Use of Artificial Intelligence (AI) in Tax Administration to Boost Economic Growth in Developing Countries

Artificial Intelligence (AI) can contribute in taxation to boost economy. AI is a collection of unique processes that can leverage Data Science to make smart changes in the software ecosystem of government organizations.

Use of Artificial Intelligence (AI) in Tax Administration to Boost Economic Growth in Developing Countries

Artificial Intelligence (AI) can contribute in Taxation especially in Tax Administration to boost economy. AI is a collection of unique processes that can leverage Data Science to make smart changes in the software ecosystem of government organizations. With the rapid innovation in the field of AI and Data Science, its use in different fields is also gaining popularity. Thus, taking the community towards greater ease than ever before. Modern technology is also going hand in hand with Artificial Intelligence to support data processing on commerce, health, communications, entrepreneurship, transportation, and many more. Likely, AI is also joining the taxation process to boost the economy of third world countries.

Now a days, computers have become expert enough to mimic human intelligence-based actions using human-induced instructions. Such machines are trained to perform a particular task in the same manner; thus, it promotes equality in solving a particular problem. AI models installed in these machines learn from experience and make decisions in real-time by using historical data.

What differentiates AI from other rising technologies?

AI is influencing lives greatly and responds to a particular problem like humans. The growing AI and trending machine learning are affecting our lives very deeply. In a relatively brief period, AI has become strong enough to think, sense, listen, and do many more functions just like humans or more efficiently than them.

According to Gartner Research Firm, AI will eradicate 1.8 million jobs and increase to 2.3 million other jobs by 2020. Furthermore, it could produce 16 percent or $13 trillion (14 percent) globally by 2030, given by McKinsey. The results of AI implementation vary by industry, work type, or geography. AI and robotics will take over the repeated task that makes humans dull and exhausted, helping them stay engaged in value-added activities. The coming wave of AI allows government organizations and businesses to automate their tax world to achieve the demand of the day.

Read more about: How AI Will Kill Jobs?

AI is on its peak in developed countries like United States. Governments in many other countries are also trying to adopt it. Hence, the U.K., China, and France decided to promote AI education, skills, and funds to develop a passionate AI expert workforce. Privacy, Cybersecurity, and IP rights are even preserved with artificial intelligence introduction in the taxation system.

What makes AI so obsessive to be introduced in Taxation?

In recent times, many governments worldwide have applied several fiscal and debt measures to fund policy startups. Consequently, a 4% rise is recorded in tax revenues as a part of GDP. These changes are appearing in the Organization for Economic Cooperation and Development (OECD) countries since 1980. However, there is inequality in income and spending that give rise to more debt than revenue. It leads to budget deficits (fiscal gap) which can destroys the country's economy.

Understanding Fiscal Gap

The fiscal gap is the total amount of money that economists predict to be owned by a government. It relates the government expenditure on running projects with the revenues generated over a specified time from those running projects. In other words, it joins tax revenues of government over a decided period with spending. Previously, the economists observed budget imbalances for various reasons, including rising pensions of government employees and the services offered to them. This imbalance in expenditures and revenues led to widening the fiscal gap, which promoted several issues on a large scale.

Major drawbacks of widening the Fiscal Gap

  • Most of the offices and industries are preferring automatic machines for bringing accuracy in their work. It results in producing high pressure on employment as it results in lowering employee’s demand.  
  • Likely, worldwide trade is now a click away. People search for a product of their interest on the internet from many e-commerce stores doing their online businesses. It also leads to unemployment as new business-starters don’t go for a physical store. They take pictures of the products and upload them to their websites. People from different regions contact them online, and they deliver it on time to their customers. Thus, it eliminates the need for physical stores and employees, saving their hours waiting for customers and then convincing them.
  • Self-employment is another word for freelancers who earn money online, and they’re not asked to pay tax from their earnings.
  • The aging population is the number of retired government employees (65 years old) who get pensions after completing their serving years. Their number is 8 to 10 percent more than the young population. It is also a significant cause of the fiscal gap that promotes an imbalance in revenues and spending.

