when taxes get reviewed. Put it all together, and you can see how India’s moving fast toward a tax system powered by AI.

4. Applications of AI in Taxation

AI is changing the way we handle taxes in four big ways: catching fraud, automating routine work, analyzing data, and helping taxpayers directly. When it comes to fraud, AI spots things like under-reporting or people trying to claim too much. In Uttar Pradesh, for example, an AI system sent out more than 600,000 compliance notices and helped recover around ₹980 crores in 2023–24 (GST Council, 2024).

Automation’s another big win. Tools like OCR and NLP take care of paperwork and cut down on mistakes that used to happen when everything was done by hand. AI chatbots make it even easier for taxpayers to get answers—any time, day or night—so there’s less waiting and fewer headaches.

On the data side, AI can sift through spending and transaction records to spot anything out of the ordinary. This kind of risk-based auditing lets tax officers zero in on the really big or suspicious cases, so enforcement actually works better.

And finally, AI-powered advisors and virtual assistants are helping people file returns, plan taxes, and find information they need. It’s making the whole process smoother and helping more people stay compliant and informed.

5. Challenges in AI Implementation

India has made real progress in using AI for tax administration, but the road ahead isn’t easy. The basics—like reliable high-speed internet and decent computing power—still aren’t available everywhere. Some states have good access, others don’t, so everything stays uneven. There aren’t enough people with the right skills in AI, data science, or analytics either, so even if the technology is there, finding folks who can actually run it is tough.

Then there’s the law. The Information Technology Act from 2000 doesn’t really mention AI at all, which leaves a lot of open questions about who’s responsible for what and how data should be handled. India’s huge mix of languages and backgrounds makes things even trickier. AI models here have to work with many different languages and cultural situations, not just one or two.

Ethics is another big concern. People worry about privacy, surveillance, and whether AI is biased. If these systems aren’t fair, open about how they work, and easy to understand, people just won’t trust them. Public trust depends on keeping things transparent and making sure nobody gets left out or mistreated.

6. Future Outlook

AI is set to shake up Indian taxation, and it all comes down to how fast technology moves, how ready the institutions are, and whether the laws keep pace. Think about quantum computing and blockchain—these aren’t just buzzwords. Quantum computing can tear through complicated tax data at speeds we’ve never seen, spotting fraud and modeling taxes with way more accuracy. Blockchain, on the other hand, locks tax records in place, makes real-time reporting possible, and puts everything out in the open.

Of course, as machines take over some of the dull, repetitive auditing work, some jobs will disappear. But that’s not the end of the story. New roles will pop up in areas like managing AI systems, overseeing data, and planning taxes strategically. The bigger picture? People will get used to the idea that their tax activity is being watched and predicted by smart systems. Over time, this could boost the culture of compliance—folks might just start following the rules more willingly. And with that, you can bet the government’s tax collection gets smoother and more efficient.

7. Conclusion

AI has the power to change how India handles taxes—making the whole system clearer, faster, and fairer. Look at what’s already happening: GSTN, Project Insight, and Faceless Assessment all show just how much India can do with data and smart tech. But to really make AI work, India needs to put serious effort into digital infrastructure, strong laws, better cybersecurity, and training people to actually use these tools. There’s also the ethical side—rules that keep things fair, cut out bias, and make sure someone’s always accountable. When done right, AI not only speeds up tax work but also makes everything more transparent, which helps people trust the government more. If India keeps pushing forward, it’s set to lead the world in tech-driven tax systems—and that’s a big step toward stronger digital governance and a more resilient economy.

References

1.      Australian Taxation Office. (2022). Smarter data program annual report 2022. Government of Australia.

2.      Central Board of Direct Taxes. (2023). Faceless assessment and appeal scheme report 2023. Ministry of Finance, Government of India.

3.      European Commission. (2022). AI in public sector governance: Enhancing tax compliance through automation. Brussels, Belgium.

4.      Goods and Services Tax Council. (2024). Annual report on digital tax governance 2023–24. Government of India.

5.      Internal Revenue Service. (2023). Paperless processing initiative overview. U.S. Department of the Treasury.

6.      NITI Aayog. (2018). National strategy for artificial intelligence – #AIforAll. Government of India.

7.      Organisation for Economic Co-operation and Development. (2021). Tax administration 3.0: The digital transformation of tax administration. OECD Publishing. https://doi.org/10.1787/0e3b2f5e-en

8.      World Bank. (2023). AI and data governance in developing economies. World Bank Group.