When Technology Outpaces Tax : Preparing the Law for a Digital Future

As a lawyer practicing in both GST and AI, I affirm a singular, undeniable truth: Technology decisively outpaces Tax. The legal architecture, anchored in analog realities, rapidly dissolves under the emergent tide of self-directing AI and pervasive digital flows.

This creates a fundamental structural break. Our computational capability, where AI detects evasion in microseconds, radically exceeds the legislature's capacity to define what we are taxing.

For India, a modern fiscal sovereign, the central duty holds two prongs. We must devise accurate methods to classify and tax this phantom value emergent technologies generate. We must also critically ensure ethical and responsible governance controls of the powerful AI deployed for compliance.

Tax Technology and the Enforcement Imperative

The operational sophistication of the tax administration, evidenced by GSTN functionality and technical documentation from bodies like the National Academy of Customs, Indirect Taxes and Narcotics (NACIN) and the Comptroller and Auditor General (CAG), confirms the extensive deployment of advanced technologies in the recent times. These tools include Artificial Intelligence (AI), Machine Learning (ML), Big Data Analytics, Cloud Computing, and Robotic Process Automation (RPA) and Optical Character Recognition (OCR).

This comprehensive technological deployment focuses on:

• Tax Evasion and Compliance Monitoring: Sophisticated fraudulent Input Tax Credit (ITC) claims, fake invoice networks and shell companies are identified with advanced AI and data analytics. This analysis is conducted through thorough and quick examination of multi sourced data lakes.

• Agentic AI for Efficiency: Agentic AI (Multi-Agent Systems) is a key strategic advancement which is set to transform the GST registration process. This technology will automate and streamline validation, significantly reducing fraudulent ITC claims from shell entities by enabling real-time, cross-database verification of applicant documents, while making compliance easier and more efficient for genuine entrepreneurs.

• Governing the Algorithm: Over all AI-generated work, the administrative framework mandates that tax officers maintain a final decision-making authority. This ensures the application of the core principle of a “Human in the Loop” (HIL) system, where human oversight remains critical to every stage of adjudication.

The practical failure of unchecked automation remains clear. Experience in litigation across various High Courts demonstrates clear evidence of automation's practical failure: GST algorithms frequently flag legitimate ITC claims as fraudulent due to minor GSTR 2A/2B mismatches or procedural delays. This triggers mechanical demands for ITC reversal and payment. HIL remains essential to avert these mechanical, system generated GST demands in the first instance.

A human check confirms the transaction's legitimacy through physical evidence or supplementary documentation, preventing immediate litigation. Accountability also requires that the deployment models be subjected to external verification and examination, which calls for technical evaluation by organisations like the NACIN and audit by organisations like the CAG.

The Definitional Paralysis: The Crisis of Intangibles

The foundational concepts underpinning our fiscal sovereignty (goods, services, supply, and consideration) buckle under the platform economy's load, creating a severe statutory gap in indirect tax interpretation.

• Machine Intelligence, Human Confusion: Artificial intelligence inherently introduces thornier fiscal puzzles. India needs to set the standard for sophisticated strategies: promote AI innovation in healthcare and education by giving it special attention, while making sure the government receives the right amount of money from only commercial uses.

• Place of Supply in a Borderless World: An AI API executes billions of complex calls across multiple jurisdictions in a split second. Determining the place of supply (the jurisdictional trigger for the tax) becomes profoundly non-trivial.

Tax regimes must give up linear, physical world reasoning in order to regain fiscal control. A functional taxation principle is what we need to adopt.

Reform: Three Non-Negotiable Imperatives

First, we need statutory flexibility. This makes it possible for definitions to change without necessitating legislative changes for each advancement in technology. The required flexibility is provided by delegated law, which is revised on a quarterly basis by expert committees made up of tax experts, technologists, and business representatives.

Second, AI's potential for enforcement was shown by GSTN. Now apply same reasoning to the simplification of compliance. Blockchain-based real-time reporting eliminates delays in submitting returns. Classification assistants with AI capabilities direct companies towards appropriate tax treatment prior to disputes.

Third, we must transition from territorial to functional taxation philosophies. In environments where value creation is distributed across networks, physical location matters less than user engagement, data contribution, and algorithmic participation.

The Urgency of Now

We require comprehensive reform before the gap between technological capability and legal capacity becomes unbridgeable.

When enforcement runs on machine learning but legislation remains analog, we build tomorrow’s economy on yesterday’s foundations. Surely our legislature defines what it taxes before the next monsoon session.

The ultimate goal must be the deployment of automation and AI for superior Data Governance, never allowing technological limitations to obstruct the essential, forward progression of the law.

Anandaday Misshra, Founder & Managing Partner, AMLEGALS