Considering these factors; there should be a reliable method to have a clear-insights of tax and revenues. The fiscal gap is growing and making it difficult for policymakers to apply policy rules equally to every business person. Improvement in a particular area helps to reduce the fiscal gap to enhance operational efficiency. The governments are moving towards AI services to improve their taxation process; thus, boosting the economy.

AI is performing structured and unorganized tasks efficiently, mimicking human voices with high speed and accuracy. Moreover, it can also analyze and modify in-depth questionnaires that were previously difficult to deal with them. All these extraordinary features are of significant importance in planning and reporting the tax life-cycle.

Artificial Intelligence can play a major role in Taxation

AI is the ultimate source of crunching big data to get better insights and help make better tax decisions. AI tools are well-prepared to completely deal with specific problems and replace natural human intelligence (but not yet achieved). Machine learning and natural language processing (NLP) is of great importance. NLP can be used for analyzing unorganized data and help in tax return determination. Ubiquitous chatbots can be well-trained to respond to taxation queries. Hence, we can leverage artificial intelligence in chatbots to answer technical tax issues.

Imbalance in income is problematic for economics, and the economist's assumptions are not easily predictable. Mckinsey published a study, AI boosted both productivity and income equality 16 percent more precisely than the manual taxation process.

Federal AI Standards Engagement Plan

National Institute of Standards and Technology (NIST) contacted PwC to share information about artificial intelligence and its working strategy. It's a reliable, empowering, and trustworthy system that works honestly and deals with everyone equally. AI has the power to sense its surrounding by listening, watching, and understanding it. It's the need of the time to install AI in every system to achieve extraordinary standards.

How AI can facilitate taxation? A practical presentation

Let’s see how AI is practically helping taxation to boost the economy. It’s a study by the Tax Function of the Future that highlights complexities and solutions in the business environment step by step:

Step 1: Tax Notice processing in Tax use case

Data in tax notices are random, and its sorting is a big problem. What machine does here is highlighting the main keyword terms in tax notices. The given data might be from federal, government, global, local, or state; thus, it automates tracking and prepares AI for responses. Data Annotation is the crucial step in helping leveraging AI to pick-up the main key terms in the aggregate data. Artificial intelligence sense everything; audio, video, language.

Sensing Audio Speech: The machine senses the spoken words and records the information in real-time. This feature helps in the conversion of audio to text.  

AI Visionary Power: AI uses scanned documents to recognize the image patterns. It helps hi remembering the patterns of tax forms, contracts, and notes. Furthermore, it also scans tax forms for further data extraction.

Language Processing: The machine understands the words written in textual form to store its meaning in memory.

Step 2: Account Classification

Account mapping is a difficult task in an account classification system. AI, in this case, helps out by remembering and balancing trial account names. Moreover, it helps then sending map information to PwC for taxonomy and other purposes like tax calculation adjustment. It includes all information on numerous account's incomes and expenses. Artificial intelligence thinks moreover, about patterns in data through machine learning.

Machine Learning implies statistical data analysis technique to identify digit characters for further prediction of planning and forecasting, extract data from scanned tax notice, determines tax applicable on transactions, and many more.  

Step 3: Tax Acquiescence & Reporting after Analysis

It's a significant problem that remains after analysis; hence, PwC prefers the combination of AI with RPA (robotic process automation). It will favor performing structured and unstructured activities in tax compliance. In structured activities, the AI robust system will respond to daily basis activities. It gathers data from the source system, makes regular tax adjustments, fills forms, and posts tax accounting entries. Above it, taxation by AI can boost the economy in third world countries and take it to the next level. It will empower the country as it's a primary step towards success.

Several factors are responsible for AI machine learning in tax compliance and reporting.

Robotic Process Automation (RPA): It replicates human behavior on desktop and web-based applications for data collection and reporting. RPA is considered the most straightforward AI strategy that represents pre-installed programs helping in accessing structured data.

Cognitive Automation: It deals with unstructured data and uses information in that particular data to make interfaces. Besides, it makes a scheme showing tax risk levels.

