Digital Transactions and Their Impact on Direct & Indirect Taxation

Discover how digital transactions are reshaping direct & indirect taxation by boosting transparency, cutting evasion, simplifying compliance & enhancing government monitoring.

2. 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

3. 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

4. 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-direct-
indirect-taxation/