Step 4: Tax Chatbot  

People ask many questions about tax, payment method, tax applicability, and many other things. That's why PwC leverages AI to understand natural languages. When people ask queries, AI should respond to these questions efficiently to engage the user with the right intent. Chatbot takes information from PwC inserted knowledge, and when someone asks questions related to a specific problem, it shows specific results. The specificity includes:

Deep Answering to Questions: The bot memory is enriched with particular tax knowledge. Thus, its understanding of questions and then find the right and most appropriate knowledge in its database. Finally, it exceptionally responds to queries after competing data research collected/stored in it.

An overview of AI working strategy

AI framework is sturdy and comes with a clear roadmap that spotlights on every crucial step. Therefore, it supports easiness and effectiveness in the implementation of AI in Taxation. Every phase is responsible for the proper method and has a series of short steps. It aligns business strategies with high-security controls. There are four fundamental pillars on which AI works efficiently.

Unique Protocol:Its unique strategy line up business and tax to avoid separate operations for both purposes.

Look and Feel: Its excellent models come with a transparent method to quickly get the strategy and calculations. Moreover, it engages the audience because of its compelling design.

Development of Complex Model: The AI in taxation involves a highly complex algorithm creation with proper management and repeated testing. For every complex problem, there is an inspiring solution that manages it with proper methodology.

Operational Implementation: As a tax, dealing is a highly sensitive department, and it should be clear and transparent for any ambiguity. For sake, AI and machine learning help eradicate all dishonest ways and eliminate malicious attacks with protective shielding.

Top AI based tools for Taxation Analysis

The outstanding system observes data and develops an instant action strategy to overcome risk chances. There are several other tools that researchers develop for taxation analysis.  

1)  H&R Block uses IBM’s Watson AI in Taxation

H&R Block is one of the largest brands that offer tax services in partnership with IBM Watson with the system of detection of possible tax subtraction and tax credits. AI-powered software prefers natural language processing for document analysis and other statements of over 74,000 pages of federal tax codes. It all depends on the user's responses to empower its tax questionnaire. Here the AI system is responsible for the identification of information patterns coded in the tax questionnaire. Besides, it provides in-depth customized details of each filer with high accuracy.

2)  TurboTax by Rival Intuit

It's popular software that helps customers identify related AI-powered questionnaires with write-offs and tax breaks for which they are eligible. Interestingly, this software uses artificial intelligence and machine learning to track their customers' interactions on social media where they're offering their services. It finds the customers who stuck in their tax preparation process and helps the designer to sort out the problematic area.

3)  Automated Ledger Review Tool (ALeRT) by Ernst & Young

The function of this AI-powered tool is to analyze business's books for taxation to classify transactions. It relates new data with the information already installed in it. It recognizes known transaction kinds by comparing data with historical records. In contrast, it identifies unknown transactions by comparing them with known keyword terms and patterns.

Perspectives on modernization of society with AI

The world is transforming its conventional dealings ways and moving towards advanced technology. AI is doing all manual operations with automation; hence it also becomes a cause of unemployment. But as we discussed earlier, it will also give billions of opportunities in other fields to maintain the livings of humans. Care is necessary with AI, as any fault during the automation system may destroy your whole struggle. You must be a master in AI operational dealings.

AI significance in Tax and Business Compliance

Shortly, AI will replace all the manual works in every part of the globe and manage it with exceptional intelligence. Also, it will help both taxpayers and organizations in filling accurate information about returns in real-time. It’s the only right and quick way to highlight a law-breaker and be a helping hand of tax collectors.

Here is a strategy to improve Taxation without AI

Even without introducing AI in taxation, the process can be made a reason for the economic improvement in third world countries like Pakistan and Bangladesh. These four ideas make it a fairer process for everyone.

  1. Combine all taxes on income, estate, gifts, corporations, and other stake-holders income in overall one tax. It eliminates loopholes and forces every wealthier person to pay tax.
  2. Besides, it reduces the audits of poor people by lessening pressure on the Internal Revenue System.
  3. There should be an equal tax on all incomes (either small or gross); it will remove the condition of low tax rates on capital incomes.
  4. People who generate high revenues should pay tax on all their income.

Cheers :)